D&O insurance policies sometimes contain Major Shareholder Exclusions, precluding coverage for claims brought by shareholders’ with ownership percentages above a certain specified ownership threshold. But when is the shareholder’s ownership percentage to be determined – at the time of policy inception or at the time of the claim? This issue was among the D&O insurance coverage question presented in a recent case before the Third Circuit. The appellate court, applying Delaware law, found that the exclusionary language involved was ambiguous, and therefore resolved the issue in the policyholder’s assignee’s favor. As discussed below, the appellate court’s ruling is interesting in a number of different respects.


The Third Circuit’s opinion in the case can be found here. The Wiley Rein law firm’s October 19, 2019 post about the decision on its Executive Summary Blog can be found here.



EMSI-Acquisition (“Acquisition”) purchased 100% of EMSI. After the transaction closed, Acquisition concluded that EMSI officials had misrepresented EMSI’s financials during the transaction negotiations. Acquisition sued the EMSI officials. Acquisition’s suit against EMSI ultimately settled for a cash payment by the defendant officials and an assignment of their rights under EMSI’s D&O insurance policy.


Based on the assignment, Acquisition sought indemnification from the D&O insurer. The D&O insurer contended that Acquisition could not recover under the policy, citing several policy terms, including in particular the policy’s Major Shareholder Exclusion and the policy’s definition of Loss. Acquisition sued the insurer seeking to enforce the policy. The parties filed cross-motions for judgment. The district court ruled in Acquisition’s favor. The insurer appealed.


Relevant Policy Language

The Major Shareholder Exclusion provides that the insurer shall not be liable for any claim “brought by or on behalf of individuals or entities that own, beneficially or directly, five percent (5%) or more of the outstanding stock of the Insured Organization.”


The policy defines Loss as “damages (including back pay and front pay), settlements, judgments (including pre- and post-judgment interest on a covered judgment) and Defense Expenses.” The definition also excludes some forms of loss, such as “amounts owed under any employment contract, partnership, stock or other ownership agreement, or any other type of contract” and “matters that may be uninsurable under the law pursuant to which this policy shall be construed.”


The September 19, 2019 Opinion

In a September 19, 2019 opinion designated “Not Precedential” and written by Judge Julio Fuentes, the Third Circuit, applying Delaware law, affirmed the judgment of the district court in favor of Acquisition.


The insurer had argued on appeal that because Acquisition acquired 100% ownership of EMSI in the acquisition transaction, coverage for Acquisition’s claim against the EMSI officials was barred by the Major Shareholder Exclusion. The insurer argued that the time to determine the ownership interest for purpose of the exclusion’s applicability was at the time of the claim. Acquisition argued that the time to determine ownership interests for determining the exclusion’s applicability was at the time of policy inception. In making this argument, Acquisition relied on the fact that in connection with the placement of the policy, the insured had given the insurer an ownership table, and the insurer had not required the insured to update the ownership table.


In interpreting these issues, the appellate court applied several rules of insurance policy interpretation under Delaware law, including that Delaware law resolves ambiguity in insurance contracts in favor of coverage, and that contract provisions are ambiguous when they are “reasonably or fairly susceptible to different interpretations or may have two or more different meanings.”


The appellate court agreed with the district court that the Major Shareholder Exclusion was reasonably or fairly susceptible to different interpretations with respect to the issue of when a shareholder’s ownership percentage is to be determined. Because, the appellate court said, under Delaware law “ambiguity resolves in favor of coverage,” the court affirmed the district court’s judgment in Acquisition’s favor with respect to the Major Shareholder Exclusion.


The appellate court also rejected the insurer’s arguments based on the policy’s definition of “Loss” because they simply represented amounts owed under contract.  The insurer had tried to argue that all of the underlying claims fundamentally were claims based on the indemnification provisions in the transaction documents, and therefore that the claims “are so intertwined with a contract claim that they cannot be separated.”


The District Court in the coverage action had concluded based on its review of the underlying complaint that the settlement payments were “in part payments made due to alleged tortious misrepresentations made by EMSI officers.” The District Court concluded that since some of those misrepresentations were made during the acquisition’s due diligence period, claims based on those misrepresentations at least might not give rise to indemnification under the acquisition contract, and therefore the settlement payments were not excluded under the policy. The appellate court agreed with the District Court’s analysis.


Finally, the appellate court rejected the insurer’s argument that the amounts paid in settlement were not insurable because the EMSI officers were never legally entitled to the money they received as a result of their misrepresentations, and therefore that the amounts paid in settlement cannot be an insurable loss. The appellate court noted that the insurer admitted that no Delaware decision supports their theory, and so the appellate court affirmed the district court’s holding on this ground as well.



This decision arguably is a direct reflection of the fact that the coverage dispute was governed by Delaware law. The outcome of the dispute regarding the Major Shareholder Exclusion clearly reflected the Delaware policy interpretation principles regarding ambiguity in insurance policies. The outcome of the final issue about the un-insurability of the return of amounts to which the insured was not entitled turned completely on the absence of Delaware law on the issue. It is possible that the outcome of this case, or at least of some of the issues involved, could well have been different had the law of another jurisdiction had applied.


(In that regard, it is worth noting that I recently published a guest post on this site in which the authors expressed alarm about the Delaware courts’ recent increased willingness to reach out and apply Delaware law to insurance coverage disputes, along the way giving rise to a series of policyholder friendly decisions.)


The value of this ruling for other insurance disputes is limited not only by its arguably outcome-determinative reliance on Delaware law, it is also limited by its designation as “Not Precedential.” In a footnote, the appellate court specifically noted that it “does not constitute binding precedent.”


But while the opinion may not have value as precedent, it still arguably has instructional value. The fact that both the district court and the appellate court found the Major Shareholder Exclusion to be ambiguous is interesting and represents a conclusion that both insurers and policyholders may want to consider.


I can certainly see that from the insurer’s perspective, the insurer would want a shareholder’s ownership percentage to be considered at the time of the claim. The insurer’s concerns about the possibility for collusive or conflicted claims makes the time of the claim the relevant moment when the ownership percentage should be considered.


Indeed, there may be circumstances when from policyholder’s perspective the time of the claim would be the preferred time for ownership percentages to be determined. Imagine a situation in which a shareholder has a greater than 5% ownership interest at policy inception but then subsequently brings a claim after reducing his or her ownership interest. The policyholder in that circumstance would want to be able to argue that the Major Shareholder exclusion does not apply.


To be sure, one could come up with any number of scenarios when the insurers or the policyholder’s interest might be advanced depending on when the ownership percentages are determined. The lesson here is that it is generally in the interests of both insurers and policyholders to eliminate potential ambiguities in the policy. That means that it may be in the parties’ mutual interest for the Major Shareholder Exclusion to address the time at which the ownership interest is to be determined. In that regard, it is worth noting that in a prior post (here), I discussed an insurance coverage dispute that arose in Australia that also involved the question of when ownership percentages are to be determined for purposed of determining the applicability of a major shareholder exclusion. In other words, this is a recurring issue.


I will say that I interpret the insurer’s request of an ownership table during the policy placement differently that the court did. Insurers ask for an ownership table for a number of reasons, among which is to determine whether or not it wants to include a major shareholder exclusion on the policy at all. In many if not most instances where there is no shareholder with more than, say, a 5% ownership interest at the time of the policy placement, the insurer will not include a Major Shareholder Exclusion on the policy at all. (There is an entirely separate blog post that could be written about whether and/or when an insurance buyer should accept a coverage proposal that includes a major shareholder exclusion.) Based on my knowledge of these standard industry practices, I do not interpret the insurer’s request of an ownership table during the policy placement process as suggesting that the time to determine a shareholder’s ownership interest for purposes of evaluating whether or not the major shareholder exclusion applies is at policy inception. Again, however, this just underscores the fact that an exclusion that specifies when ownership interest is to be determined will eliminate these kinds of questions.


The district court and appellate court’s conclusion that at least a part of the settlement amount represented a payment in resolution of claims that did not sound in contract is interesting and even important. The curious thing about this conclusion is that though determining that a part of the settlement represented amounts that were not outside the policy’s definition of loss, both the district court and the appellate court found that the entire settlement amount was covered. However, the clear implication of both courts’ analysis is that at least a part of the settlement amount represented amounts due under contract and therefore would fall outside the policy’s definition of loss; to that extent, it would seem, the settlement amount was not covered loss within the meaning of the policy.


This analysis would seem to suggest that the settlement amount needs to be allocated between covered and non-covered loss. The appellate court’s opinion makes no allusion to the possibilities for an allocation. It may be that that the insurer itself did not seek an allocation; indeed, in seeking to argue that the entire amount of the settlement was non-covered loss, the insurer argued, as the appellate court noted, that the portion of the settlement amount reflecting the misrepresentation claims “are so intertwined with a contract claim that they cannot be separated.” It may well be that having argued that the various amounts paid are inseparably intertwined, the insurer felt it could not argue in the alternative in favor of an allocation.