In the latest development in Pfizer’s long-running efforts to recover from its D&O insurers amounts the company paid in defense and settlement of prior securities litigation (the “Morabito Action”), a Delaware Superior Court Judge, applying Delaware law, has held that the company’s settlement with a lower level excess insurer for less than that insurer’s policy limit did not create a gap relieving an upper layer excess insurer of its payment obligations.  The court also found that the company’s earlier notice of a different securities litigation did not trigger the policy’s Prior Notice exclusion. The court’s August 28, 2020 opinion can be found here.



For the policy period April 16, 2004 to April 16, 2005, Pfizer maintained a D&O insurance program consisting of a layer of primary insurance and twelve layers of follow-form excess insurance.


On April 15, 2003 (that is, at a time prior to the inception of the 2004-2005 insurance program), Pfizer gave notice to its then-current of one set of securities lawsuits (known as the “Garber Action.”). As the Court in the insurance coverage litigation later summarized, the Garber Action alleged that Pfizer, as successor in interest to Pharmacia, had misled investors about the adverse gastrointestinal effects of Celebrex, an anti-inflammatory drug.


The 2004-2005 D&O insurance program contained an exclusion precluding coverage for claims “arising out of, based upon, or attributable to” or sharing “as a common nexus any fact, circumstance, situation, event, transaction [or] cause” with the Garber action.


During the 2004-2005 policy period, a plaintiff shareholder initiated a different securities lawsuit known as the Morabito Action. The Morabito action alleged that Pfizer, as successor in interest to Pharmacia, had misled investors about the cardiovascular health risks associated with Celebrex, by contrast to the Garber Action, which related to alleged misrepresentations concerning gastrointestinal health risks.


The Morabito Action ultimately settled for Pfizer’s agreement to pay to the plaintiff class a total of $486 million. Pfizer incurred a total of more than $82 million in defending the Morabito action. The primary D&O insurer and ten of the excess insurers ultimately contributed to the payment of the defense and settlement costs of the Morabito action, either by paying their limits in full or by paying a portion of their limits under settlement agreements with Pfizer.


Two excess insurers denied coverage for the Morabito action, relying, among other things on the specific litigation coverage exclusion precluding coverage for any subsequent litigation arising out of or having a common nexus of facts with the Garber Action. Coverage litigation ensued.


As discussed here, in a July 23, 2019 ruling, Delaware Superior Court Judge Paul R. Wallace, applying Delaware law, ruled that, in order for the specific litigation exclusion to apply, it would have to be shown that the Morabito Action was “fundamentally identical” to the Garber action. Judge Wallace reasoned that because Morabito alleged concealment of cardiovascular risks while Garber alleged concealment of gastrointestinal risks, the two actions were “in all relevant respects, different” and therefore that the exclusion did not apply.


Following Judge Wallace’s prior ruling, one of the two excess insurers involved in the coverage litigation reached a settlement with Pfizer, pursuant to which the settling insurer agreed to pay less than its full policy limit.


After the other insurer reached the settlement, the excess insurer remaining in the coverage litigation filed a motion for summary judgment, arguing that, due to the underlying excess insurer’s settlement, the underlying excess layer had not been exhaustion by payment of loss, and therefore that its payment obligation did not attach. The insurer also argued, in reliance on the policy’s Prior Notice Exclusion, that coverage was precluded based on Pfizer’s prior notice to its predecessor insurers of the Garber Action.


Relevant Policy Provisions

The excess insurer’s policy contains an Exhaustion Clause, which specifies that it “shall attach only after all Underlying Insurance has been exhausted by actual payment of claims or losses thereunder.”


The excess insurer’s policy also incorporated the primary policy’s Prior Notice Clauses, which bar indemnification for losses:


directly or indirectly based on, attributable to, arising out of, resulting from, or in any manner relating to wrongful acts or facts, circumstances or situations of which notice of claim or occurrence which could give rise to a claim has been given prior to the effective date of this policy under any other policy or policies




alleging, arising out of, based upon, or attributable to the facts alleged or contained in any Claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement.


The August 28, 2020 Opinion

In an August 28, 2020 opinion, Judge Wallace denied the excess insurer’s motion for summary judgment and granted Pfizer’s cross-motion for summary judgment, ruling that neither the Exhaustion Clause nor the Prior Notice Clauses precluded coverage under the excess insurer’s policy.


In ruling on the excess insurer’s Exhaustion Clause argument, Judge Wallace identified two schools of thought on the question whether the exhaustion requirement was met when a lower level insurer’s settled with the policyholder for less that its full policy limit. He noted that Delaware follows what he called Stargatt Rule, based on a prior District of Delaware ruling, which provides that excess policies attach irrespective of “whether the insured collected the full amount of the primary policies, so long as the excess insurer was only called upon to pay amounts in excess of the lower policies limits. (The ruling in the Stargatt case itself relied on the venerable 1928 Second Circuit ruling in Zeig v. Massachusetts Bonding & Ins. Co., and so this principle is referred to in many jurisdictions as the Zeig Rule)


He contrasted this principle with what he called the “contrary proposition,” referring to what he called the Qualcomm Rule in reference to the 2008 California intermediate appellate decision that stated the principle that underlying policy settlements below limits bar attachment above where the excess policy requires “exhaustion by actual payment of covered loss.”


Judge Wallace said that Delaware “consistently follows the Stargatt Rule, construing a settlement in satisfaction of a policy as an exhaustion of that policy, at least in the absence of an explicit provision to the contrary.” He also noted that Delaware’s courts had expressly rejected the Qualcomm Rule as “contrary to the established Case law” of Delaware.


Judge Wallace further noted while the excess policy at issue in the coverage litigation did not contain an express no-settlement-below-limits exhaustion requirement, there is, in any event, a “strong suggestion in our law that Delaware embraces the Stargatt Rule absolutely even in the face of explicitly contrary clause.”


Simply put, Judge Wallace said, “Delaware recognizes no business reason for an excess insurer to care whether the payment in satisfaction of a policy below was for the policy’s full dollar value, so long as the protections afforded by all underlying insurance policies are extinguished and the excess insurer’s liability begins only at its own attachment point.” An excess carrier, he said, “cannot avoid coverage under an exhaustion clause due to a settlement below unless that settlement works some additional exposure or prejudice on the excess carrier above the attachment point.”


Finally, Judge Wallace rejected the excess insurer’s attempt to rely on the Prior Notice Clauses, noting that the arguments the insurer relied upon in contending that the Prior Notices Clauses applied were “almost identical” to the arguments the court had considered and rejected in ruling on the excess insurer’s prior summary judgment motion based on the Specific Litigation Exclusion. His prior ruling, he concluded, is controlling. He noted that “the distinction the Court identified in the previous round of cross-motions between concealment of cardiovascular health risks and concealment of gastrointestinal heal risks dooms [the excess insurer’s] current effort to avoid coverage.”



In commenting on Judge Wallace’s prior ruling on the Specific Litigation Exclusion, I noted the choice of law issue, and particularly Judge Wallace’s determination that Delaware law applies, arguably was outcome determinative. Once again in this instance, the application of principles of Delaware law arguably was outcome determinative.


In that regards, it is worth noting that the Qualcomm decision to which Judge Wallace referred in connection with the exhaustion issue is far from the only ruling in which a court determined that an excess insurer’s payment obligation did not attach  if an underlying insurer paid less than its full policy limits, even if the policyholder funded the “gap.”  Indeed, within a few years of the 2008 decision in Qualcomm, there was a long and growing list of cases in which courts reached similar conclusions, relieving other excess insurers’ of the payment obligations under their policies.


Indeed, alarm within the community of policyholder-side representatives and advocates soon caused these same representatives to insist on policy provisions addressing this situation. These days, many insurance buyers seek and many excess insurers  grant excess coverage trigger language that allows the amounts below the excess insurer’s attachment point to be funded by payment either by the underlying insurers or by the policyholder. With this type of alternative payment trigger language in place, excess insurers are much less likely to be able to avoid payment.


The excess policy at issue in the Pfizer coverage litigation was put in place well before the Qualcomm decision, and so it did not have this modified exhaustion language. But even though these days many excess policies now have the modified exhaustion language, Judge Wallace’s ruling here is of more than just historical interest and it is not just a vestige of policy terms and conditions from an earlier era. Judge Wallace’s analysis of the exhaustion and attachment issues could still be relevant, arguably even in connection with determination of coverage under an excess policy that has the modified exhaustion provision allowing for payment of the underlying amount either by the insurer or the policyholder. Judge Wallace’s statement of the principles that the Stargett Rule represents provide a strong framework to use in resisting excess insurer’s efforts to argue that their policy’s exhaustion requirement has not been satisfied.


The one thing I will say about Judge Wallace’s rulings in this case is that they represent still further evidence that insurers might interpret to suggest that Delaware is a policyholder-friendly forum for insurance coverage disputes, particularly when the court determines that Delaware law applies. Indeed, just between this Pfizer coverage litigation and the long-running Dole Foods coverage litigation (about which refer here and here), there are quite a number of very favorable policyholder friendly coverage decisions. It does kind of make me wonder when we might start to see more insurers trying to incorporate choice of forum provisions, or at least choice of law provisions, in their policies.