Coverage for the corporate entity under public company D&O insurance policies is limited to claims that constitute “Securities Claims” as that term is defined in the policy. A coverage dispute between Calamos Asset Management and its D&O insurer involved the question of whether an underlying breach of fiduciary duty claims alleged in connection with the company’s take-private tender offer meet the policy’s “Securities Claim” definition.


In a February 19, 2021 opinion (here), District of Delaware Judge Maryellen Noreika, applying Delaware law, ruled that the breach of fiduciary duty claims do not fall with the policy’s definition of “Securities Claim” and granted summary judgment for the insurer, largely in reliance on the Delaware Supreme Court’s 2019 decision in the Verizon case, notwithstanding the fact that the definition of the term “Securities Claim” in the Calamos dispute express referred to the “common law,” while the definition in the Verizon dispute did not.



In December 2016, Calamos announced a transaction in which the company would be taken private through a tender offer conducted through an affiliate entity. After the transaction announcement, company stockholders filed several lawsuits (later consolidated) in the Delaware Court of Chancery against Calamos and certain of its directors and officers alleging breaches of fiduciary duties. The stockholder litigation ultimately settled for about $22.4 million.


During the relevant period, Calamos maintained a program of insurance consisting of a layer of primary insurance and two layers of follow-form excess insurance. Calamos sought coverage under the D&O insurance program for the settlement. The second level excess insurer denied coverage for the settlement arguing that the fiduciary duty claims asserted in the underlying lawsuit were not “Securities Claims” within the meaning of the primary policy, and therefore that coverage under its policy had not been triggered. Calamos sued the excess insurer (hereafter, “the insurer”) for breach of contract. The parties filed cross-motions for summary judgment.


The primary policy defined “Securities Claim” to mean in relevant part a claim for “any actual or alleged violation of any federal, state, local regulation, statute or rule (whether statutory or common law) regulating securities.”


The February 19, 2021 Decision

In a February 19, 2021 Opinion, Judge Noreika granted the insurer’s motion for summary judgment and denied the summary judgment motion of Calamos.


In reaching her ruling, Judge Noreika considered the definition of “Securities Claim,” which she said, has three parts; it requires: “(1) an actual or alleged violation (2) of a regulation, statute, or rule, that (3) regulates securities.” Calamos agued that underlying fiduciary duty claims met the first two parts of this definition because the term “rule” in the definition includes common law and claims for breaches of fiduciary duties are based on violations of common law. Judge Noreika said that even if this argument is true, the underlying lawsuit “cannot satisfy the third part of the definition because fiduciary duty claims do not regulate securities.”


In support of this conclusion, Judge Noreika relied on the Delaware Supreme Court’s 2019 decision in the Verizon lawsuit (discussed here). In that decision, Judge Noreika noted, the Delaware Supreme Court held that claims for breaches of fiduciary duties were not “securities claims” under an insurance policy that had what Judge Noreika described as “a nearly identical definition” of “Securities Claim.” The one difference, she observed, was that “the Verizon policy, unlike the Calamos policy, did not define ‘rule’ to include common law.” But this difference, she said, “does not change the result.”


The Verizon court, Judge Noreika said, had held that fiduciary-based claims are not specific to any rule, regulation, or law “regulating securities.” This holding, she said, “is relevant here” and “indeed is fatal to Plaintiff’s claims.” The Verizon court, she said, explained that the phrase “regulating securities” imposes “its own limitations.”  The Verizon court has said that rules “that regulate securities are those specifically directed toward securities, such as the sale, or offer for sale, of securities.” Fiduciary duty claims are not, the Verizon court said, “specifically directed toward securities” and “do not depend on a security being involved, and indeed encompasses a wide variety of claims involving persons in special positions of trust. Reading the phrase “regulating securities” to cover fiduciary duty claims would be, the Verizon court said, “inconsistent with the plain meaning of the term.”


In reliance on this analysis, Judge Noreika concluded that the underlying stockholder claims “did not involve a regulation, statute or rule (whether statutory or common law) regulating securities as required by the insurance policy at issue.” Because the underlying claim was not a “Securities Claim,” coverage was not triggered, and accordingly she granted summary judgment for the insurer.



Before I get to Judge Noreika’s analysis of the definition of “Securities Claim,” there are a few analytically prior issues to consider.


First and foremost, a claim for breach of fiduciary duty is the exact type of claim for which companies buy D&O insurance. So for a court to hold that a claim for breach of fiduciary duty is not covered because it does not come withing the policy’s insuring provisions is something we need to stop and talk about.


The reason Judge Noreika concluded this claim was not covered is because it is not a “Securities Claim.” D&O insurance professionals and other knowledgeable persons know that under public company D&O insurance policies, the coverage for the corporate entity (so-called “entity coverage”) is limited to Securities Claims. However, public company policies also provide coverage for insured individuals under different insuring provisions, and coverage under those provisions is not limited just to “Securities Claim.” Coverage under the policy for Claims against the individuals is triggered by allegations of Wrongful Acts, without regard to whether or not securities law claims are involved.


Judge Noreika’s opinion expressly states that the named defendants in the underlying action included individual directors and officers of Calamos.  This is hardly surprising as it is the individuals who owe fiduciary duties, and if there were a breach of the duties, it is the individuals who breached them. In other words, the underlying stockholder claims were not just entity claims; they were at least in part individual claims. Given these considerations, and based on what I know about this situation, the question of whether the underlying claims were or were not “Securities Claims” should not have been exclusively coverage determinative. Judge Noreika’s opinion does not explain why the “Securities Claim” issue is determinative, without regard to coverage that seems like it should have been otherwise available under the policy for the claims against the individuals. (Perhaps a reader with better knowledge of this coverage dispute could, using the blog’s comment feature, supplement this blog post by advising why the “Securities Claim” issue was coverage determinative.)


Setting all of that aside and focusing on Judge Noreika’s consideration of the “Securities Claim” issue, I have to say that her observation that the definition of “Securities Claim” at issue in the Verizon case and the definition of “Securities Claim” here are “nearly identical” is an analytically incorrect starting point.


In my opinion, it makes all the difference in the world that the definition of “Securities Claim” at issue here, unlike the definition in Verizon, expressly referred to a regulation rule or statute “whether statutory or common law.” In my view, the inclusion of the “common law” reference changes the entire meaning of the definition. The point is that the term expressly intends to provide coverage for claims involving alleged violations of common law principles that regulate securities.


In my view, because the definition in this dispute, unlike the definition at issue in Verizon, expressly referred to “common law” claims, the purpose and the reach of the definition compared to the definition at issue in Verizon has been substantially altered. This altered definition requires the question to be asked whether the claim at issue involves an allegation of a violation of a common law principle that in the circumstances at issue relate to regulating securities.


The common law claim here – alleging that the defendants in the underlying action breached their fiduciary duties in connection with the tender offer transaction to complete the take-private deal – is, as the Verizon court itself said is required, “directed towards securities.”


In other words, in my view, the express inclusion of the words “common law” in the definition here changes the meaning of the definition of “Securities Claim” compared to the definition of the term at issue in Verizon, and rather than commencing the analysis with the starting point that the two definitions are “nearly identical,” the analysis should start with the understanding that the two definitions are in fact materially different and must be understood differently because of that.


As a district court opinion, Judge Noreika’s ruling may not be the final word on this issue. Calamos may well appeal this decision, so stay tuned.


Special thanks to a loyal reader for sending along a copy of Judge Noreika’s opinion.