Several years ago, when it became clear that plaintiffs’ lawyers were going to file merger objection lawsuits in connection with essentially every M&A transaction, the D&O insurers responded by adding a separate, larger retention for M&A-related claims. The larger M&A-related claim retention quickly became pretty much a standard feature of public company D&O insurance policies. However, because the M&A claim retention is in many instances substantially larger than the retention that would otherwise apply, the question of whether the larger retention applies to a particular claim can be a significant one. In a recent case, the Delaware Superior Court addressed a D&O insurance coverage dispute in which, among other things, the insurers and the policyholder disagreed on whether the larger M&A-related claim retention applied to the underlying litigation. In an interesting November 23, 2021 opinion (here), Delaware Superior Court Judge Eric Davis held that the larger M&A retention did not apply.



CVR Refining LP is a limited partnership with a number of related entities operating energy-related businesses. In 2019, CVR was hit with two class action lawsuits, one in Delaware Chancery Court and one in the Southern District of New York. As Judge Davis later noted in his opinion in the coverage lawsuit, the two underlying lawsuits are “substantially similar” and they allege that the CVR entities and affiliated individuals “improperly used a call right in CVR Refining’s limited partnership agreement to buy out CVR Refining’s public common unit holders.” Both lawsuits involve allegations that CVR manipulated the price of CVR Refining’s stock to enable a CVR entity to call the common units at an artificially depressed price. The Delaware action asserted common law claims; the Southern District of New York alleges that the defendants violated Section 10(b) of the Securities Act of 1934 and Rule 10b-5.


CVR submitted the underlying claims to its D&O insurers. After the insurers took the position that there is no coverage under the policies for the underlying claims, CVR initiated coverage litigation against the insurers. CVR filed a motion partial summary judgment. In his November 23, 2021 opinion, Judge Davis addressed the question of which retention under the policy applies to the underlying claim.


The Relevant Policy Language

Coverage Parts B and C of CVR’s D&O Insurance policy are subject to a self-insured retention of $1 million. However, Policy Endorsement No. 23 amends the policy to provide that a $2.5 million retention applies for claims arising from mergers and acquisitions; Endorsement No. 23 provides that the retention applies “solely with respect to any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any: (a) acquisition, assumption, merger, consolidation or otherwise of any entity, asset, Subsidiary or liability described in Section VI General Conditions (D)(1) and (2); or (b) Change in Control.”


Section VI General Conditions (D) is entitled “Mergers and Acquisitions (Changes in Exposure or Control)” and provides in relevant part that


(1) If during the Policy Period the Company acquires any entity by merger, consolidation or otherwise such that the entity becomes a Subsidiary, coverage shall be provided for any Loss involving a Claim, Interview or Investigation Demand for a Wrongful Act occurring after the consummation of the transaction.

(2) If, however, by reason of the transaction (or series of transactions described in (D)(1) above, the assets or liabilities so acquired or assumed as a result of such acquisition, exceed forty percent (40%) of the total assets or liabilities, respectively, of the Company, as represented in the Company’s most recent audited consolidated financial statements, coverage under this Policy shall be provided for a period of ninety (90) days or to the Expiration Date, whichever occurs first, for any Loss involving a Claim, Interview or Investigation Demand for a Wrongful Act that occurred after the transaction has been consummated, Coverage beyond such period will ony be provided if: (a) the Insurer receives written notice containing full details of the transaction(s); and (b) the Insurer at its sole discretion agrees to provide such additional coverage upon such terms, conditions, limitations, and additional premium it deems appropriate.


The November 23, 2021 Opinion

In his November 23, 2021 Opinion, Judge Davis granted the CVR entities’ motion for partial summary judgment with respect to the retention, holding that the base policy form’s $1 million retention applies, and that the larger $2.5 million M&A retention provided for in Endorsement No. 23 did not apply.


Judge Davis began his analysis by holding that Endorsement No. 23 is not ambiguous. He said, after reviewing the Endorsement’s language that Subsection (a) of the Endorsement (referring to any “acquisition, assumption, merger, consolidation etc.”) relates to “a situation where the Insured increases the risk of loss through a merger or acquisition” as specified in General Condition VI(D)(1). Judge Davis noted further that General Condition VI(D)(2) provides for the same type of transaction but one that results in the acquired assets or liabilities exceeding 40% of the Company’s total assets.


The Insurers had tried to argue that Endorsement No. 23 applies because the underlying actions “in any way” involve the acquisition of any entity or asset. Essentially, Judge Davis noted, the Insurers were arguing that Endorsement No. 23 applies when a claim involves acquiring (i) an entity, (ii) an assert, (iii) a Subsidiary, or (iv) a liability described in Section IV General Conditions (D)(1) and (2).  That is, they were arguing that the phrase “described in Section IV General Conditions (D)(1) and (2) modified only the immediately preceding word “liability,” and not the preceding words “entity,” “asset” or “Subsidiary.” Judge Davis said of this argument that it “seems like a reasonable interpretation based on the provision’s ordinary meaning except it does not faithfully include all the language of the endorsement.”


Judge Davis said that Section VI General Conditions (D)(1) and (2) “are there to create two categories of transactions in subsection (a) that would increase the deductible — one involving acquisition of a Subsidiary and one where the Company [sic] assets or liabilities by 40%.” This is “the most sensible way” to read Endorsement No. 23, the purpose of which, Judge Davis said, is to “increase the deductible in those situations where the insurable risk is increased, i.e., where entities have been added or assets or liabilities have increased due to acquisition.”


The Insureds argued that Endorsement No. 23 does not apply because it is limited to situations described in Section VI General Conditions (D)(1) and (2) – that is, when a claim involves acquiring an entity, asset, a Subsidiary or a liability described in Section VI General Conditions (D)(1) and (2). Judge Davis said that this argument “tracks the unambiguous language of Endorsement No. 23.”


He concluded by saying that the “plain and unambiguous language” of Endorsement No. 23 limited the increase in retention to claims “arising from mergers and acquisitions as ‘described in Section VI General Conditions (D)(1).’” Because the underlying litigation does not involve the acquisition of a subsidiary, (D)(1) does not apply. (D)(2) does not apply as “the buyback does not involve a situation where assets or liabilities were acquired let alone assets or liabilities that exceed 40% of the total assets or liabilities of CVR Refining.” Accordingly, Judge Davis concluded that the $2.5 million retention provided for in Endorsement No. 23 does not apply.



This case is interesting because the question of which retention applies can be an important one, and it is a question that can come up at the outset of the claim. Although the question of which retention applies can come up frequently, it is not (as far as I am aware) an issue that has frequently been the subject of judicial scrutiny. That is what makes Judge Davis’s scrutiny of the policy language so interesting.


Stepping back a moment from the specific language of Endorsement No. 23, there is the larger question of why the larger retention is in a public company D&O insurance policy in the first place. As I noted at the outset, D&O insurers added the larger retention a few years ago when it became clear that plaintiffs’ lawyers were going to file a merger objection lawsuit in connection with every M&A transaction. The larger retention is there to provide insurers with a measure of protection against what is essentially a standard attribute of every M&A transaction. The retention’s purpose relates to – and is limited to — M&A transaction-related claims; that is, claims arising out of transactions in which the insured company is merging with or acquiring another entity. The larger retention is not there for other types of corporate transactions, such as, say, when a company is buying back its own stock.


So, before getting to the question of what Endorsement No. 23 itself provides, there is the more fundamental question whether the transaction involved in the underlying claim is the kind of transaction to which the larger retention was meant to apply. From my perspective, in this case, it is not.


The insurers argued that in the language in part of (a) of Endorsement No. 23 referring to “any entity, asset, Subsidiary or liability described in Section VI General Conditions (D)(1) and (2),” the phrase “described in Section VI General Conditions (D)(1) and (2)” modifies only the word “liability” and not “entity,” “asset,” or “Subsidiary.” Judge Davis allowed that this is “seems like a reasonable interpretation,” but he found the insureds’ argument that the reference to the General Conditions section modified all of the preceding words – that is, including the words “entity,” “asset” and “Subsidiary,” and not just “liability” – is the “most sensible way” to read Endorsement No. 23. I agree, for an added reason not present in Judge Davis’s analysis, which is that if the insurers’ reading were to be adopted, then the larger retention would apply to a whole range of corporate transactions (including, for example, a stock buyback) and not just to the M&A transaction-related claims.


The insurers may feel that this is yet another insurance coverage issue where Delaware’s courts have, as they so often seem to do, favored the policyholder at the expense of the insurer. But though the insurers here may feel they have been hard done by once again by a Delaware court, in this case I think the court got it right. The underlying claim is not of the type to which the larger M&A retention should apply.