Alleged Breach of Fiduciary Duty Not a “Securities Claim”

The United States District Court for the District of Delaware, applying Delaware law, has held that lawsuits alleging breaches of fiduciary duty did not constitute “Securities Claims” under a D&O policy.  Calamos Asset Mgt., Inc. v. Travelers Cas. & Surety Co. of Am., 2021 WL 663056 (D. Del. Feb. 19, 2021).

An insured company announced that it had reached an agreement to go private through a merger transaction.  After the announcement, several stockholders brought lawsuits against the company, its affiliates, and its directors and officers in the Delaware Court of Chancery alleging breaches of fiduciary duty in connection with the merger.  Several stockholders also sought appraisal of the fair value of their shares pursuant to Delaware law.  The company had three D&O policies: a primary policy, a first-layer excess policy, and a second-layer excess policy.  The second-layer excess insurer denied coverage in part for the underlying actions.

In the ensuing coverage litigation, the court held that the lawsuits alleging breaches of fiduciary duty did not constitute “Securities Claims” within the definition of the policy.  The second-layer excess policy, which incorporated by reference the terms of the primary policy, defined “Securities Claim” to mean a claim for “any actual or alleged violation of any federal, state, local regulation, statute or rule (whether statutory or common law) regulating securities.”  Applying its plain meaning, the court determined that the policy definition of “Securities Claim” had three parts: (1) an actual or alleged violation (2) of a regulation, statute or rule, that (3) regulates securities.

The court concluded that the fiduciary duty lawsuits did not meet the third requirement—i.e., they did not involve a regulation, statute or rule regulating securities.  The court explained that regulations, rules or statutes that regulate securities are those “specifically directed towards securities, such as the sale, or offer for sale, of securities,” while fiduciary duty claims “are not specifically directed towards securities” and “do not depend on a security being involved.”  Instead, fiduciary duty claims involve a special duty to protect the interests of another.  Accordingly, the court granted summary judgment in favor of the insurer on this issue.  The court also granted summary judgment in favor of the insurer with respect to the lack of coverage for the appraisal lawsuits because the company neither opposed the insurer’s motion for summary judgment nor filed a competing motion.