Delaware Superior Court Reaffirms That Appraisal Action Is Not A Claim For A Wrongful Act Under D&O Policy

The Delaware Superior Court has held that an insurer is not obligated to reimburse or advance an insured’s attorneys’ fees and costs incurred in defense of an appraisal action because the appraisal action is not a claim for a wrongful act. MPM Holdings, Inc. v. Fed. Ins. Co., 2022 WL 779563 (Del. Super. Ct. Mar. 15, 2022). However, issues of fact precluded summary judgment regarding the insured’s allegations of bad faith against the insurer for its allegedly wrongful denial of coverage for a putative stockholder’s class action suit against the insured.

A series of derivative actions were brought against the insured and certain directors and officers in connection with alleged breaches of fiduciary duties in connection with a merger. Shareholders of the insured filed a pre-closing Section 220 books and records action; three consolidated post-merger appraisal actions; and a putative stockholders’ class action (“SCA”).

The insured provided its D&O insurer with notice of the various lawsuits and sought coverage for defense costs and indemnification. The insurer acknowledged coverage for the Section 220 action but denied coverage for the appraisal action because “appraisal actions merely seek to assert the shareholder’s statutory right to appraisal and do not allege a Wrongful Act against the Insured[.]” After initially denying coverage for the SCA on the grounds that “none of the individual defendants . . . are Insured persons under the Policy,” the insurer changed its position and agreed to advance defense costs for the SCA.

The insured filed suit against the insurer, requesting declaratory judgment and relief for breach of contract and bad faith. The insured argued that the appraisal action was a “Merger Objection Claim” arising from alleged “Wrongful Acts.” The Policy defined a “Merger Objection Claim” as “a Claim based upon, arising from, or in consequence of any proposed or actual acquisition of an Organization, or of all or substantially all of the Organization’s assets by another entity, or the merger or consolidation of the Organization into or with another entity such that the Organization is not the surviving entity . . . or similar transaction.”  The insured’s bad faith claim was based on an alleged wrongful denial of coverage for the SCA. The insurer filed a counterclaim for declaratory relief that the insured was not entitled to defense or indemnity coverage for the appraisal actions and to dismiss the bad faith claim. Both parties moved for summary judgment.

Relying on the Delaware Supreme Court’s decisions in In re Solera Insurance Coverage Appeals and Jarden, LLC v. ACE American Insurance Company, the court held that the appraisal action “is not a securities claim because it does not involve a ‘violation’ of law” and by “logical extension,” that “an appraisal action is not for a wrongful act[.]” Rather, an appraisal action is “a limited legislative remedy intended to provide shareholders dissenting from a merger on grounds of inadequacy of the offering price with judicial determination of the intrinsic worth (fair value) of their shareholdings” and that “[a] determination of fair value does not involve an inquiry into claims of wrongdoing in the merger.” Thus, the insurer was not obligated to reimburse or advance the insured’s attorneys’ fees and costs incurred in defense of the appraisal action.

The court also found that questions of fact precluded summary judgment regarding the alleged wrongful denial of coverage for the SCA and denied the insurer’s cross-motion to dismiss the bad faith claim. Specifically, the court noted two genuine issues of material fact regarding the availability of coverage for the SCA: i) whether “the acts of the insured party have increased the settlement,” or whether the increased settlement resulted only from acts of the uninsured parties; and ii) whether fees incurred were “reasonably necessary” to minimize litigation expenses and develop strategies for subsequent SCA litigation.