HNRK Coverage Corner

On March 22, 2022, the Delaware Supreme Court issued a decision in First Solar, Inc. v. National Union Fire Ins. Co. of Pittsburgh Pa., No. 217, 2021, clarifying the standard for applying the related claims provision of a directors and officers liability policy under Delaware law.

D&O policies are typically claims-made—meaning they cover claims made against the insured during the policy period, even though the underlying conduct may have occurred during an earlier period.  But sometimes a lawsuit filed during the policy period may, in fact, be covered by an earlier policy.  This is because a standard policy term (the related claims provision) groups together claims arising from the same underlying conduct and deems all such claims to have been made at the time of the earliest such related claim.  Sometimes the effect of such a provision benefits the insured (if, for example, the earlier policy has a higher limit or more favorable coverage terms), and other times it may benefit the insurer (if, for example, the limits of the earlier policy have been exhausted).

The policy at issue in First Solar broadly defined a “Related Claim” as “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.”  In the decision under review, the Delaware Superior Court held that two lawsuits against the insured were Related Claims because both “stemmed from the same original lawsuit, were against ‘identical defendants,’ overlapped in time, contained allegations of the same securities law violations, and relied on the same specific disclosures”, as well as the same “underlying wrongful conduct”—“allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports.”  In reaching this conclusion, the court applied a standard derived from an earlier Superior Court decision—that “a complaint is ‘related to’ or ‘aris[es] out of’ a previous complaint if the claims are ‘fundamentally identical.’”  Under this standard, Related Claims must have “the ‘same subject’ and ‘common facts, circumstances, transactions, events, and decisions,’” or stated otherwise, something more than mere “thematic similarities.”

The Delaware Supreme Court affirmed the judgment, but rejected the “fundamentally identical” standard, explaining:

[N]either the Delaware Supreme Court nor any other jurisdiction has adopted “fundamental identity” as the standard governing all relatedness inquiries, regardless of the contractual language at issue.  With all insurance policies, the scope of an insurance policy’s coverage is prescribed by the language of the policy.  And absent ambiguity, Delaware courts interpret contract terms according to their plain, ordinary meaning.  Whether a claim relates back to an earlier claim is decided by the language of the policy, not a generic “fundamentally identical” standard.

(Citations and internal quotation marks omitted).  Relying the breadth of the related claims provision in First Solar’s policy, the Supreme Court affirmed the Superior Court’s judgment that the two actions were “Related Claims”.

The decision also highlights an important practice pointer:  the need to consider the impact any court filing may have on a party’s insurance coverage.  In this case, before the coverage action was filed, First Solar, seeking to litigate both cases before the same judge, filed a “Motion to Transfer Related Case” in which it argued that the two Actions made “nearly identical allegations” and that “[t]he substantial overlap in legal and factual issues and the substantial overlap in parties weigh in favor of [transfer].”  Those admissions made it difficult for First Solar to dispute the relatedness of the two claims in the subsequent coverage action.  The takeaway here is to engaging coverage counsel as early as possible.  First Solar may have had no practical choice, but careful consideration of the potential insurance implications of any litigation positions a party takes is well advised.