The Delaware Superior Court recently held that a fraud exclusion in a D&O policy did not bar coverage arising out of a stockholder litigation because the settlement of litigation did not constitute an adjudication of fraud as required to trigger the fraud exclusion. AT&T Corp. v. Clarendon America Ins. Co., No. 04C-11-167 (Del. Super. Ct. June 25, 2008).

The coverage dispute arose out of underlying shareholder lawsuits brought against AT&T and certain directors and officers of AT&T and At Home. After consolidating the lawsuits, the court granted partial summary judgment in favor of AT&T with respect to claims based on the alleged failure to disclose known material facts and let stand claims related to whether forward-looking statements were false or misleading when made. See In Re AT&T Corp. Litigation, No. 00-5364 (D. N.J. June 4, 2004). A jury trial followed, but the parties reached a settlement agreement before the jury rendered a verdict.

Throughout the course of the litigation, AT&T and the other defendants vigorously denied any wrongdoing and there was no finding by a court or jury that AT&T or the other defendants were deliberately dishonest, fraudulent, or engaged in a criminal act or omission. After the settlement, AT&T sought payment for the settlement, defense fees and costs from its excess D&O insurer. AT&T’s insurer denied coverage based on a fraud exclusion that excluded coverage for acts:

Brought about or contributed to in fact by any deliberate dishonest, fraudulent or criminal act or omission, or any personal profit or advantage gained by any of the Directors and Officers to which they are not legally entitled and providing any such finding is material to the cause of action so adjudicated.

Applying New York law, the court granted AT&T’s motion for summary judgment, holding that the exclusion did not bar coverage unless there was a finding that such acts occurred and that such finding was material to the cause of action being adjudicated. The court noted that “a settlement is a settlement . . . the fraud exclusion does not entitle the insurers to a trial now on the issue of whether the defendants in the Common Stock Litigation engaged in deliberate dishonest, fraudulent or criminal acts.” The court further noted that “the cause of action so adjudicated is not the coverage dispute; it is the underlying action giving rise to the coverage dispute.”

For a full copy of the opinion, please click here.