XL Specialty Insurance v. Loral Space & Communications, Inc.
82 A.D.3d 108
| N.Y. App. Div. | 2011Background
- Loral Space & Communications, Inc. (Loral) purchased a Management Liability policy; endorsements expanded Securities Claim to include derivative suits.
- Two shareholder actions were filed in Delaware Chancery Court: a derivative action by BlackRock and a class action ( Highland Crusader Offshore Partners, L.P.) alleging fiduciary breach related to MHR financing.
- Delaware Chancery Court reformed the MHR transaction to remedy unfairness, providing a nonmonetary benefit to Loral and ordering monetary attorneys’ fees to plaintiffs’ counsel.
- The Chancery Court awarded approximately $8.7M to BlackRock’s counsel and about $10.7M to Highland’s counsel; both awards were upheld on appeal (Delaware Supreme Court affirmed Highland).
- Loral sought coverage from XL Speciality, Arch, and U.S. Specialty under the policy; insurers argued there was no Loss since no monetary liability against Loral existed and the benefit was nonmonetary.
- The majority held that derivative-fee awards are Loss coverage under the policy’s broad “other amounts” clause, while Highland class-action fees are not covered because they are not a Securities Claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are derivative-fees covered as Loss? | Fees are Loss under 'other amounts' payable by Insured for a Securities Claim. | There was no monetary loss to Loral; the court reformed, providing nonmonetary benefit; fees should not be covered. | Yes, derivative-fee awards are covered as Loss. |
| Are class-action fees covered as a Securities Claim? | The Highland fees stem from a Securities Claim as part of the derivative action framework. | Highland fees do not arise from a Securities Claim; they are common-law fiduciary-duty claims. | No, Highland class-action fees are not covered. |
| Does the policy interpret 'Loss' and 'legally obligated to pay' to require a monetary loss? | Loss includes 'other amounts' Loral is legally obligated to pay, including attorneys’ fees. | Loss requires an actual loss net of nonmonetary benefits; the transaction reform created a Net Benefit, not a loss. | Loss includes fees here; the insured is legally obligated to pay them as a Loss. |
Key Cases Cited
- Safeway Stores, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 64 F.3d 1282 (9th Cir. 1995) (fees in settlement can be an insured loss under policy when defined as damages or similar obligation)
- Reliance Group Holdings v National Union Fire Ins. Co. of Pittsburgh, Pa., 188 AD2d 47 (1st Dept. 1993) (no loss where insurer realized profit; actual loss required)
- In re First Interstate Bancorp Consol. Shareholder Litig., 756 A.2d 353 (Del Ch Ct 1999) (corporate benefit doctrine; fees awarded when corporation benefits without a common fund)
- First Interstate Bancorp v Williamson, 755 A.2d 388 (Del 2000) (affirmation of corporate benefit doctrine and fee-shifting principles)
- Mills v Electric Auto-Lite Co., 396 U.S. 375 (1950) (cost-shifting to class when benefits accrue to the class; equitable allocation of fees)
- Emerald Partners v Berlin, 787 A.2d 85 (Del 2001) (entire fairness standard; fiduciary-duty review in related transactions)
- Weinberger v UOP, Inc., 457 A.2d 701 (Del 1983) (entire fairness framework for controlling- shareholder transactions)
- Vigilant Ins. Co. v Credit Suisse First Boston Corp., 10 AD3d 528 (1st Dept. 2004) (distinguishes loss and disgorgement concepts in insurance coverage)