In a ruling that may impact the Directors & Officers (D&O) insurance market, a court found coverage available for a company's D&Os under policies issued to a special purpose acquisition (SPAC) company.

Overview

Social Capital Hedosophia Corp. III (“Social Capital”), a SPAC, merged with Clover Health Investments Corp. (“Legacy Clover”), a private company, on January 7, 2021. Social Capital maintained a D&O policy structure consisting of a primary policy and two excess policies. Clover Health separately purchased a D&O insurance program for the go-forward public company (“Go Forward Insurers”), which included broad prior acts coverage for the private company exposure. Following the deSPAC transaction, Clover Health became involved in a variety of legal matters: a securities class action lawsuit; a shareholder derivative lawsuit; shareholder demands under Section 220 of the Delaware Corporations Code; and an SEC investigation. Clover Health notified both the SPAC runoff policies (“Tail Insurers”) and the Go Forward Insurers of these matters.

At issue was coverage for the D&Os of Clover Health under the Tail Insurers program. The primary insurer on the tail program accepted coverage for the securities and derivative claims against the SPAC former D&Os, but denied coverage for the individual defendants who were directors of Legacy Clover and not directors of Social Capital prior to the merger. The primary insurer in the tail program also denied coverage with respect to the SEC investigation, on the grounds that the investigation did not constitute a Claim within the meaning of the policy.

The Ruling

The court articulated the central issue in the case as follows: “The question for the Court is whether these allegations against [D&Os of Legacy Clover] amount to a Wrongful Act by an Insured Person under the Tail Policies.” The primary tail policy defined Insured Persons as follows: “Any one or more natural persons who were, now are or shall become duly elected or appointed directors, trustees, governors, Managers, in-house general counsel, controller, risk manager, advisory director or member of a duly constituted committee or board of the Company or their functional equivalent.”

The judge observed that the former directors of Legacy Clover allegedly assisted with Social Capital’s filings in connection with the merger. In largely denying the insurers’ motion to dismiss, the court found that “(b)ecause Social Capital was set to become Clover Health at the time of the alleged wrongdoing – and [the Legacy Clover D&Os] allegedly committed the wrongdoing concerning Social Capital’s SEC filings while in position of control as future D&Os of Clover Health – these individuals were acting in functionally equivalent roles to Social Capital’s D&Os when they committed the alleged wrongdoing.” As a result, the court found that the Legacy Clover D&Os were entitled to coverage under Social Capital’s tail/runoff policy.

The court found the policy language ambiguous as to whether an SEC Investigation was encompassed in the definition of “Claim”. However, the court affirmed that the Larger Settlement Rule applies not only to settlements or indemnity payments, but also defense costs. The Larger Settlement Rule requires that the insurer pay all costs associated with a settlement or defense, without allocating costs to the uninsured parties or matters if: “(i) the settlement [or defense] resolves, at least in part, insured claims; (ii) the parties cannot agree as to the allocation of covered and uncovered claims; [] (iii) the allocation provision does not provide for a specific allocation method (e.g., pro rate or alike);” and (iv) “the defense or settlement costs of the litigation were” not higher “than they would have been had” only the insured claims “been defended or settled”.

Read more insights like this in the latest edition of the Legal & Claims Review.

Clover Health Invest. Corp. v. Berkley Ins. Co., et al., No. N22C-06-004 (Super. Ct. DE February 6, 2023)

Contact

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker. Discuss this article with Financial Services Group professional Adam Furmansky.



Adam Furmansky
Senior Vice President, Deputy D&O Product Leader - East
New York