At least in the foreseeable future, a recent decision handed down by the Delaware Superior Court will potentially impact many D&O insurers, especially those hoping to divvy defense fees for certain policyholders.

In the case of HLTH Corporation and Emdeon Practice Services, Inc. v. Federal Insurance Company et. al. (July 31, 2008), the Court ruled that a D&O insurance company must pay defense costs on behalf of its policyholder to the full policy limits against a criminal indictment alleging wrongful acts over an extended period of time, even when involving a subsidiary acquired after a number of the alleged acts occurred.

In granting summary judgment to HLTH Corporation, Superior Court Judge Richard R. Cooch rejected defendant Federal Insurance Company's argument that defense costs must be allocated proportionately among multiple insurance companies according to the quantity of alleged wrongful acts committed during discreet policy periods. When rendering his decision, Judge Cooch noted that the insurance policy failed to stipulate any such allocation.

"The Delaware Superior Court has recognized that a broadly construed obligation to pay full defense costs as incurred is fundamental to the insurance promise," said William G. Passannante of Anderson Kill & Olick, P.C., HLTH's lead counsel.

The Court also rejected Federal's contention that the company was not liable to full policy limits because the policyholder had settled some of its claims against underlying insurance companies, and that the limits of those underlying policies were not therefore exhausted. Citing Stargatt v. Fidelity in Delaware and Westinghouse v. American Home Assurance, Judge Cooch ruled that in the current case as in Westinghouse, "the excess policy was triggered when the underlying policy limit was reached by the total costs incurred by the insured, regardless of whether the total payments to the insured reached those limits."

Federal countered, citing SL Industries v. American Motorists Insurance Co. and Hebela v. Healthcare Insurance Co., in which the Court did order proportionate allocation of insurance liability, noting a fundamental difference between allotting coverage after a claim has been resolved and attempting defense cost allocation before the resolution of the underlying case. Still, Judge Cooch remained resolute. "A requirement to allocate insurance liability before a triggering claim has been finally decided actually could create more, rather than less, uncertainty about ultimate proportionate liability for insurance coverage between two or more companies," he said.

To further solidify its logic, the Court pointed to the New York Supreme Court's decision in Trustees of Princeton University v. National Union Fire Insurance that "as the policy obligates [the insurer] to advance all defense costs as they are incurred; the court had no obligation at this juncture to rule on the allocation of defense expenses."

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Court Rejects Federal's Motion for Proportionate Allocation

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