"The lawsuit alleged, among other things, that the landline telephone assets that Spinco and FairPoint received in exchange for their cash, stock and debt securities were effectively worthless and made Spinco and FairPoint immediately insolvent at the time of the transactions," said McKenna. 

Verizon Seeks Coverage 

While the Spinco-FairPoint deal was in the works, Verizon had negotiated two primary policies with National Union–one for a single year (the Verizon policy) and one for six years (the FairPoint policy)–to reduce transaction-related liability risks; each policy was "followed" by excess insurance from different companies. After FairPoint filed for bankruptcy, Verizon requested coverage for a tax dispute with the Trustee, which National Union denied. Verizon again requested coverage for defense and related expenses after the Trustee filed suit; National Union again denied the claim. Verizon eventually settled with the Trustee for $95 million, which did not include $24 million in defense-related costs, and subsequently claimed coverage for both the settlement and defense costs. The claims were denied.

Verizon sued National Union and the excess insurers in August 2018. A flurry of motions and cross-motions for summary judgment followed. Verizon moved for summary judgment concerning whether coverage was available for defense costs related to the FairPoint Action, and the insurers filed cross-motions for summary judgment. The Delaware Superior Court granted Verizon's motion in February 2021, which included two crucial holdings: that the Trustee "brought the FairPoint Action as a 'security holder' of Spinco," and that the FairPoint Action was a securities claim within the meaning of the FairPoint policy. However, genuine and material issues remained as to coverage for the $95 million settlement–which had not been discussed in Verizon's motion–so the case continued forward. 

National Union contended the FairPoint Action, and therefore the settlement for it, was not covered because it wasn't a "securities claim" within the meaning of the Verizon policy. National Specialty, one of the excess insurers on the FairPoint policy, claimed the FairPoint Action did not constitute a covered "Loss." Verizon cross-moved for summary judgment in both cases. All four motions came before the Delaware Superior Court.  

Settlement Coverage Under the Verizon Policy 

According to the Verizon policy, a "securities claim" was a claim, excluding administrative or regulatory proceedings, made against an insured "brought derivatively on behalf of an Organization by a security holder of such Organization." National Union argued the FairPoint Action was not a securities claim because it had not been brought on behalf of Spinco's security holders, and the action was not a derivative suit.

"The [FairPoint] claims were derivative in nature because they were brought on behalf of the combined Spinco/FairPoint entity for the benefit of all creditors," McKenna said. "An 'Organization'…included entities that were Verizon subsidiaries on or before the policy period, and the Trustee was suing to recover assets that had been owned by Verizon's former subsidiary [Spinco] before it was spun off." 

The court pointed out that their earlier decision had included a ruling that the FairPoint Action was a derivative claim "for purposes of the Securities Claim definition in the FairPoint policy." As the definitions of "securities claim" in the Verizon policy and the FairPoint policy were identical, neither the court's rationale nor the conclusion changed: the FairPoint Action constituted a derivative claim within the meaning of a "securities claim" under the Verizon policy.

Even if Verizon could show the FairPoint Action was a securities claim, National Union said the Trustee was not a "security holder" with the ability to sue Verizon. The court had ruled the Trustee could pursue claims for FairPoint security holders in its earlier decision, and it applied a similar rationale here. When Spinco merged into FairPoint, "the 'new' FairPoint held Spinco assets and liabilities, including liability for payment on the Spinco notes." (emphasis added).  

"As a matter of law, [the Trustee] stood in the shoes of holders of Spinco debt securities that were issued as part of transactions that were claimed to constitute fraudulent conveyances," McKenna said. 

Settlement Coverage Under the FairPoint Policy 

National Specialty argued the settlement wasn't covered because it was not a covered "Loss" under the policy. The policy definition of "Loss" excluded coverage for any "matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed, including but not limited to damages or settlements which are in the nature of restitution, disgorgement or the return of ill-gotten gains." (emphasis omitted). Merriam-Webster Online defines "disgorgement" as the "giv[ing] up (as illegally gained profits) on request, under pressure, or by court order especially to prevent unjust enrichment." 

The court assumed, for the sake of argument and analysis, that the settlement was a disgorgement, but it did not ultimately matter. Both the Verizon and the FairPoint policies were governed by Delaware law. Two prior Delaware cases had actually held that disgorgement was insurable: Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 Del. Super. LEXIS 182 (Del. Super. Ct. 2021, unpub.) ["the Court will not hold that restitution or disgorgement is uninsurable as a matter of Delaware public policy unless a Delaware statute commands it to do so"] and Rsui Indem. Co. v. Murdock, 248 A.3d 887 (Del. 2021) ["concluding that certain conduct, including a director's breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different than placing a stamp of approval on that conduct"].

"The Delaware Superior Court recognized that National Specialty's policy did not exclude coverage for settlements in the nature of disgorgement," McKenna said. "Because disgorgement is insurable under applicable Delaware law, the Court held that the exclusion to Loss did not apply." 

Conclusion 

Based on the foregoing analysis, Verizon's motion for summary judgment requesting coverage for settlement of the FairPoint Action was granted. 

The views expressed by Keith McKenna are his own. 

Keith McKenna is a partner and co-founder of Cohen Ziffer Frenchman & McKenna. Known for his ardent advocacy in complex and highly consequential cases, Keith represents corporate policyholders in federal and state court actions seeking damages, declaratory judgments, and other relief against prominent U.S. and EU property and casualty insurers. He handles a wide range of complex commercial disputes for companies in industries including healthcare, manufacturing, sports and entertainment, government services, real estate, and telecommunications.