In a win for Wiley Rein’s client, the Delaware Supreme Court has affirmed the trial court’s decision that a securities class action and an opt-out case constitute related Claims, such that the opt-out case is excluded from insurance coverage under later-issued policies. First Solar, Inc. v. National Union Fire Ins. Co., C.A. No. 217, 2021 (Del. March 16, 2022). The Delaware Supreme Court further held that “[w]hether a claim relates back to an earlier claim is decided by the language of the policy, not a generic ‘fundamentally identical’ standard.”
The underlying securities class action alleged that a solar-power company and individual defendants violated federal securities laws by engaging in a fraudulent scheme to convince investors and the public that they had a winning formula for making solar power cost-competitive with fossil fuels. A number of shareholders opted out from the securities class action and filed a securities lawsuit in the same court. The opt-out case similarly alleged that the company and the same current and former officers and directors engaged in a fraudulent scheme to oversell the company’s ability to make solar power cost-competitive with fossil fuels – otherwise known as grid parity.
The company agreed to settle the opt-out case for $19 million and then sought coverage from the insurance tower in effect when the opt-out case was filed. The company’s primary and first excess D&O carriers denied coverage for the settlement on the grounds that the opt-out case related back to and is deemed first made at the time of the securities class action, which was prior to the inception of the policies.
In the ensuing coverage action, the company argued that the opt-out case did not relate back to the securities class action because the two cases were not “fundamentally identical,” which the company argued is the applicable standard for interrelatedness under Pfizer Inc. v. Arch Insurance Company. The Delaware Superior Court granted the Insurers’ motions to dismiss without addressing arguments regarding the proper standard for interrelatedness, holding that the opt-out case was a claim first made at the time of the securities class action, prior to the inception of the policies, even under the “fundamentally identical” standard.
The Delaware Supreme Court affirmed, stating that it “agree[d] with the Insurers that the Superior Court’s use of the ‘fundamentally identical’ standard to assess the relatedness of the [securities class action and opt-out case] disregards the plain language of the insurance policy.” The Court determined that the phrase “fundamentally identical” was originally used innocuously in United Westlabs, Inc. v. Greenwich Insurance Co., and then picked up by later cases and “converted … into a standard to assess relatedness under an insurance policy’s related claims provision.” The Court held that this application was “erroneous” because “[w]hether a claim relates back to an earlier claim is decided by the language of the policy, not a generic ‘fundamentally identical’ standard.” The relevant policy defined “Related Claim” as “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.”
Turning to the plain language of the policy, the Delaware Supreme Court agreed with the insurers that the “Related Claim provision is broad” and that the securities class action and opt-out case are related because both actions “are based on the same alleged misconduct—First Solar’s misrepresentations about the cost-per-watt of its solar power.” The Delaware Supreme Court determined that the differences alleged by First Solar were not “meaningful to the relatedness inquiry” and “[a]lthough the [a]ctions are not identical in their claims or evidence, absolute identity is not required.” The court focused instead on how the actions involved “the same subject, as well as common facts, circumstances, transactions, events and decisions.” The court further emphasized that “the thrust of the Wrongful Acts alleged in the two [a]ctions is the same regardless of how damages are claimed.”
The Delaware Supreme Court also disagreed with First Solar’s argument that the actions have “distinct wrongful acts” such that “non-excluded separate claims exist.” Instead, the court determined that the actions “include different misrepresentations and evidence to support their claims—not different Wrongful Acts.” The court likened the case to United Westlabs, where there were similar allegations that an insured “‘engaged in a continuous series of related acts, constituting a single wrongful act as defined by the’ policy at issue, even though the complaints spanned different time periods and included different allegations.” The Delaware Supreme Court therefore affirmed the judgment of the Superior Court.
