Related Claim Exclusion Does Not Require “Substantially Same” Actions in Delaware

The Delaware Supreme Court ruled that solar panel maker First Solar, which was facing two securities class action lawsuits, was barred from having both covered by its insurance policies because the police subsequently issued excluded the coverage of related actions.

The state Supreme Court reached the same conclusion as the state Superior Court in its decision which was appealed by First Solar. But the two courts used different standards to assess the connection between the two actions for the purpose of satisfying the exclusionary provision.

The Superior Court used a “substantially identical” standard to conclude that the two securities claims were sufficiently related to be excluded under the second policy. The Supreme Court has declared that a “fundamentally identical generic” measure is not the correct standard for judging parentage; rather, the correct way is to follow the actual language in the policies. In so ruling, the High Court sided with the insurers.

The case (FirstSolar c. National Union Fire Insurance Co. and XL Specialty Insurance) involves class actions filed in March 2012 and June 2015 against First Solar alleging that it violated federal securities laws by making false or misleading public disclosures.

Plaintiffs in the original March 2012 lawsuit, known as the Smilovits action, alleged that from April 30, 2008 to February 28, 2012, First Solar: to make solar energy competitive with fossil fuels; » « perpetuated [its] fraudulent self-portraiture by concealing and misrepresenting the nature and extent of major manufacturing and design defects in [its] solar modules; » misrepresented its financial statements; artificially inflated its stock price; permitted individuals to engage in insider trading; manipulated cost per watt settings; and underestimated his expenses.

The National Union Fire Insurance Co. provided insurance coverage for Smilovits stock under a 2011-2012 directors and officers insurance policy with a limit of $10 million.

On June 23, 2015, while the Smilovits action was pending, First Solar shareholders who opted out of the Smilovits action filed what came to be called the Maverick action, alleging violations of the same federal securities laws. securities as the Smilovits action, as well as violations of Arizona laws and claims for fraud and negligent misrepresentation.

When the plaintiffs filed the Maverick lawsuit in 2015, First Solar had a $10 million “claims made” primary policy with National Union for 2014-2015 and a $10 million excess layer of coverage with XL Specialty Insurance Co. The 2014-2015 Primary Policy excludes coverage for “related claims”, which the policy defines as claims “alleging, arising out of, based on or attributable to” facts or wrongful acts which are identical or related to those alleged in a claim made against an insured.

Both courts determined that the related claim exclusion precluded coverage under the 2014-2015 policies if the Maverick action was a related claim to the Smilovits action.

Initially, First Solar obtained defense coverage for the Maverick stock under its 2011-2012 policies. In 2015, First Solar exhausted all coverage under the National Union Policy 2011-2012. Chubb, the next excess insurer after the 2011-2012 National Union policy, accepted coverage for the Maverick action because “the new Maverick litigation is based on the same facts and circumstances as the class action complaint. Smilovits previously noted”, and as such, Chubb treated this Maverick matter as a related claim. Chubb covered the Maverick action as the litigation progressed.

After years of litigation and after incurring more than $80 million in defense costs, First Solar settled the Smilovits lawsuit on January 5, 2020, for $350 million. All primary and excess insurers under the 2011-2012 policies have paid their policy limits.

After settling the Smilovits action and exhausting all coverage under the 2011-2012 policies, First Solar began arbitrating a settlement of the Maverick action seeking coverage under the 2014-15 Master Policy and the XL Policy Specialties. After the insurers denied coverage under the policies, First Solar sued in Superior Court seeking a declaratory judgment that the insurers were required to provide coverage under the policies.

The courts focused on the connection between the Smilovits and Maverick actions and whether the Maverick action fell within the main policy exclusion for related claims.

First Solar argued that the Smilovits action and the Maverick action were not sufficiently related because they involved different operational facts – different plaintiffs, conducts, causes of action and time periods.

The insurers responded that the Maverick action arose out of the Smilovits action and raised the same claims against the same parties in all material respects.

Based on previous decisions, the Superior Court has held that a complaint is “related to” or “arises[es] on” a previous complaint if the claims are “substantially identical”. Fundamentally identical suits, according to this court, require the “same subject matter” and “common facts, circumstances, transactions, events and decisions.” The Superior Court noted that there must be more than “thematic similarities” for the complaints to be sufficiently related under similar policy language, because the words “arising from” imply causation.

The Superior Court found that the Maverick action was “fundamentally identical” to the Smilovits action in that the lawsuits arose out of the same original lawsuit, involved “identical defendants”, overlapped in time, contained allegations of the same violations of securities laws and relied on the same specific information. Further, the court found that the underlying wrongful conduct – allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt measurements and falsifying financial reports – was the same. Although there were some differences, including the theory of damages claimed by plaintiffs Maverick, the Superior Court held that the differences did not outweigh the similarities and therefore Maverick was excluded as a related claim in under the policies.

On appeal, First Solar argued that the Superior Court ruled incorrectly, saying the actions simply shared “thematic similarities” and not a “fundamental identity.”

The insurers, however, countered that the Maverick action met the “substantially identical” standard because it involved the same wrongful act and the same fraudulent scheme as the Smilovits action. They further argue that the fundamentally identical standard was taken out of context by the Superior Court. According to insurers, the meaning of “related to” should come from the language of the insurance policy.

In response, First Solar argued that the plain language of the primary policy’s linking standard would render coverage “illusory.”

On appeal, the Supreme Court said it agreed with the insurers that the Superior Court’s use of the “substantially identical” standard ignores the plain language of the insurance policy. The court said the error could be attributed to a misunderstanding of the meaning of “arising from” or “related to” for the coverage of related complaints and claims. Whether a claim is related to a prior claim is determined by the wording of the policy, not by a “substantially identical” generic standard, the High Court said.

The general related claims provision of the main policy states that a related claim is a “claim alleging, arising out of, based upon or attributable to” facts or wrongful acts which are identical or related to those alleged in a claim made against an insured.

Thus, the question before the Supreme Court on appeal was whether the Maverick action raised allegations that[e] out of, [are] based on or attributable to “any prejudicial fact or act” which is the same as or related to the “Smilovits action”.

The high court found that both actions were based on the same alleged misconduct: First Solar’s misrepresentation of the cost per watt of its solar power. The court put together a side-by-side comparison of the two complaints to argue that, while there may be minor differences between the claims, these were not material to the nexus investigation:

“In other words, both actions allege that First Solar misrepresented its ability to achieve grid parity. Both actions allege that First Solar concealed defects in the design and manufacture of modules and panels. Both actions allege that First Solar manipulated its costs, including cost-per-watt measurements.Both actions allege that First Solar published false financial reports in violation of GAAP.Both actions allege that First Solar’s deceptions were exposed on February 28, 2012.”

Although the actions are not identical in their claims or evidence, “absolute identity is not required,” the court concluded.

Using the main policy’s related claim definition, the Maverick action raised claims “alleging, arising out of, based upon, or attributable to facts or wrongful acts which are the same or related to those” raised in the Smilovits action. , the court said in finding that the Maverick claim is excluded from coverage and upholding the lower court’s decision.

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