Delaware High Court Rules on Insurance Coverage for Stock-Based Settlements

A recent ruling by the Delaware Supreme Court has clarified that a settlement paid in stocks rather than cash is indeed a covered loss that insurers must honor. This decision reinforces the notion that the definition of “loss” in insurance policies does not limit coverage to monetary payments alone.

The case originated when AMC Entertainment Holdings, Inc. (AMC) sought coverage for losses stemming from a lawsuit filed by its shareholders. AMC had attempted to amend its certificate of incorporation to increase the number of authorized common stock shares but faced two unsuccessful votes. In response, AMC created a new security known as the AMC Preferred Equity Units (APEs). Shareholders subsequently sued to prevent this move. As part of the settlement, AMC agreed to pay 6,897,018 shares of common stock along with the plaintiffs’ attorney fees. In return, the plaintiffs released all claims, allowing AMC to proceed with its APE proposal.

Initially, AMC sought coverage from 17 different insurance companies, all of which had issued directors and officers (D&O) insurance policies, including its primary insurer, XL Specialty Insurance Co. (XL). However, these insurers denied coverage, arguing that the settlement payment method—shares of AMC stock—was not covered under the policies.

In response, AMC contended that the insurers were obligated to provide coverage and sought a declaratory ruling in court. Midvale Indemnity Co. had provided an excess D&O liability policy that followed the XL policy, kicking in at $30 million and covering 33% of any covered “loss” until AMC reached $45 million in covered losses. Midvale became the sole defendant in the Superior Court case, where both the insurer and AMC filed cross-motions for summary judgment to resolve the dispute over insurance coverage.

AMC argued that the shares represented a legal obligation for settlement, thus qualifying as a covered “loss” under its insurance policy. The company pointed out that the definition of “loss” did not explicitly limit itself to cash payments.

Midvale countered, asserting that since shares of stock are not cash, they do not constitute a payment that would be covered under the policies. The insurer maintained that AMC issued stock but did not make any cash payments that would trigger the excess policies.

In a ruling issued in February, the Superior Court sided with AMC, stating that the definition of “loss” in the policies does not restrict coverage to cash payments. The court emphasized that the term “pay,” as used in the definition of “loss,” is not specifically defined. It further noted that insurance policies should be interpreted to favor broad coverage, rejecting the idea of inserting a clause that limits coverage to cash settlements.

Delaware case law acknowledges the “close similarity” between stock and cash. The court remarked that “stock is a form of currency that can be exchanged for other forms of currency or used for various corporate purposes,” including settling debts and compensating employees.

On December 9, the Delaware Supreme Court upheld the lower court’s ruling without further comment. AMC was represented by Robin Cohen, Adam Ziffer, and Michelle Migdon of Cohen Ziffer Frenchman & McKenna LLP. The firm described the ruling as a “vital precedent for cash-strapped policyholders seeking coverage for settlements paid with non-cash compensation.”

Photo: Delaware Supreme Court

A recent ruling by the Delaware Supreme Court has clarified that a settlement paid in stocks rather than cash is indeed a covered loss that insurers must honor. This decision reinforces the notion that the definition of “loss” in insurance policies does not limit coverage to monetary payments alone.

The case originated when AMC Entertainment Holdings, Inc. (AMC) sought coverage for losses stemming from a lawsuit filed by its shareholders. AMC had attempted to amend its certificate of incorporation to increase the number of authorized common stock shares but faced two unsuccessful votes. In response, AMC created a new security known as the AMC Preferred Equity Units (APEs). Shareholders subsequently sued to prevent this move. As part of the settlement, AMC agreed to pay 6,897,018 shares of common stock along with the plaintiffs’ attorney fees. In return, the plaintiffs released all claims, allowing AMC to proceed with its APE proposal.

Initially, AMC sought coverage from 17 different insurance companies, all of which had issued directors and officers (D&O) insurance policies, including its primary insurer, XL Specialty Insurance Co. (XL). However, these insurers denied coverage, arguing that the settlement payment method—shares of AMC stock—was not covered under the policies.

In response, AMC contended that the insurers were obligated to provide coverage and sought a declaratory ruling in court. Midvale Indemnity Co. had provided an excess D&O liability policy that followed the XL policy, kicking in at $30 million and covering 33% of any covered “loss” until AMC reached $45 million in covered losses. Midvale became the sole defendant in the Superior Court case, where both the insurer and AMC filed cross-motions for summary judgment to resolve the dispute over insurance coverage.

AMC argued that the shares represented a legal obligation for settlement, thus qualifying as a covered “loss” under its insurance policy. The company pointed out that the definition of “loss” did not explicitly limit itself to cash payments.

Midvale countered, asserting that since shares of stock are not cash, they do not constitute a payment that would be covered under the policies. The insurer maintained that AMC issued stock but did not make any cash payments that would trigger the excess policies.

In a ruling issued in February, the Superior Court sided with AMC, stating that the definition of “loss” in the policies does not restrict coverage to cash payments. The court emphasized that the term “pay,” as used in the definition of “loss,” is not specifically defined. It further noted that insurance policies should be interpreted to favor broad coverage, rejecting the idea of inserting a clause that limits coverage to cash settlements.

Delaware case law acknowledges the “close similarity” between stock and cash. The court remarked that “stock is a form of currency that can be exchanged for other forms of currency or used for various corporate purposes,” including settling debts and compensating employees.

On December 9, the Delaware Supreme Court upheld the lower court’s ruling without further comment. AMC was represented by Robin Cohen, Adam Ziffer, and Michelle Migdon of Cohen Ziffer Frenchman & McKenna LLP. The firm described the ruling as a “vital precedent for cash-strapped policyholders seeking coverage for settlements paid with non-cash compensation.”

Photo: Delaware Supreme Court