U.S. Court of Appeals for the Seventh Circuit, Komatsu Mining Corp. v. Columbia Casualty Comp., Docket No. 21-2695

 

Insurance Law & Securities

 

D&O Policies

 

Securities and State-Law Suits

 

Exclusions

 

Inadequate Consideration Claim

 

Wisconsin Law

 

 

 

 

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 2:18-CV-02034

 

 

The policies in question address securities and state-law suits, which the insurers must defend at their expense. But the underwriters need not indemnify the insureds (directors and officers as well as Joy Global) for “any amount of any judgment or settlement of any Inadequate Consideration Claim other than Defense Costs”. In these policies, words and phrases in boldface are defined terms. The definition of “inadequate consideration claim” is: that part of any Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate. And a “claim” is: any civil, criminal, administrative or regulatory proceeding (other than an investigation) or arbitration, mediation or any alternative dispute resolution proceeding, ...  alleging a Wrongful Act, including any appeal therefrom.

 

 

The district court, applying Wisconsin law (which the parties agree is appropriate), granted summary judgment to the insurers. 555 F. Supp. 3d 589 (E.D. Wis. 2021). The judge found that the suits assert the wrongful act of failing to disclose documents that could have been used to seek a higher price. That brought the suits within the definition of “inadequate consideration claim” and activated the exclusion from indemnification (though the insurers still had to cover defense costs). Consider why an insurance policy might exclude coverage for “inadequate consideration”. How much a company is worth depends on the market, but bidders would like to shift the cost to a third party if possible. Suppose Company X is worth $100 million. Company Y agrees to buy X for $80 million and promises that X’s shareholders will be made whole. The shareholders sue, contending that X has withheld the “fact” that the company is worth $100 million. X and Y settle that claim for $20 million and turn to their insurer for indemnity. The shareholders get their $100 million, but if this maneuver works Y completes the purchase for only $80 million, with the rest coming from insurance. Insurers use clauses about inadequate consideration to protect themselves from this moral hazard. The hypothetical in this paragraph looks a lot like the actual merger between Joy Global and Komatsu America. But an inadequate-consideration clause means that Y, not the insurer, pays the target’s full market value.

 

 

(…) The only objection to this merger was that Joy Global could and should have held out for more money, and that revealing this would have induced the investors to vote “no” (or file suit in state court) and so trigger a renegotiation of the price.

 

 

Like the district court, we recognize that one state judge’s decision supports the approach that Komatsu Mining pursues. Northrop Grumman Innovation Systems, Inc. v. Zurich American Insurance Co., 2021 Del. Super. LEXIS 92 (Feb. 2, 2021), application for interlocutory review denied, 2021 Del. LEXIS 106 (Mar. 18, 2021), finds an inadequate-consideration exclusion in a different policy inapplicable because the claim rested in part on inadequate disclosure. The judge of the Superior Court wrote that such exclusions apply only when inadequate price is the sole allegation in the underlying complaint. Any other kind of allegation (including insufficient disclosure) nullifies the exclusion, the state judge wrote.

 

 

The state judge invoked what he understood to be a rule of Delaware insurance law that all conceivable ambiguities be construed against an insurer. But as the district judge pointed out, 555 F. Supp. 3d at 595, that may be the law in Delaware but is not the law in Wisconsin. See, e.g., Danbeck v. American Family Mutual Insurance Co., 2001 WI 91 ¶10 (Sykes, J.). What’s more, the language of the exclusion in Northrop Grumman differs from the definition of “inadequate consideration claim” in Joy Global’s policies. Komatsu Mining wants us to proceed as if all D&O policies contain the same language, but they don’t, so we shouldn’t.

 

 

 

 

(U.S. Court of Appeals for the Seventh Circuit, Jan. 23, 2023, Komatsu Mining Corp. v. Columbia Casualty Comp., Docket No. 21-2695)