Insurance Covers Settlement Paid by Stocks Instead of Money: Delaware High Court

A settlement paid by stocks rather than money is a covered loss that must be paid by an insurer, the Delaware Supreme Court has affirmed.

The state’s high court agreed with a lower court’s ruling that the definition of “loss” does not restrict coverage to cash payments or monetary amounts.

The rulings came in a dispute that arose when AMC Entertainment Holdings, Inc. (AMC) sought coverage for losses incurred in a settled lawsuit brought by AMC shareholders. AMC twice sought shareholder approval to amend its certificate of incorporation to increase the amount of authorized common stock it could issue, but these efforts were unsuccessful. Unable to issue more common stock, AMC created a new security, the AMC Preferred Equity Units (APEs). Shareholders sued to block the move. Under its settlement with shareholders, AMC agreed to pay 6,897,018 shares of common stock and the plaintiffs’ attorney’s fees. In exchange, the plaintiffs agreed to release all claims, enabling AMC to move forward with its APE proposal.

The movie theater company originally sought coverage from 17 insurance companies, each of which issued directors and officers (D&O) insurance policies to AMC including its primary D&O insurer, XL Specialty Insurance Co. (XL). The insurers denied coverage, contending that the settlement payment method, shares of AMC stock provided by AMC to the plaintiffs in the underlying actions, is not covered by the policies.

AMC argued the insurers were obligated and went to court seeking a declaratory ruling in its favor.

Midvale Indemnity Co. provided an excess D&O liability policy to AMC that followed the XL policy, attaching at $30 million and responding to 33% of covered “loss” until AMC incurred $45 million in covered “loss.” Midvale ended up being the only remaining defendant in the case in Superior Court and the insurer and AMC filed cross-motions for summary judgment, seeking the court’s resolution of the insurance coverage dispute.

AMC asserted the shares constitute an amount AMC was legally obligated to pay for a settlement, making the expended shares a covered “loss” under its insurance. AMC noted that the “loss” definition contains no language limiting its application to cash payments.

Midvale countered that because shares of stock are not money which can be “paid,” the polices do not cover the settlement. The insurer insisted that AMC issued stock but did not pay any amount which reaches the excess policies.

In a February opinion, the Superior Court agreed with AMC that the definition of “loss” in the policies does not restrict coverage to cash payments or monetary amounts. Also “pay,” as used in the “loss” definition, is not a defined term. The court said insurance policies should be interpreted to favor broad coverage and it would not insert a restricting clause into the policy providing that only cash settlements are covered “loss.”

Delaware case law recognizes the “close similarity” between stock and cash money. “Stock is a form of currency that can be exchanged for other forms of currency or used for a variety of corporate purposes, including paying off debts, acquiring assets, compensating employees, or acquiring other entities,” the court noted.

The Delaware Supreme Court upheld the lower court’s ruling and reasoning without further comment on December 9.

AMC was represented by Robin Cohen, Adam Ziffer, and Michelle Migdon of Cohen Ziffer Frenchman & McKenna LLP. In a statement, the firm called the ruling a “vital precedent for cash-strapped policyholders seeking coverage for settlements paid with non-cash compensation.”

Photo: Delaware Supreme Court