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Unclear policy forms prevent rejection of D&O coverage allowances for statutory assessment requirements



Does the term "illegal action" always ask that the current behavior is "wrong"? In at least one D&O insurance policy, the answer cannot be as clear as it seems. A federal district court in Texas recently denied an insurer's proposal to reject the company's coverage claim for nearly $ 5 million in costs incurred by the company to defend a statutory assessment process submitted by dissatisfied shareholders, citing D & O's "terrible" written definition of "illegal action," which may have been written so broad that it provides coverage for "actions" that are not "improper".

Considering that a more developed record was necessary in view of the poorly formulated policy, the court denied the insurer's proposal to reject which had been based on the insurer's argument that the statutory assessment was necessary to determine whether the merger consideration paid was unfair and if so, determine the "fair value" of the shares. The court based its decision that it could not decode whether or not an "erroneous act" had been committed, under the terms of the policy, in view of the unfair wording of the definition of the term.

illustrates how courts will not accept the insurance defense, where they are based on the insurer's favorable interpretation of unfairly designed political language (see previous posts on these issues here and here). Given the limited nature of the court in the early stages of the case, it seems likely that the parties will raise these issues again in further exercise classes once the discovery is completed. We continue to monitor the case, CEC Entertainment Inc. v. Travelers Casualty and Surety Co. of America No. 3: 1

6-cv-02493-M (ND Tex.), For further development.


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