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 in
crease the amount of authorized common stock it could issue, but these efforts were unsuccessful. Unable to iss
ue more common stock, AMC created a new security, the AMC Preferred Equity Units (APEs). Shar
eholders sued to block the move. Under its settlement with shareholders, AMC agreed to pay 6,897,018 share
s 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 dire
ctors and officers (D&O) insurance policies to AMC including its primary D&O insurer, XL Specialty Insuranc
e 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.
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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 mil
lion and responding to 33% of covered “loss” until AMC incurred $45 million in covered “loss.” Midvale ended up bein
g the only remaining defendant in the case in Superior Court and the insurer and AMC filed cross-motions for su
mary 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, makin
g 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 set
tlement. 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 de
fined term. The court said insurance policies should be interprete
d 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 cu
rrency that can be exchanged for other forms of currency or used for a variety of corporate purpo
ses, 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 c
ash-strapped policyholders seeking coverage for settlements paid with non-cash compensation.”