Inconsistent Pleadings and Argument Establish Coverage in One Case and Exclusion in Another

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Posted on March 23, 2022 by Barry Zalma

The Delaware Supreme Court was called upon to determine whether a securities class action and a later follow-on action were related actions, such that the follow-on action was excluded from insurance coverage under later-issued policies. The Superior Court found that the follow-on action was “fundamentally identical” to the first-filed action and therefore excluded from coverage under the later-issued policies.

In First Solar, Inc. v. National Union First Insurance Company Of Pittsburgh, PA and XL Specialty Insurance Company, No. 217, 2021, Supreme Court of Delaware (March 16, 2022) the Supreme Court used the words of the Plaintiff in one case to destroy its claims in the current case.
FACTS

First Solar, Inc. (“First Solar”) manufactures solar panels and sells photovoltaic (“PV”) power plants. First Solar competes in the renewable energy space and has installed PV facilities throughout the world. In March 2012, First Solar stockholders filed a class action lawsuit against the company alleging that it violated federal securities laws by making false or misleading public disclosures. The parties refer to the original suit as the Smilovits Action. The Smilovits plaintiffs alleged that from April 30, 2008, to February 28, 2012, First Solar misrepresented that it had a winning formula for reducing manufacturing costs so rapidly and dramatically as to make solar power competitive with fossil fuels and perpetuated its fraudulent self-portrayal by concealing and misrepresenting the nature and extent of major manufacturing and design defects in its solar modules, misrepresented its financials, artificially inflated its stock prices, allowed individuals to engage in insider trading, manipulated the cost-per-watt metrics, and understated its expenses in violation of General Accepted Accounting Principles (“GAAP”).

National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) provided insurance coverage for the Smilovits Action under a 2011-12 $10 million “claims made” directors and officers insurance policy.

On June 23, 2015, while the Smilovits Action was pending, First Solar stockholders who opted out of the Smilovits Action filed what has been referred to as the Maverick Action. The Maverick Action alleged violations of the same federal securities laws as the Smilovits Action, as well as violations of Arizona statutes and claims for fraud and negligent misrepresentation with mainly the same allegations as the Smilovits Action.

When the plaintiffs filed the Maverick Action in 2015, First Solar had a $10 million “claims made” policy with National Union for 2014-15 (the “Primary Policy”) and a $10 million layer of excess coverage with XL Specialty Insurance Company (“XL Specialty” and the “XL Specialty Policy”).

The 2014-15 Primary Policy excluded coverage for “Related Claims.” A Related Claim is “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.” A Related Claim is deemed first made at the time of the previously made claim under the following conditions:

(b) Relation Back to the First Reported Claim or Pre-Claim Inquiry: Solely for the purpose of establishing whether any subsequent Related Claim was first made . . . during the Policy Period or Discovery Period (if applicable), if during any such period:

[C]laims actually first made or deemed first made prior to the inception date of this policy . . . are not covered under this policy[.]

The Related Claim Exclusion will bar coverage under the 2014-15 policies if the Maverick Action is a Related Claim to the Smilovits Action.

In 2015, First Solar exhausted all coverage under the 2011-12 National Union policy. Chubb, an excess insurer next in line after the 2011-12 National Union policy, accepted coverage of the Maverick Action because “the new Maverick litigation is based on the same facts and circumstances of the previously noticed Smilovits class action complaint,” and as such, “[Chubb] treats this matter as a related claim.”

Chubb provided coverage for the Maverick Action as the litigation progressed. In the Smilovits Action, First Solar filed a “Motion to Transfer Related Case” to litigate both Actions before the same judge. It argued that “[t]he substantial overlap in legal and factual issues and the substantial overlap in parties weigh in favor of transferring the Maverick [] Action to this Court.” The court granted the motion.

After years of litigation and after incurring over $80 million in defense costs, First Solar settled the Smilovits Action on January 5, 2020 for $350 million. All primary and excess insurers under the 2011-12 policies paid their policy limits. Having settled the Smilovits Action and exhausted all coverage under the 2011-12 policies, First Solar began to arbitrate a settlement of the Maverick Action. It sought coverage under the 2014-15 Primary Policy and the XL Specialty Policy (the “Policies”) for the Maverick Action. First Solar eventually settled the Maverick Action for $19 million without a coverage commitment from National Union or XL Specialty (collectively, the “Insurers”). After the Insurers denied coverage under the Policies, First Solar filed suit in the Superior Court for breach of contract and declaratory relief that the Insurers were obligated to provide coverage under the Policies.

The Superior Court litigation focused on the relatedness of the Smilovits and Maverick Actions. The Superior Court held that a complaint is “related to” or “aris[es] out of” a previous complaint if the claims are “fundamentally identical.” Fundamentally identical lawsuits, according to the court, require the “same subject” and “common facts, circumstances, transactions, events, and decisions.”
ANALYSIS

On appeal, First Solar argued that the Superior Court ruled incorrectly that the Smilovits Action and the Maverick Action were fundamentally identical. The Insurers argued that the Maverick Action meets the “fundamentally identical” standard because it is directed to the same Wrongful Act and fraudulent scheme as the Smilovits Action.

The Supreme Court noted that the Primary Policy’s Related Claim provision is broad. The question on appeal was, therefore, whether the Maverick Action raises Claims that “aris[e] out of, [are] based upon or attributable to any facts or Wrongful Acts that are the same as or related to” the Smilovits Action.

If the Maverick Action is a Related Claim under the Primary Policy. Both Actions are based on the same alleged misconduct-First Solar’s misrepresentations about the cost-per-watt of its solar power.

The Supreme Court concluded that while there might be minor differences – like the disparity between a certain cost-per-watt level and grid parity – the Actions focus on First Solar’s misrepresentations about the cost of solar power. Both Actions allege violations of the same federal securities laws from this wrongful conduct. In both cases, plaintiffs allege that First Solar made material misrepresentations regarding its solar power capabilities as part of a fraudulent scheme to increase stock prices.

If there was any remaining doubt about relatedness under the Primary Policy language, the Supreme Court relied on what First Solar said about the two Actions when insurance coverage was not at issue. Because First Solar agreed in another case that the Actions were nearly identical its agreement is exactly opposite to what it argued to the Delaware Supreme Court. In its filings, First Solar claimed that the Maverick Action made “nearly identical allegations” to other actions “asserting that First Solar’s stock price decline was somehow caused by a fraudulent scheme to conceal the existence and costs of various manufacturing deviations.” First Solar was correct in its argument to consolidate the cases because the Smilovits Action and the Maverick Action include different misrepresentations and evidence to support their claims-not different Wrongful Acts.

The Primary Policy’s Relation Back Provision applies when two claims are related. Under the Policy, “any Related Claim that is subsequently made against an Insured . . . shall be deemed to have been first made at the time that such previously reported Claim was first made.”

Since claims first made before the inception date of the Primary Policy are not covered the Superior Court correctly applied the Primary Policy language, because if the Maverick Action relates back to the Smilovits Action, it is deemed “first made” at the time of the Smilovits Action and thus “not covered under this policy.”

The Maverick Action Claim was deemed by the Supreme Court to be first made at the time of the Smilovits Action and is excluded from coverage under the Related Claim Exclusion of the Policies. As a result, the judgment of the Superior Court was affirmed.
ZALMA OPINION

It is essential that a litigant seeking insurance coverage must act consistently. In this case First Solar first argued that Smilovits and Maverick were identical and should be tried together which worked well until the available insurance coverage was exhausted and then, to gain more insurance coverage, claimed they were different and it was entitled to coverage for the Maverick Action. The court did not ignore the contradiction and held in favor of the insurer.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

Over the last 54 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created a library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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