From 3000 miles away, here is an interesting insurance coverage decision.
Genzyme Corporation had issued several classes of “tracking stocks” which “tracked” the performance of various of its divisions, in that Genzyme tracked and announced the performance of the divisions, allocating corporate expenses to them in certain proportions. The market for the tracking stocks followed the divisions’ performance. Eventually Genzyme exchanged the tracking stocks for shares of its general common stock. Former holders of tracking stocks brought a class action claiming they had been defrauded in the acquisition because Genzyme had accounted unfairly for the profits of the division their stock had been tracking, thus shortchanging them in the exchange.
Does Public Policy Bar Coverage?
That case settled and Genzyme then tried to recover a fraction of its costs for both defense and settlement from its sole D&O carrier, whose coverage was only roughly 1/5 of Genzyme’s total outlay. The trial court dismissed the case on the interesting ground that Genzyme had in effect stolen share value from its tracking shareholder class and that an insurance recovery for this outlay would be an indemnity for the insured’s restoration of stolen property and thus contrary to public policy.
The First Circuit reversed, Genzyme Corp. v. Federal Ins. Co. (2010) 622 F. 3d 62. It first noted that Massachusetts “recognizes only a limited public policy exception” to the right to cover risks by insurance, “only proscrib[ing] coverage of acts committed with the specific intent to do something the law forbids.” That standard is more generous but not really very different from California’s coverage limitations under Insurance Code section 533. The appeals court found that the case “does not present an unjust enrichment situation” because “a corporation is neither benefited nor harmed by issuing additional shares of stock.”
Genzyme thus plainly holds that D&O coverage applies to transactions in the insured’s own stock: an unusual fact situation and a strong point for broad interpretation of this insurance coverage.Continue Reading...