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Case Highlight

CNL Hotel & Resorts, Inc. v. Houston Casualty Co., et al.

Reprinted from Acredula -- Spring 2007

On March 14, 2007, the middle district of Florida entered a decision that held a settlement of a Section 11 claim, which focused on misrepresentation in a prospectus or registration statement, and said it was not covered by the Company’s Director & Officer (D&O) liability insurance. The settlement, the Court said, represented a disgorgement by the Company of “wrongfully appropriated” money that did not constitute a “loss” under the relevant policy provision and therefore, was not insurable under New York law.

The Court also held that settlements of claims under Section 11 do not constitute a “loss” if they result in the repayment by the insured company of monies wrongfully appropriated.

The Plaintiffs in this securities class action alleged that CNL Hotel & Resorts, Inc. (CNL) employed improper accounting practices and made materially false and misleading statements in its prospectuses and registration statements in connection with several securities offerings. CNL settled for $35 million, including a payment of $7 million (awarded by the Court to the plaintiffs’ attorneys).

CNL brought a declaratory action against its D&O insurers. CNL settled with its primary carrier and moved for Summary Judgment against its two excess carriers asserting that the $35 million constituted a “loss”. The D&O policy at issue defined “loss” as “sums [the Insureds] are legally liable to pay solely as a result of any Claim insured by this Policy, including claims expenses, compensatory damages, settlement amounts . . . but excluding fines, penalties, taxes . . . or matters uninsurable pursuant to any applicable law.”

While the Court found this disgorgement to be uninsurable, it fell short of finding all Section 11 claims to be per se uninsurable. It’s easy to envision that every D&O insurer would attempt to treat all Section 11 settlements as uninsurable, so now it is crucial for D&O insurers to clarify the language of their policy to clearly reflect the coverage that policyholders can expect for amounts paid in resolution of such claims. Equally important as clear writing is the policyholders’ clear understanding of their D&O insurance and exactly what it will and will not cover.