Background
The appellant in this case was First Solar, Inc., which manufactures solar panels and sells photovoltaic power plants. In March 2012, First Solar stockholders filed a class action alleging violations of federal securities laws due to false and misleading public disclosures (the “Smilovits Action”). The plaintiffs in the original securities class action alleged that First Solar (i) made various misrepresentations, including regarding the quality and costs of its manufacturing; (ii) perpetuated these misrepresentations by concealing and misrepresenting major design defects in its solar modules; (iii) misrepresented its financials; (iv) artificially inflated its stock prices; (v) permitted insider trading; (vi) manipulated cost-per-watt metrics; and (vii) understated its expenses in violation of GAAP. The Smilovits plaintiffs alleged that these actions took place from April 30, 2008 to February 28, 2012. National Union Fire Insurance Company of Pittsburgh, PA provided insurance coverage for the Smilovits Action under a 2011-2012 $10 million “claims made” directors and officers insurance policy. First Solar also had excess 2011-2012 coverage from Chubb, a fact that would become important later.
On June 23, 2015, while the original Smilovits Action was still pending, certain First Solar stockholders who had opted out of the class action filed a separate action (the “Maverick Action”). The second action alleged violations of the same federal securities laws, as well as violations of Arizona statutes and claims for fraud and negligent misrepresentation. The second action alleged similar, but not identical, misconduct in the period between May 2011 and December 2011.
When the second set of plaintiffs filed the Maverick Action in 2015, First Solar had a 2014-2015 $10 million “claims made” policy with National Union, plus a $10 million layer of excess coverage with a different insurer, XL Specialty Insurance Company. The 2014-2015 National Union policy excluded coverage for “Related Claims.” The policy defined a “Related Claim” as “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.” The policy specified that a Related Claim is deemed to relate back in time and that this “shall be deemed to have been first made at the time that such previously reported Claim was first made.” Claims deemed to have been made prior to the inception date of the 2014-2015 policy would not be covered by the policy. Hence, the question of whether National Union would need to provide insurance coverage for the second Maverick Action turned on whether or not the claims were “Related Claims.”
At first, First Solar actually obtained coverage for the second Maverick Action under its 2011-2012 policies. First, National Union paid under the 2011-2012 primary insurance policy. When that coverage was exhausted, the 2011-2012 excess insurer, Chubb, accepted coverage on the grounds that “the new Maverick litigation is based on the same facts and circumstances of the previously noticed Smilovits class action complaint,” and hence, “[Chubb] treats this matter as a related claim.” Chubb provided coverage for the Maverick Action as the litigation progressed. Meanwhile, in the original Smilovits Action, First Solar filed a motion to transfer in order to litigate both actions before the same judge, arguing “substantial overlap in legal and factual issues and the substantial overlap in parties.” The court granted First Solar’s motion.
On January 5, 2020, First Solar settled the original Smilovits Action. The $80 million settlement exhausted all of the 2011-2012 coverage from both the primary and secondary insurers. First Solar then began to arbitrate the Maverick Action and sought coverage under the 2014-2015 primary National Union policy and the XL Specialty excess policy. First Solar eventually settled the Maverick Action for $19 million without a coverage commitment from either National Union or XL Specialty. National Union and XL Specialty subsequently denied coverage, and First Solar filed the insurance coverage action in Delaware Superior Court. First Solar alleged breach of contract and sought declaratory relief that the insurers were obligated to provide coverage.
Analysis
The question in the Superior Court litigation boiled down to the relatedness of the two actions, and whether the second Maverick Action fell within the exclusion in the primary policy for “Related Claims.” First Solar argued that the two actions were not sufficiently related because they involved different plaintiffs, conduct, causes of action, and time periods. The insurers countered that the second action arose out of the first, and that the two actions raised materially the same claims against the same parties.
The Superior Court relied on Pfizer Inc. v. Arch Ins. Co., 2019 WL 3306043 (Del. Super. July 23, 2019) and held that an action is “related to” or “aris[es] out of” a previous action where the claims are “fundamentally identical.” According to the Superior Court, fundamentally identical lawsuits require the “same subject” and “common facts, circumstances, transactions events, and decisions.” There must be more than “thematic similarities,” as the court explained in the Pfizer decision. This is because the words “arising out of” imply a causal connection.
Applying these standards, the Superior Court found that the two actions in this case had “substantial similarities” and were “fundamentally identical.” Among other things, the lawsuits stemmed from the same original suit, were against “identical defendants,” overlapped in time, contained allegations of the same securities law violations, and relied on the same specific disclosures. The Superior Court further found that the underlying wrongful conduct (i.e., allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports) was the same. While there were some differences between the actions, including the damages theory of the Maverick plaintiffs, the Superior Court held that the similarities won out. The Superior Court ruled that the Maverick Action was fundamentally identical to the Smilovits Action and was excluded as a Related Claim.
On appeal, the Supreme Court agreed with the insurers that the standard for relatedness is not “fundamentally identical.” The Supreme Court explained the genesis of this terminology in Superior Court case law, but clarified that this terminology should not be interpreted as a new legal standard separate from the policy language. Instead, the scope of the insurance policy’s coverage is prescribed by the language of the policy itself, which, absent ambiguity, Delaware courts will interpret according to its plain, ordinary meaning.
In this case, the policy’s “Related Claim” language was broad, defining a Related Claim as 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.” Applying this standard, the Supreme Court found that the second Maverick Action was a Related Claim to the original Smilovits Action. The Supreme Court agreed that both actions were based on the same alleged underlying misconduct ‒ First Solar’s misrepresentations about the cost-per-watt of its solar power. The Court subsequently provided a chart illustrating side-by-side comparisons of the similarities between the cases in defendants, time period, overall theory, relevant statements and evidence, and claimed damages.
The Supreme Court acknowledged that there were some differences between the actions, but found that these differences were “not meaningful … to the relatedness inquiry.” First Solar argued that the Smilovits Action focused on cost-per-watt representations (which were representations about a present state of affairs), while the Maverick Action focused on representations concerning electrical grid parity (which were representations about a future objective). First Solar further argued that the Smilovits Action focused on the company’s “Components Business” (individual PV cells or solar modules), whereas the Maverick Action focused on the “Systems Business” (the PV facilities built by First Solar). According to First Solar, these distinctions show that the Smilovits Action centered on “historical performance” representations, while the Maverick Action dealt with predictions of grid parity, or “forward-looking statements.”
The Supreme Court agreed with the Superior Court that, ultimately, both cases concern First Solar’s alleged misrepresentations about the cost of solar power. In both cases, the plaintiffs alleged that the company made material misrepresentations regarding its solar power capabilities as part of a fraudulent scheme to increase stock prices. The Supreme Court explained that “although the Actions are not identical in their claims or evidence, absolute identity is not required.” Like the Superior Court, the Supreme Court noted a difference in the requested damages ‒ with the Smilovits plaintiffs seeking actual damages but the Maverick plaintiffs seeking additional types of damages, including “rescission or rescissionary damages.” Nonetheless, the Supreme Court held that “the thrust of the Wrongful Acts alleged in the two Actions is the same regardless of how damages are claimed.”
Finally, the Supreme Court looked to First Solar’s prior statements about relatedness as removing any doubt that the claims were indeed Related Claims. The Court explained that “if there is any remaining doubt about relatedness under the Primary Policy language, we can rely on what First Solar said about the two Actions when insurance coverage was not at issue.” The Supreme Court pointed out First Solar initially sought and received coverage for the Maverick Action as a related action to the Smilovits Action under the 2011–2012 policies. In addition, First Solar filed a motion to transfer to litigate the two actions before the same judge, arguing “substantial overlap in legal and factual issues” and “substantial overlap in parties.” Thus, even though many of these statements were made in a different procedural context, the Supreme Court appeared to take them as persuasive, if not determinative, of relatedness.
Key takeaways
- The standard for relatedness between two insurance coverage claims is determined by the policy language, which, absent ambiguity, Delaware courts will interpret according to its plain, ordinary meaning. There is no separate “fundamentally identical” standard applicable to Related Claims in insurance coverage cases.
- When an insurance policy contains broad “arising out of” or “related to” language, some differences in allegations, facts, and damages will not bar a finding of relatedness. Instead, where the “thrust of the Wrongful Acts alleged” is the same, the actions will likely be found to be Related Claims. Nonetheless, litigants should bear in mind that the determination will hinge on the specific language of the policy, and that different language may occasion a different result.
- The court may look to prior statements by the parties on the subject of relatedness.
Client Alert 2022-103
