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In Pan Pacific Retail Properties, Inc. v. Gulf Insurance Company, 471 F.3d 961 (9th Cir. 2006), the United States Court of Appeals for the Ninth Circuit, applying California law, considered the insurability of an underlying shareholder class action in which the shareholders sought additional consideration in connection with a merger.  The Ninth Circuit affirmed in part and reversed in part the district court’s grant of summary judgment in favor of the two insurers.  The Court found that there was a genuine issue of material fact as to the question of whether the amount paid by the insured to settle the underlying class action constituted an uninsurable restitutionary payment.  However, the Ninth Circuit affirmed the district court’s finding that a loss incurred by one insured that was indemnified by another party was not a covered “loss” under the policy.  The case highlights the question: is the settlement of an underlying securities class-action involving allegations of corporate misconduct an uninsurable loss?

The Pan Pacific action arose from a merger transaction between Pan Pacific Retail Properties, Inc. (“Pan Pacific”) and Western Properties Trust (“Western”) that involved the acquisition of all Western’s shares by Pan Pacific, with consideration paid in Pan Pacific stock.  Subsequently, shareholder Bryant Bennett brought a class action on behalf of all Western shareholders challenging many aspects of the merger.  Bennett’s complaint alleged that Pan Pacific, Western, and their directors and officers were liable for breaches of fiduciary duty, abuse of control, fraud, negligent misrepresentation, unjust enrichment, and for statutory violations under state law.  Western tendered notice of the Bennett lawsuit to Twin City Fire Insurance Company (“Twin City”), which had issued a Directors’ and Officers’ Liability and Company Indemnification Policy (“D&O Policy”) to Western.  Pan Pacific also tendered notice of the suit to its own D&O insurer—Gulf Insurance Company (“Gulf”).  Both Twin City and Gulf denied coverage, stating that additional consideration paid in connection with the merger would not constitute a “loss” under the policies.

After the state superior court dismissed all of Bennett’s derivative claims the case settled.  Following the settlement, Pan Pacific and Western filed a complaint against Gulf and Twin City in the Superior Court of California alleging that the insurers had unjustifiably refused to recognize any insurance coverage for the Bennett litigation.  The case was removed to the district court, which then granted summary judgment to Gulf and Twin City, concluding that the Bennett settlement was, as a factual matter, restitutionary relief that was uninsurable under California law.  The district court also found that Gulf and Twin City did not breach their obligation to pay defense costs and expenses for the dismissed claims because these claims were similarly uninsurable.  Finally, the district court held that Twin City was not obligated to pay any indemnification or reimbursement because Western and its directors and officers did not pay any damages as part of the Bennett litigation.  Rather, pursuant to an indemnification agreement, Pan Pacific paid all claims arising from the merger. 

On appeal, the Ninth Circuit first addressed the question of whether the settlement paid by Pan Pacific in the Bennett action was uninsurable.  The Court explained that “[a]n insurer is not required to provide coverage for claims seeking the return of something wrongfully received, but must still indemnify for claims that seek compensation for injury suffered as a result of the insured’s conduct.”  Accordingly, the Court examined the nature of the claims reflected in the settlement and whether any of those claims sought non-restitutionary compensation for injuries suffered by the shareholders, which would be covered under the D&O policies. 

The Ninth Circuit determined that even though the settlement occurred after the superior court had dismissed all derivative claims, the settlement payment was not necessarily made solely in consideration for the then-pending direct claims.  According to the Court, it was conceivable that at least a portion of the settlement was motivated by the concerns of the officers and directors about potential exposure on appeal of the dismissed claims.  Alternatively, the Bennett action may have been settled to avoid liability from the remaining direct claims in the on-going class action.  The Court explained that “[c]laims asserted by shareholders challenging the actions of corporate participants in a merger need not only seek additional merger consideration.”  Because the record contained material issues of fact regarding the purpose of the settlement, the Court held that the district court erred in concluding that the entire settlement reached was for uninsurable relief.

Based upon its finding that a genuine issue of material fact existed as to the nature of the claims reflected in the settlement, the Ninth Circuit also reversed the district court’s denial of reimbursement for defense costs.  The D&O policies at issue in this case limited reimbursement to costs incurred in the defense of claims that would be insurable. 

Lastly, the Court addressed Twin City’s argument that because neither Western nor its officers and directors were required to pay any of the expenses, defense costs, or settlement payment at issue, no insured suffered a “loss” as defined by the D&O policy.  Notably, Pan Pacific paid all amounts that Western or its directors and officers were legally obligated to pay as a result of the Bennett action based on an indemnification provision included in the merger agreement.  The Court held that Western did not have a right to recover twice for the same loss.

Pan Pacific demonstrates that claims for recovery asserted by shareholders challenging the actions of corporate parties to a merger are not necessarily uninsurable.  Although California law prohibits an insurer from insuring “against the risk of being ordered to return money or property that has been wrongfully acquired,” insurance is available for claims seeking compensation for individualized harm to shareholders as a result of the insured’s conduct.  As the Ninth Circuit made clear, a close examination of the record is necessary in order to determine what the settlement payment represents and whether the settled claims sought non-restitutionary compensation.   

Jaime Wisegarver is an associate in the litigation section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or

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