IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
THE OPTIONS CLEARING ) CORPORATION, ) ) Plaintiff, ) C.A. No. N20C-11-001 AML CCLD ) v. ) ) U.S. SPECIALTY INSURANCE ) COMPANY, INDIAN HARBOR ) INSURANCE COMPANY, and ) EVANSTON INSURANCE COMPANY, ) ) Defendants. )
Submitted: September 7, 2021 Decided: November 30, 2021
MEMORANDUM OPINION
Upon Plaintiff’s Motion for Partial Summary Judgment: GRANTED
Miranda N. Gilbert, Esquire, Kenneth J. Nachbar, Esquire and John P. DiTomo, Esquire of MORRIS NICHOLS ARSHT & TUNNELL LLP, Wilmington, Delaware and Robin L. Cohen, Esquire, Adam S. Ziffer, Esquire and Michelle R. Migdon of COHEN ZIFFER FRENCHMAN & MCKENNA, New York, New York, Attorneys for Plaintiff The Options Clearing Corporation.
Robert J. Katzenstein, Esquire of SMITH, KATZENSTEIN & JENKINS LLP Wilmington, Delaware, and Leslie S. Ahari, Esquire and Emily A. Golding, Esquire of CLYDE & CO US LLP, Washington, D.C., Attorneys for Defendant U.S. Specialty Insurance Company.
Robert J. Katzenstein, Esquire of SMITH, KATZENSTEIN & JENKINS LLP Wilmington, Delaware, and Kimberly M. Melvin, Esquire and Elizabeth Jewell, Esquire of WILEY REIN LLP, Washington, D.C., Attorneys for Defendant Indian Harbor Insurance Company.
LEGROW, J. The plaintiff, a clearing agency subject to federal oversight and regulation,
seeks insurance coverage for defense costs the plaintiff incurred in connection with
two enforcement actions pursued by federal regulators. The defendant insurers
contend coverage is barred by policy provisions that exclude coverage for claims
arising out of, based upon, or attributable to previous investigations into the
plaintiff’s compliance with various federal regulations.
The insurers seek to establish that the later actions are a continuation of
compliance errors identified and investigated years earlier and therefore are barred
by coverage exclusions for related claims. Although the insurers identify some
general similarities between the earlier investigations and the later enforcement
actions, the nature of the plaintiff’s business makes it likely that those similarities
would exist in any regulatory action directed toward the plaintiff. Significantly, the
enforcement actions for which the plaintiffs seek coverage relate to regulations
adopted after the previous investigation and - by extension - conduct allegedly
occurring after that date. Under the exclusions’ plain language, the enforcement
actions are not related to the earlier investigation because there is no meaningful
linkage between them. The insurers’ contention that they should be permitted
discovery into all aspects of the enforcement actions before the Court may determine
relatedness fails under Delaware law. Accordingly, the plaintiff is entitled to partial summary judgment as to coverage exclusions based on relatedness. My reasoning
follows.
FACTUAL & PROCEDURAL HISTORY
A. The Parties
Unless otherwise noted, the following facts are not disputed. Plaintiff The
Options Clearing Corporation (“OCC”) is a registered United States clearing agency
and derivatives clearing organization.1 In March 2015, OCC first purchased
Directors, Officers, and Organization (“D&O”) Liability insurance from Defendants
U.S. Specialty Insurance Company (“U.S. Specialty”) and Indian Harbor Insurance
Company (“Indian Harbor”) (collectively, the “Insurers”).2 OCC renewed its policy
(the “Primary Policy”) with U.S. Specialty for the policy period March 15, 2017 to
March 15, 2018.3 That Primary Policy provides $5 million in coverage over a
$250,000 retention.4 Indian Harbor issued OCC the first excess policy with $5
million in coverage in excess of $5 million (the “Excess Policy”). The Excess Policy
“follows form” to the Primary Policy, meaning it incorporates and adopts the
Primary Policy’s terms, conditions, definitions, and, importantly for this case,
exclusions.5
1 Plaintiff’s Mot. for Partial Summ. J., (hereinafter “Plf.’s Mot.”) at 1. 2 Def.’s Mot. in Opp. of Plaintiff’s Mot. for Partial Summ. J. (hereinafter “Def.’s Mot.”). at 6. 3 Plf.’s Mot. at 5. 4 Id. 5 Id.
2 B. The Polices
The Primary Policy and Excess Policy (collectively, the “Policies”) provide
OCC coverage for “Loss arising from Claims first made against [OCC] during the
Policy Period . . . for Wrongful Acts.”6 A “Claim” includes “any oral or written
demand, including any demand for non-monetary relief” and “any administrative or
regulatory proceeding commenced by the filing of a notice of charges, formal
investigative order or similar document.”7 “A Wrongful Act” means “any actual or
alleged act, error, misstatement, misleading statement, omission or breach of duty .
. . by OCC.8 “Loss” includes “Defense Costs and any damages, settlements,
judgments . . . that an Insured is legally obligated to pay as a result of any Claim . .
.”9 And “Defense Costs” are the “reasonable legal fees, costs and expenses
consented to by” OCC “resulting from the investigation, adjustment, defense or
appeal of a Claim against an Insured.10 The Policies provide coverage for all
OCC’s Defense Costs, even if a Claim only is partially covered.11
6 Id.; see also Ex. 1, Insuring Agreement B. 7 Id. at 6; see also Ex. 1, Definitions (B)(1), (4). 8 Id.; see also Ex. 1, Definitions (U). 9 Id.; see also Ex. 1, Definitions (J). 10 Id.; see also Ex. 1, Definitions(C). 11 Id.
3 1. The Event Exclusion Provision
The Policies contain exclusions (the “Exclusions”) that Defendants list among
their affirmative defenses but that OCC contends are not applicable to this case.12
The Exclusions were negotiated between OCC’s broker and U.S. Specialty’s
underwriter.13 The “Event Exclusion” relieves the Insurers from any obligation to
cover any Claim related to certain previous events involving a Security and
Exchange Commission (“SEC”) investigation into OCC’s compliance with
particular industry standards and regulations (the “Event Exclusion”). Specifically,
The Insurers will not be liable to make any payment of Loss in connection with a Claim arising out of, based upon or attributable to: (a) any Event(s); (b) the prosecution, adjudication, settlement, disposition, resolution or defense of any Event(s) and/or any Claim(s) arising from any Event(s); (c) any Wrongful Act, underlying fact or circumstance in any way relating to any Event(s); or (d) any Interrelated Wrongful Act, regardless of whether or not such Claim involves the same or different Insureds or parties, the same or different legal causes of action or the same or different claimants, or is brought in the same or different venue or resolved in the same or different forum.14
For the purposes of this provision, “Event” means:
any of the following Claim(s), notice(s), event(s), investigation(s), litigation(s) and/or action(s):
12 Id. at 7. 13 Def.’s Mot. at 7. 14 Plf.’s Mot. at 7. See Ex. 1, Specific Event(s) Exclusion- Absolute.
4 detailed in the June 7, 2012, September 18, 2013 and September 18, 2014 letters15 from the SEC and [OCC]’s subsequent response letters dated August 6, 2012, November 1, 2013 and November 3, 2014.16
2. Prior Notice Exclusion
In addition to the Event Exclusion, the Policies’ Prior Notice Exclusion bars
coverage for Loss in connection with a Claim:
arising out of, based upon or attributable to facts or circumstances alleged, or to the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or with respect to which any notice has been given, under any policy of which this Policy is a renewal or replacement or which it may succeed in time[.]17
C. 2012-2014 OCIE Letters
OCC is a registered United States clearing agency and derivatives clearing
organization, acting as a central counterparty and providing clearing and settlement
services to eighteen exchanges.18 OCC is the sole registered clearing agency for
exchange listed options contracts in the United States and has been designated as a
“systemically important financial market utility” (a “SIFMU”) under Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
15 A detailed explanation of these letters follows. The letters will be referred to collectively as the “2012-2014 OCIE Letters” because they derive from the Security and Exchange Commission’s Office of Compliance Inspections and Examinations during that range of years. 16 Plf.’s Mot. at 7; see Ex. 1, Specific Event(s) Exclusion- Absolute (1)(A). The Insurers contend that after OCC sought coverage from U.S. Specialty for the SEC Investigation, U.S. Specialty learned at least 7 additional letters and 6 formal Inspection Reports had been sent by the SEC between 2012 and March 2015, which had not been disclosed. Def.’s Mot. at 6, n. 4. 17 Id. Definitions (B)(1)(H). 18 Id. at 4.
5 Act”).19 In that role, OCC falls within the oversight responsibility of the SEC’s
Office of Compliance Inspections and Examinations (“OCIE”). The OCIE conducts
the SEC’s National Exam Program, which examines financial market participants,
like OCC, on a regular basis, facilitating compliance and cooperation between its
examination staff and the registered entities.20 The OCIE’s mission is to protect
investors, ensure market integrity, and support reasonable capital formation through
risk-focused strategies that improve compliance, prevent fraud, monitor risk, and
inform policy.21
In 2012, the OCIE identified deficiencies at OCC and informed them that an
investigation was underway.22 Between June 2012 and November 2017, the SEC
sent at least 25 letters and 9 inspection reports to OCC concerning noncompliance
and potential violations of the Securities and Exchange Act of 1934.23 Three specific
letters and responses from the OCIE, the 2012-2014 OCIE Letters, are the subject of
the Event Exclusion provision in the Policies.24
Each of the 2012-2014 OCIE Letters addressed different concerns. The 2012
Letter identified system control failures in OCC’s Escrow Receipt Depository
19 Id. at 4-5; Ex. 11 at 2. SIFMUs are subject to a host of new regulations and enhanced and evolving expectations by regulators and are highly scrutinized. See Plf.’s Mot. Ex. 9. 20 Def.’s Mot. at 17. 21 Division of Examinations, U.S. SECURITIES AND EXCHANGE COMMISSION, https://www.sec.gov/exams (last visited Nov. 9, 2021, 3:54 PM). 22 Def.’s Mot. at 2. 23 Id. at 3. 24 Plf.’s Mot. at 2.
6 program, reduced effectiveness of the internal audit function, weaknesses within
OCC’s risk management framework, and insufficient written, formal policies and
procedures throughout the organization.25 The 2013 Letter involved a number of
repeat findings, causing OCIE to raise a serious concern about OCC’s overall
commitment to establishing a culture of regulatory compliance and its ability to
timely and adequately address the Staff’s findings.26 The 2013 Letter also found a
pattern of systemic weaknesses in OCC’s risk management and operations in the
areas of Quantitative Risk Management, Governance, Liquidity, Policies and
Procedures and Documentation.27 Lastly, the 2014 Letter found OCC did not
sufficiently identify and mitigate operational risk, as specified under standards
established by Exchange Act Rule 17Ad-22(d)(4), which require clearing agencies
to identify and minimize operational risk through the development of appropriate
systems, controls, and procedures.28 Collectively, the 2012-2014 OCIE Letters
noted several points where OCC’s documentation and practices were not in
compliance with securities laws and regulations or otherwise were insufficient.29
25 Id.; Ex. 14. 26 Id.; Ex. 15. 27 Id. 28 Id.; Ex. 16. 29 See Compl. ¶ 31.
7 Christine Montelbano (“Montelbano”) underwrote on U.S. Specialty’s behalf the
primary D&O liability insurance policies issued to OCC from 2015 to 2020.30
During the underwriting process, U.S. Specialty examined the 2012-2014 OCIE
Letters and became aware the SEC was scrutinizing OCC’s operations, internal
controls and risk management for noncompliance with securities laws and
regulations.31 Based on her assessment of those Letters, Montelbano agreed to issue
a primary D&O policy to OCC, but drafted the Events Exclusion to bar coverage for
OCC’s “ongoing noncompliance and violations of the securities laws reflected in the
SEC’s findings.”32 When the Events Exclusion was prepared, the only documents
in Montelbano’s possession relating to the SEC’s scrutiny of OCC were the 2012-
2014 OCIE Letters.33
D. The SEC Enforcement Actions
On June 14, 2017, the SEC’s Division of Enforcement informed OCC of “an
ongoing investigation” (the “2017 Letter”).34 The 2017 Letter required OCC to
preserve and retain evidence relating to its compliance with specific SEC statutes
and regulations “until further notice,” and warned that OCC’s failure to do so “could
30 Declaration of Christine Montelbano (hereinafter “Monetelbano Decl.”) ¶ 2. The policy relevant to this action is Policy No. 24-MGU-17-A40094, issued for the period of March 15, 2017, to March 15, 2018. Id. at ¶ 4. 31 Montelbano Decl. ¶ 7. 32 Id. ¶ 12. 33 Id. ¶ 16. 34 Plf.’s Mot. at 9; Ex. 6.
8 give rise to civil and criminal liability.”35 OCC was instructed to preserve
documents dating back to January 1, 2013.36 On February 27, 2018, the Division of
Enforcement notified OCC of its intention to recommend the SEC bring an
enforcement action alleging violations of specified regulatory provisions.37
1. The Draft SEC Order Instituting Proceedings (“OIPs”)
On March 12, 2018, OCC executed a prejudgment waiver, filed a Position
Statement, and submitted compliance plans as requested by the SEC.38 The waiver
allowed SEC staff to discuss the matter with the SEC Commissioners.39 On April
26, 2018, OCC sent the SEC a Statement of Position.40 On August 6, 2018, the SEC
provided a draft Order Instituting Proceedings (“Draft SEC OIP”) to OCC, which
included a list of proposed charges against OCC.41 Unless OCC entered into a
settlement, the SEC indicated it would file an administrative proceeding.42
2. SEC’s Final OIP
After negotiations, on September 4, 2019, the SEC issued a final OIP (the
“SEC OIP”) which included allegations that OCC violated certain statutes and
35 Id. 36 Def.’s Mot. at 3. 37 Plf.’s Mot. at 9; Ex. 24 at 2. 38 Id; Exs. 7-9. 39 Id. at 9. 40 Def.’s Mot. at 3. 41 Plf.’s Mot. at 9-10; Ex. 10; Ex. 24 at 4. 42 Id. at 10.
9 regulations.43 OCC entered into a settlement agreement with the SEC to avoid an
administrative proceeding, agreeing to pay $15 million in penalties and accept a
mandatory injunction to force improved compliance, including the appointment of
an independent auditor.44 The alleged violations involved (1) the Covered Clearing
Agency Standards (the “2016 CCAs”), effective December 12, 2016 (requiring
OCC’s compliance by April 11, 2017), (2) Regulation Systems, Compliance, and
Integrity (“Reg. SCI”), effective February 3, 2015 (requiring OCC’s compliance by
November 3, 2015), and (3) Section 19(b)(1) of the Exchange Act .45
a. The 2016 CCAs
Seven of the twelve violations identified in the SEC OIP involved a new
paragraph (e) of Exchange Act Rule 17Ad-22; this paragraph was added when the
SEC adopted the 2016 CCAs on September 28, 2016, and OCC’s compliance
deadline was April 11, 2017.46 The SEC OIP asserted OCC violated paragraph (e)
by failing to implement certain policies and procedures reasonably designed to
provide a transparent legal framework, maintain risk management, and establish a
methodology to account for risks and attributes of products cleared by OCC.47
43 Id. 44 Id. at 10-11. 45 Id. at 10. 46 Id. at 11. 47 Id. at 11-12; for a more detailed description, see Ex. 11 at ¶¶ 17-35, 50-56.
10 b. Allegations involving Reg. SCI 19(b)
The SEC OIP also included alleged violations of Reg. SCI, which required
OCC to create policies and procedures to ensure the security of its computers,
network, and electronic systems that support clearance and settlement of financial
transactions.48 After the November 3, 2015 compliance date passed, the SEC OIP
found OCC failed to establish written policies and procedures reasonably designed
to identify and test vendor-issued patches and secure certain data.49
c. Rule-Filing Obligation Violations
The SEC OIP also identified one violation of Section 19(b)(1) of the Exchange
Act, requiring OCC to file with the SEC policies and practices that meet the
definition of a proposed rule change.50 In contrast to the 2016 CCAs and Reg. SCI,
these rule-filing obligations were in effect from 2012-2014, but were not the subject
of the 2012-2014 OCIE Letters.51 These alleged violations arose because of OCC’s
2015 notification to the SEC that OCC did not plan to seek approval of certain
policies under which it had been operating, but instead would file changes to those
policies going forward.52 The SEC rejected that position.53 Further, the SEC OIP
48 Id. at 12; Ex. 11 at ¶¶ 43-45. 49 Id. at 12-13; for more detailed description, see Ex.11 at ¶¶ 47, 58-59. 50 Id. at 13. 51 Id. 52 Id.; see also Ex 9 at 19-23; Ex. 24 at 15. 53 Id.
11 listed various policies OCC implemented before obtaining the SEC’s approval,
including six policies OCC revised in May 2017.54
d. The February 2018 Market Event
Before issuing the SEC OIP, the SEC also questioned OCC about its response
to a one-day market volatility anomaly that occurred on February 5, 2018.55 After
the event, OCC recalculated margins due by exercising its Rule 609A waiver
authority; this provided OCC with a short-term remedy as a response to the one-day
market volatility anomaly.56 In the Draft SEC OIP, the SEC alleged OCC failed to
enforce its margin level policies “from February 6, 2018 to February 15, 2018.”57
This claim, however, eventually was removed from the final SEC OIP.58
E. The Commodity Futures Trading Commission (“CFTC”) Enforcement Action
On June 1, 2018, the Division of Enforcement of the Commodity Futures Trading
Commission (the “CFTC”) informed OCC that the CFTC was conducting an
investigation concerning compliance with CFTC regulations.59 The CFTC issued its
own draft and final OIPs (respectively, the “CFTC Draft OIP” and the “CFTC OIP”)
on August 6, 2018, and September 4, 2019, asserting OCC violated Core Principles
54 Id. at 14. 55 Id. 56 Id. 57 Id. 58 Id. at 15. 59 Id.
12 (B, D and I) under Section 5(b) of the Commodity Exchange Act and related Part 39
regulations.60 The factual allegations included in the CFTC OIP track those
underlying the SEC OIP.61 A similar claim concerning the February market volatility
event was included in the CFTC Draft OIP, but OCC defended against this
allegation; like the SEC Enforcement Action, this allegation was removed from the
final CFTC OIP.62 OCC entered into a settlement agreement with the CFTC, paying
$5 million in penalties and agreeing to injunctive relief.63 OCC neither admitted nor
denied the CFTC’s allegations in connection with the settlement.64
F. Contact with the Insurers
On November 10, 2017, OCC provided notice to the Insurers of the SEC
Enforcement Action under Policies issued for the 2017-2018 period, and OCC gave
the Insurers notice of the CFTC Enforcement Action on October 5, 2018 under
policies issued for the 2018-2019 period.65 In October 2018, OCC also forwarded
its April 2018 Statement of Position and the Draft SEC OIP along with additional
materials to show, in its view, an actual Claim had been made.66
60 Id. at 15-16. 61 Id. at 16. Specifically, the CFTC OIP, like the SEC OIP, alleged OCC failed to implement policies and procedures reasonably designed to: (1) produce margin levels commensurate with the risk and attributes of each relevant product, (2) effectively monitor its credit exposure and liquidity risk, and (3) protect the security of certain information systems. Ex. 13 at 2. 62 Id. at 16. 63 Id. at 17. 64 Id. 65 Id. at 21. 66 Def.’s Mot. at 8.
13 On December 7, 2018, U.S. Specialty denied coverage for the SEC
Enforcement Action based on the Events Exclusion, claiming the alleged violations
in the SEC Draft OIP arose out of the events detailed in the 2012-2014 OCIE Letters,
which were “continuing and unresolved.”67 U.S. Specialty also accepted notice of
the CFTC Enforcement Action on that same day; it did not deny coverage of that
action under the Events Exclusion or on any other basis, but reserved its right to
deem the CFTC Enforcement Action related to the SEC Enforcement Action (the
“Enforcement Actions”).68 In response, OCC’s counsel sent U.S. Specialty a letter
detailing the differences between the SEC Enforcement Action and the 2012-2014
OCIE Letters and asking U.S. Specialty to reconsider its coverage position.69
On December 20, 2019, U.S. Specialty maintained its position that the SEC
Enforcement Action was barred by the Events Exclusion after receiving the Final
SEC OIP; at this time, U.S. Specialty also raised the Prior Notice Exclusion as an
independent reason to deny coverage.70 U.S. Specialty did concede that the Final
OIP constituted a Claim against OCC.71 But U.S. Specialty reiterated denial of
coverage on July 28, 2020.72
67 Plf.’s Mot. at 21; Ex. 22 at 6. 68 Id. at 22; Ex. 23. 69 Id. at 21. 70 Id. at 22. 71 Id. 72 Id.
14 OCC filed its action against the Insurers on November 10, 2020, alleging
breach of the 2017-2018 Policies and seeking coverage for the defense costs OCC
incurred in connection with the investigation.73 On April 28, 2021, OCC filed this
motion for partial summary judgment on relatedness.74 At the time OCC filed its
summary judgment motion, Defendants had discovery requests outstanding.75 On
April 30, 2021, OCC served responses and objections to U.S. Specialty’s Requests
for Production, but OCC did not produce any documents in response to those
Requests.76
G. Party Contentions
OCC contends the Court should enter summary judgement in its favor with
respect to the Events Exclusion and the Prior Notice Exclusion. OCC argues the
Exclusions are not blanket SEC or regulatory exclusions, but instead exclude
coverage for particular bargained-for events unrelated to the Enforcement Actions
at issue here.77 OCC asserts that under Delaware law, the Enforcement Actions must
be “fundamentally identical” to the 2012-2014 OCIE Letters to bar coverage based
73 Def.’s Mot. at 9; Compl. ¶¶ 5, 46-50. 74 See Plf.’s Mot. 75 U.S. Specialty sent Requests for Production of Documents to OCC on March 8, 2021. 76 Emily A. Golding Affidavit (hereinafter “Golding Aff”). at ¶ 9. 77 Plf.’s Mot. at 4.
15 on relatedness.78 And OCC stresses that the Enforcement Actions are not
sufficiently related to the 2012-2014 OCIE Letters to preclude coverage.79
OCC emphasizes several differences between the OCIE Letters and the
Enforcement Actions. OCC contends those differences preclude this Court from
finding the actions “fundamentally identical,” arguing the OCIE Letters and the
Enforcement Actions involve (1) different regulatory bodies; (2) different time
periods; (3) different alleged wrongful conduct under different enforcement
schemes; and (4) different requested relief.80 The Polices provide that, even if a
Claim involves both covered and uncovered matters, 100% of OCC’s Defense Costs
will be allocated to the covered matters.81 So, OCC contends all the Defense Costs
it incurred in defending the Enforcement Actions are covered because at least a
portion of the Enforcement Actions are unrelated to the 2012-2014 OCIE Letters
and therefore covered. 82 Lastly, OCC asserts the 2012-2014 OCIE Letters were
related to rules and regulations under the SEC’s authority, while the CFTC brought
78 Id. at 3. 79 Id. 80 Id. Specifically, OCC argues that (1) the OCIE, which coordinates routine yearly compliance reviews vs. the enforcement divisions of the SEC and CTFC; (2) the 2012-2014 OCIE Letters cover conduct prior to 2014, while the Enforcement Actions cover activity from 2015-2018; (3) the 2012-2014 OCIE Letters focused on areas for compliance improvements, while the Enforcement Actions alleged violations of various statutes and regulations that had not even been adopted at the time of the earlier examinations; and (4) OCC designed remediation plans instead of the SEC and CFTC mandated monetary penalties and injunctive relief in the Enforcement Actions. 81 Id. at 2, Ex. 1. 82 Plf.’s Mot. at 2.
16 an independent Enforcement Action against OCC for alleged violations of the
Commodity Exchange Act and related regulations.83
The Insurers contend OCC’s summary judgment motion is premature.84 The
Insurers argue they should be permitted to take discovery under Superior Court Civil
Rule 56(f) concerning the exact circumstances and events related to the OIPs issued
by the SEC and the CFTC, as well as the scope of the Enforcement Actions.85 The
Insurers also assert material disputes of fact concerning the Exclusions negate the
application of the “fundamentally identical” standard.86 The Insurers believe the
Event Exclusion is broad enough to exclude coverage for any Claim arising out of,
based upon or attributable to any Wrongful Act or any underlying fact or
circumstance in any way relating to the 2012-2014 SEC Letters87
The Insurers also allege that the phrase “Covered and uncovered” matters
used in the Allocation Provision is limited to the circumstances where an
indisputably covered Claim includes some uncovered aspect, which is inapplicable
in this case.88 A covered Claim would allow OCC to seek covered damages, wages,
83 Id. at 4. 84 Def.’s Mot. at 1. 85 Id. 86 Id. at 2. 87 Id. at 7; Ex. 1. 88 Id. at 34.
17 fines, taxes or penalties, and the Policies would allow 100% coverage for defense
costs, notwithstanding the uncovered matters included in the Claim.89
ANALYSIS
Summary judgment is appropriate “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits” show “there is
no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.”90 The movant bears the initial burden of demonstrating
its motion is supported by undisputed material facts.91 If that burden is met, the non-
movant must demonstrate that there is a “genuine issue for trial.”92 To determine
whether material facts are in dispute, the Court construes the record in the light most
favorable to the non-movant.93
A. The Insurers have not carried their burden of demonstrating that the Policies’ Exclusions apply because the 2012-2014 OCIE Letters are not related to the Enforcement Actions.
Delaware law governs the Policies.94 OCC, as the insured, has the burden of
“proving that a claim is covered by an insurance policy,” and if satisfied, “the burden
89 Id. 90 Del. Super. Ct. Civ. R. 56(c). 91 Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979). 92 Del. Super. Ct. Civ. R. 56(e); see also Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995) (“If the facts permit reasonable persons to draw but one inference, the question is ripe for summary judgment.”). 93 Judah v. Del. Tr. Co., 378 A.2d 624, 632 (Del. 1977). 94 Compl. ¶ 15-17. The Insurers did not argue that any other state’s law governs the Policies. Further, the Delaware Supreme Court has concluded that Delaware law generally applies to D&O coverage for Delaware corporations. See RSU Indem. Co. v. Murdock, 248 A.3d 887, 900-01 (Del.
18 shifts to the [I]nsurer[s] to prove that the event is excluded under the policy.”95 The
Insurers’ Exclusions only will bar coverage if the Enforcement Actions are related
to the 2012-2014 OCIE Letters under the Policies’ definition of relatedness.
Under Delaware law, the principles of insurance contract interpretation are
well-established and grounded in the parties’ intent.96 Trial courts have been
instructed to analyze contracts using a “plain language framework that is based on
general interpretive principles.”97 OCC attempts to persuade this Court that it should
determine relatedness between the Enforcement Actions and the 2012-2014 OCIE
Letters by applying a “fundamentally identical” standard. But that standard is not
grounded in the Policies’ language, and this Court therefore declines to apply it.98 If
2021) (“[I]n the vast majority of cases, Delaware law governs the duties of the directions and officers of Delaware corporation to the corporation, its stockholders and its investors. As such corporations must assess their need for D&O coverage with reference to Delaware law.”) (internal citations omitted). 95 See Virtual Bus. Enterprises, LLC v. Maryland Cas. Co., 2010 WL 1427409, at *4 (Del. Super. Ct. Apr. 9, 2010). 96 Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 WL 4130631, at *10 (Del. Super. Ct. Sept. 10, 2021.) 97 Id. at *11 (Del. Super. Ct. Sept. 10, 2021.) 98 This Court recently addressed the “fundamentally identical” standard in Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co. There, the Court explained that a number of recent decisions from the Delaware Superior Court have applied a “fundamentally identical” standard to policy exclusions based on the relatedness of claims. But the Court went on to explain that neither the Delaware Supreme Court nor any other jurisdiction has adopted “fundamental identity” as the standard for all relatedness inquiries. Specifically, this Court explained: “To apply indiscriminately that type of gloss to otherwise unambiguous policy language arguably could contravene Delaware law requiring this Court to interpret insurance policies according to their plain language and to avoid grafting public policy limitations into contracts in the absence of a policy pronouncement by the General Assembly.” Sycamore Partners Mgmt., L.P., 2021 WL 4130631 at *11 (citing In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1131(Del. 2019), In re Verizon Ins. Coverage Appeals, 222 A.3d 566, 573-75 (Del. 2019)); Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 WL 761639, at *11 (Del. Super. Ct. Feb. 26, 2021) (“Sycamore I”).
19 contract language is clear and unambiguous, the parties’ intent is established by
giving the language its ordinary and usual meaning.99 A contract will not be found
ambiguous simply because parties do not agree on its construction.100 Ambiguity
exists only when the contract’s controversial provisions reasonably are susceptible
of different interpretations or have two or more different meanings.101
This Court finds the Policies’ relevant terms clear and unambiguous. The
Event Exclusion bars coverage for Claims “arising out of,” “based upon,” or
“attributable” to the OCIE Letters or any Wrongful Act, which “in any way relat[es]
to” the OCIE Letters or an Interrelated Wrongful Act.102 An Interrelated Wrongful
Act is “any fact or circumstance alleged” in the OCIE Letters or any Wrongful Act
“which is the same as, similar or related to, or a repetition of any Wrongful Act”
alleged or asserted in the OCIE Letters.103 Well-settled Delaware law instructs this
Court to look to dictionaries for assistance in determining the plain meaning of
undefined contract terms.104 The Delaware Supreme Court has undertaken this
99 RSU Indem. Co. v. Murdock, 248 A.3d 887, 905-06 (Del. 2021). 100 Id. 101 Id. 102 Plf.’s Mot., Ex. 1, Specific Event(s) Exclusion- Absolute. 103 Def.’s Mot. at 34; Ex. 1 104 Tetragon Financial Group Limited v. Ripple Labs Inc., 2021 WL 1053835, at *4 (Del. Ch. Mar. 19, 2021) (citing Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006).“...[D]ictionaries are the customary reference source that a reasonable person in the position of a party to a contract would use to ascertain the ordinary meaning of words not defined in the contract.”) Id.
20 process and defined “arising out of” as having “some meaningful linkage.”105 With
no other textual intent provided by the parties, phrases like “based on” and
“attributed to” also most logically mean “originating from” or “sharing some
meaningful linkage.”106 The Court therefore reads the Event Exclusion to mean that
the Insurers will not be liable to pay any Loss in connection with a Claim originating
from or with “some meaningful linkage” to:
(a) any Event(s); (b) the prosecution, adjudication, settlement, disposition, resolution or defense of any Event(s) and/or Claim(s) arising from any Event(s); (c) any Wrongful Act, underlying fact or circumstance in any way relating to any Event(s); or (d) any Interrelated Wrongful Act, regardless of whether or not such Claim involves the same or different Insureds or parties, the same or different legal causes of action or the same or different claimants, or is brought in the same or different venue or resolve in the same or different forum.”107
When considering the plain language, the Event Exclusion bars coverage of a
Claim with a “meaningful link” to the allegations in the 2012-2014 OCIE Letters.
Additionally, the Event Exclusion bars coverage of the prosecution, adjudication,
settlement, disposition, resolution or defense of a Claim with a “meaningful link” to
the 2012-2014 OCIE Letters. Third, the Event Exclusion bars coverage for a Claim
that has a “meaningful link” to any Wrongful Act that relates to the 2012-2014 OCIE
105 Pac. Ins. Co. v. Liberty Mut. Ins. Co., 956 A.2d 1246, 1257 (Del. 2008); Eon Labs Mfg., Inc., v. Reliance Ins. Co., 756 A.2d 889, 894 (Del. 2000). 106 See Sycamore Partners Mgmt., L.P., 2021 WL 4130631, at *12. Naturally, this assertion should also qualify for phrases such as “based upon” or “attributable to.” 107 Plf.’s Mot., Ex. 1, Specific Event(s) Exclusion- Absolute.
21 Letters. Finally, the Event Exclusion bars coverage for a Claim with a “meaningful
link” to any Interrelated Wrongful Act. Accordingly, to invoke this exclusion, the
Insurers must establish a “meaningful link” between the Enforcement Actions and
the 2012-2014 OCIE Letters or the wrongful conduct alleged in those letters.
Similarly, the Prior Notice Exclusion bars coverage for Loss in connection
with a Claim “arising out of, based upon or attributable to facts or circumstances
alleged, or to the same or related Wrongful Acts alleged or contained” in any Claim
that already has been reported to the Insurers.108 Here too a “meaningful link” must
exist between the Enforcement Actions and the 2012-2014 Letters for the Prior
Notice Exclusion to apply.
This Court holds that no such meaningful link exists between the Enforcement
Actions and the 2012-2014 OCIE Letters or the wrongful acts alleged therein. In
determining whether a “meaningful link” exists, this Court has held that it is not
enough for two claims to mention some of the same facts.109 And the Delaware
Supreme Court has instructed lower courts to implement “meaningful linkage” in a
coverage context broadly, where possible, to find coverage.110 As OCC correctly
asserted, the nature of its business is such that there is bound to be some surface-
108 Id. at 7. Definitions (B)(1)(H). 109 See, e.g., Sycamore Partners Mgmt., L.P., 2021 WL 4130631, at *14. 110 Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 WL 4130631, at *14 (Del. Super. Ct. Sept. 10, 2021) (citing Pac. Ins. Co. v. Liberty Mut. Ins. Co., 956 A.2d 1246, 1256-57 & n.42 (Del. 2008)).
22 level overlap between earlier enforcement actions and those for which OCC
presently seeks coverage.111 But several key differences refute the Insurers’
argument that a “meaningful link” exists between the Exclusions and the 2012-2014
OCIE Letters.
First, the type of investigation differs between the Enforcement Actions and
the 2012-2014 OCIE Letters.112 The Enforcement Actions are not concerned with
routine annual compliance examinations, while the 2012-2014 OCIE Letters involve
the SEC Office of Compliance Inspections and Examinations in its function of
overseeing annual compliance.113 Second, the investigation time periods differ; the
SEC Enforcement Action occurred during 2017-2019, the CFTC Enforcement
Action was between 2018-2019, and the 2012-2014 OCIE Letters were from 2009-
2013.114 Next, the regulations allegedly violated differ from the Enforcement
Actions and the 2012-2014 OCIE Letters. The SEC Enforcement Action involved
the 2016 CCAs, Reg. SCI, Rule-Filing Obligations in Section 19(b) and Rule 17Ad-
22(b)(2) and (d)(1).115 The CFTC Enforcement Action concerned Section
5b(c)(2)(B), (D), and (I) of the Commodity Exchange Act and Section 39
Regulations.116 But overall, the 2012-2014 OCIE Letters only involved general
111 D. I. 58 Tr. at 6. 112 Plf.’s Mot., Comparison Chart [hereinafter “Chart”], at 1. 113 Id. 114 Id. 115 Id. 116 Plf.’s Mot. at 15-16.
23 compliance obligations.117 Perhaps most significantly, the Enforcement Actions and
the 2012-2014 OCIE Letters differ in the type of wrongful conduct that is alleged.
The SEC Enforcement Action alleges OCC (1) failed to maintain policies for credit
and liquidity stress testing and margin methodologies as demanded by the 2016
CCAs; (2) failed to maintain system infrastructure policies as demanded by Reg.
SCI; (3) failed to file proposed rules with the SEC; and (4) engaged in wrongful
conduct involving the 2018 volatility event.118 The CFTC Enforcement Action
reproduces the allegations contained in the SEC Enforcement Action. But the 2012-
2014 OCIE Letters involve (1) deficiencies and weaknesses in OCC’s escrow
deposit program, (2) its handling of confidential information, and (3) board structure.
Lastly, the Enforcement Actions differ from the 2012-2014 OCIE Letters based on
the nature of relief sought. The Enforcement Actions sought punitive damages and
injunctive relief. The 2012-2014 OCIE Letters sought compliance and remediation
of OCC’s deficiencies and weaknesses.
This interpretation and application of the Exclusions also avoids rendering
coverage under the Policies illusory. As a policy matter, the Exclusions must be
construed to safeguard OCC’s reasonable expectation of insurance coverage. 119
117 Specifically, the 2012-2014 OCIE Letters made references to Exchange Act Rule 17Adj- 22(b)(2); (b)(3); (b)(4); and (d)(1), (d)(3), (d)(4), (d)(8), (d)(11); Rule 17a-1; and Section 19(g)(1). 118 Chart, at 1. 119 Sycamore Partners Mgmt., L.P., 2021 WL 4130631, at *11.
24 Insurance contracts should be interpreted as providing broad coverage to align with
an insured’s reasonable expectations, and it is the insurer’s burden to establish that
a claim specifically is excluded.120 The Insurers successfully bargained for the
inclusion of the 2012-2014 OCIE Letters as part of an exclusion within the Policies.
The Insurers did not bargain for the inclusion of any Claim that has “any fact in
common” with the 2012-2014 OCIE Letters or any Claim involving an SEC office.
If this Court were to interpret the Policies that broadly, coverage would be elusive.
Having concluded the Exclusions do not apply, the Court need not address
the other issues the parties raised in their briefs, namely (1) whether the Enforcement
Actions involved a single Claim or multiple Claims, and (2) the effect of the 100%
allocation provision.121
B. The Insurers’ Rule 56(f) request is denied.
A motion under Superior Court Civil Rule 56(f) is directed to this Court’s
broad discretion.122 In certain circumstances, the Court may “refuse the application
for [summary] judgment” or “may order a continuance” to permit an opposing party
to gather discovery.123 “[A] party opposing summary judgment may, pursuant to …
Rule 56(f), request limited discovery if it cannot present facts essential to oppose the
120 Murdock, 248 at 905-06. 121 The Policies also include a Pre-Pending Litigation Exclusion. The Insurers did not address this in the Answering Brief, admitted so in oral argument, and therefore that argument is moot. 122 Brick v. Retrofit Source, LLC, 2020 WL 4784824, at *3 (Del. Ch. Aug. 18, 2020). 123 Del. Super. Ct. R. 56(f).
25 summary judgment motion.”124 The party seeking discovery bears the burden of
demonstrating the discovery requested is both specific and relevant “in light of
applicable law.”125 In support of their Rule 56(f) affidavit, the Insurers allege they
were provided with very little documentation of the SEC Enforcement Action or the
CFTC Enforcement Action during the pendency of those investigations.126 The
Insurers claim the information necessary to adequately respond to and oppose
OCC’s Motion exclusively is in OCC’s possession.127
The Insurers first argue discovery is necessary to determine whether the
Enforcement Actions constitute a single Claim or multiple Claims at issue.128 But
as indicated above, the Court does not need to address this question at this time.
Based on this Court’s ruling, the issue regarding the number of claims need not be
resolved. This issue may be relevant to retention but does not preclude summary
judgment on the relatedness question before the Court.
The Insurers also contend discovery is needed to respond to OCC’s argument
that the Prior Notice Exclusion does not exclude coverage for the Enforcement
124 Aveanna Healthcare, LLC v. Epic/Freedom, LLC, 2021 WL 3235739, at *28 (Del. Super. Ct. July 29, 2021) (citing Corkscrew Mining Ventures, Ltd. V. Preferred Real Est. Fund Invs., Inc., 2011 WL 704470, at *3 (Del. Ch. Feb. 28, 2011)). 125 Aveanna Healthcare, LLC, 2021 WL 3235739, at *28. (citing Schillinger Genetics v. Benson Hill Seeds, Inc., 2021 WL 320723, at *16 (Del. Ch. Feb. 1. 2021)). 126 Golding Aff. ¶ 13. 127 Id. 128 Id. ¶ 15.
26 Actions in this case.129 The Insurers argue OCC filed this motion too quickly.130 But
this Court takes no issue with the timing of this motion. Next, the Insurers contend
they are entitled to discover the communications between OCC and the SEC that
resulted in the Final OIP to determine the “contours” of OCC’s claim. But the
Insurers have failed to cite to any authority for the proposition that this Court should
look beyond the pleading documents and consider communications between parties
in addition to formal documents as a means of determining relatedness. 131 This
Court only considers the language of the Policies and the pleadings or similar formal
documents to determine the scope of coverage for defense costs.132 The Court does
not find such discovery relevant to the summary judgment motion.
Lastly, the Insurers argue discovery is needed to aid in policy interpretation if
the terms are deemed ambiguous by this Court.133 But the Policies’ terms are not
ambiguous, and this argument therefore is moot.
CONCLUSION
For the foregoing reason, OCC’s motion for partial summary judgment on
relatedness is granted. The Insurers have failed to meet their burden of proving that
129 Id. ¶ 13. 130 D. I. 58 Trans. 36:10-13. 131 See id. 42, 50:4-9. 132 In determining coverage for defense costs, the Court looks to the allegations in the underlying complaint. See IDT Corp. v. U.S. Specialty Ins. Co., 2019 WL 413692, at *10 (Del. Super. Ct. Jan. 31, 2019); Johnston v. Tally Ho, Inc., 303 A.2d 677, 679 (Del. Super. Ct. 1973). 133 Golding Aff. ¶ 19.
27 the Enforcement Actions are related to the 2012-2014 OCIE Letters. Likewise, the
Insurers have failed to present a sufficient basis to support their Rule 56(f) affidavit.