U.S. District Court holds that settlement of shareholder claim for unfair stock redistribution is not an insured loss

In Genzyme v. Federal Ins. Co., 2009 WL 3101025 (D. Mass.) Judge Gertner held that a settlement of a claim of unfair stock redistribution is not an insurable loss pursuant to the commonly understood meaning of the word "loss" or under public policy.

The underlying plaintiffs alleged that Genzyme's directors and officers conspired to benefit holders of one type of Genzyme stock at the expense of holders of another type of Genzyme stock. Genzyme agreed to settle the claim by making a payment of $64 million to the plaintiff class, owners of the disadvantaged stock. Genzyme then sought reimbursement from a Directors and Officers ("D & O") insurance policy. Judge Gertner held that the payment was not a "loss" covered by the policy:

Genzyme may not have benefitted in the Share Exchange, but the existing General Division's shareholders surely did. And the Settlement Payment was meant to redress that imbalance. The question then is: When a corporation pays a settlement to resolve a claim that it benefitted one group of shareholders at the expense of another group of shareholders, is this settlement payment an insurable loss? The answer to this question must undoubtedly be "no."

Judge Gertner explained this answer with an analogy to dividing a milkshake between two sons, apparently a reference to the movie There Will Be Blood. While I'm sure her analogy would make sense if I pondered it, or perhaps watched the movie during my copious free time, luckily she also wrote plainly:

Genzyme should not be able to divide the benefits of equity ownership among its shareholders one way, redistribute those benefits, and then demand indemnification from its insurer for the redivision. If Genzyme's interpretation of the Settlement Payment as a "loss" were correct, one could imagine how insured companies could transform insurance policies into profit centers for their businesses. A corporation merely need issue several classes of shares, cancel one class of shares in an arguably unfair way, and then demand that its insurer pick up the tab for the resulting judgment or settlement. The shareholders whose shares were "cancelled" would be compensated through judgment or settlement, and the corporation's other shareholders would obtain the benefits flowing from the share cancellation while shifting a portion of its costs to the corporation's insurer. Everyone would win, except for the insurance company forced to bear the loss of paying off the disgruntled shareholders.