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Sealed Air Corporation v. Royal Indemnity Company

404 N.J. Super. 363, 961 A.2d 1195 (App. Div. 2008)

INSURANCE; ENVIRONMENTAL LIABILITY — A corporation’s business and directors liability insurance is intended to cover a claim for damages allegedly incurred as a result of shareholders relying on statements made by the officers and directors and the insurers cannot deny coverage based upon the policy’s pollution exclusion just because the statements were remotely related to asbestos claims and prior litigations.

A corporation acquired, through a merger, a company that had been involved in, and found liable for, a number of asbestos claims. The company had been spun off from a larger entity which had agreed to indemnify and defend the acquiring corporation from any of the company’s asbestos litigation costs. The acquiring corporation used this agreement to assure its own shareholders and potential shareholders that the value of its shares would not be affected by the prior asbestos litigation. The entity that had spun off the company later filed for bankruptcy, and a committee of its creditors brought an action against it, alleging that the spin off of the subsidiary constituted a fraudulent transfer. The action resulted in a significant drop in the acquiring corporation’s share price because of fears that a judgment in favor of the creditors would result in the acquiring corporation having to return assets acquired in the merger to the bankrupt estate of the bankrupt entity.

The creditors’ claims were eventually settled. Subsequently, a shareholders’ action was brought against the acquiring corporation. It alleged that false and misleading statements caused the corporation’s stock to be artificially inflated. The corporation then sought coverage from its insurer under the directors and officers liability portion of the policy. The policy provided coverage for securities litigation, but not for the release of pollutants. The insurer refused coverage on the basis that the pollution exclusion applied to the prior asbestos claims the acquiring corporation allegedly attempted to shed through the spin off. In response, the corporation brought an action against the insurer to compel coverage. The lower court found that the pollution exclusion clause did not bar coverage for the securities claims.

On appeal, the insurer argued that the securities losses were related to the release of asbestos that triggered the prior litigations. The Appellate Division rejected this argument, pointing out that insurance contracts are to be broadly construed in favor of coverage for the insured and that exclusionary provisions are to be narrowly construed. It then found that the securities claims were based on damages incurred as a result of the shareholders relying on the acquiring corporation’s statements that the entity doing the spin-off would remain solvent and that the asbestos claims in the prior litigations were too attenuated from the damages sought in the shareholders’ action. It added that applying the pollution exclusion to securities claims with only a distant connection to the pollution claims would have required explicit language in the policy. As a result of its findings and conclusions, the Court affirmed the lower court’s decision to compel coverage by the insurer for the securities claims against the corporation.

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