Hertz Global Holdings, Inc. v. Alterra American Insurance Company.

Citation: Not availableDocket: N22C-01-153 PRW

Court: Superior Court of Delaware; December 18, 2023; Delaware; State Appellate Court

Original Court Document: View Document

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Hertz Global Holdings, Inc. filed a motion for partial summary judgment against Alterra American Insurance Company (AAIC), seeking indemnification for legal fees incurred during an SEC investigation. AAIC's motion for summary judgment was granted, and Hertz's motion was denied based on several key points. The court found that the SEC Matter does not qualify as a Securities Claim against Hertz or as a Claim against Insured Persons. It ruled that previous findings from a New York federal court, which dismissed Hertz's suit for lack of covered claims, barred Hertz from relitigating the issue due to collateral estoppel. Furthermore, the SEC Matter was determined to be directed solely at Hertz, thus not constituting a Claim against its Insured Persons. The court emphasized that Hertz's failure to provide proper notice and the non-exhaustion of underlying insurance also contributed to the denial of relief. Hertz had originally acquired a $200 million insurance policy in 2013, with multiple insurers involved, and had incurred over $27 million in legal expenses during the SEC investigation, which ultimately concluded without formal charges.

Hertz initiated a lawsuit against National Union and U.S. Specialty in the Southern District of New York, alleging breach of contract, but the court dismissed the case for failure to state a claim, opting to apply New York law without engaging in a choice-of-law analysis. Hertz appealed, but the appeal was dismissed after the parties reached a settlement. Subsequently, Hertz filed a breach of contract claim against AAIC in Delaware, asserting that conditions for triggering AAIC’s excess policy had been met, including the exhaustion of the AIG primary policy. Hertz claims that the SEC investigation qualifies as a "Securities Claim" under AAIC’s policy, seeking indemnification for associated costs.

Before responding to Hertz’s complaint, AAIC sought to enjoin the Delaware action in New York, arguing that allowing it to proceed during the appeal would unfairly advantage Hertz. AAIC contended that the policies involved were identical and had already been interpreted in the New York court. However, the New York court denied AAIC’s motion, stating that the preclusive effect of its judgment should be determined in a subsequent case, meaning that the Delaware court is an appropriate venue for addressing collateral estoppel. The court also noted that the Second Circuit's jurisdiction over related cases would not be compromised by the Delaware action.

Regarding the relevant insurance policies, the AAIC policy follows the AIG primary policy and includes Coverage A for executive liability insurance and Coverage B for organizational liability. Coverage A provides for loss incurred by insured persons due to wrongful acts, while Coverage B covers losses to the organization from securities claims and indemnifies insured persons when the organization has provided indemnification.

The Primary Policy outlines key definitions relevant to claims and coverage. A 'Claim' includes various forms of legal actions, such as written demands for relief, civil or criminal proceedings initiated by formal documents, requests for extradition, shareholder derivative investigations, and investigations of an Insured Person. It explicitly encompasses Securities Claims and Employment Practices Claims, including their equivalents in foreign jurisdictions. The term 'Organization' refers to the Named Entity, its Subsidiaries, and any debtor-in-possession resulting from bankruptcy proceedings. A 'Securities Claim' is defined as a claim involving allegations against Insured parties concerning violations of securities regulations or common law. It includes actions by security holders and derivative suits, along with administrative or regulatory proceedings against the Organization.

Additionally, 'Wrongful Act' is defined as breaches of duty, errors, or omissions by Executives of the Organization or Outside Entity Executives in their professional capacities. 

In Hertz's complaint, it alleges that AAIC breached the excess policy by refusing to reimburse defense fees related to an SEC matter, which Hertz claims qualifies as a Securities Claim against both itself and its Insured Persons for a Wrongful Act. AAIC initially sought to dismiss the complaint based on res judicata and collateral estoppel, or alternatively, to stay proceedings pending a related New York interpleader action. The Court denied the motion to dismiss, determining that the complaint was adequately pled and that the issues raised required a more comprehensive factual record.

Hertz seeks summary judgment on AAIC's Third and Fourth Affirmative Defenses, asserting that the SEC Matter qualifies as a Securities Claim against Hertz for a Wrongful Act and as a Claim against Insured Persons for a Wrongful Act. In contrast, AAIC requests summary judgment on the entire Complaint, arguing that the SEC Matter does not constitute a Securities Claim, that proper notice was not provided, that collateral estoppel and res judicata bar the action, and that the policy has not been exhausted. The Court has conducted oral arguments on the motions and subsequently requested supplemental briefing on choice of law and exhaustion issues, which has been completed. 

In Hertz's view, the SEC Letter from June 11, 2014, represented a demand for non-monetary relief and the SEC Order initiated an administrative proceeding, thus satisfying the criteria for claims against both Hertz and Insured Persons. Conversely, AAIC contends that the SEC Matter does not meet the criteria for Securities Claims, that notice was inadequate, and that the policy remains unexhausted.

The standard for summary judgment requires showing no genuine issue of material fact exists, allowing the moving party to be entitled to judgment as a matter of law. When cross-motions for summary judgment are filed and no genuine issues of material fact are argued, the Court treats them as a stipulation for decision on the merits based on the submitted record. The moving party bears the initial burden of demonstrating that their motion is supported by undisputed facts. If this is satisfied, the burden shifts to the non-moving party to show material facts remain in dispute. The Court may grant summary judgment if, upon viewing the facts favorably to the non-moving party, no genuine issues of material fact exist, and if the law supports the moving party's claim.

Collateral estoppel prevents relitigation of an issue previously determined in a prior action, and in this case, it bars Hertz from contesting whether the SEC Matter constitutes a securities claim under the Primary Policy. AAIC asserts that Hertz's claims are precluded due to a New York federal court's prior interpretation of the Primary Policy. Hertz disputes the applicability of both collateral estoppel and res judicata, arguing that the New York court's decisions were pure questions of law, the policies differ, exhaustion was not a relevant fact in the prior case, and that the SEC Matter was only an alternative holding.

The court clarifies that while collateral estoppel does not apply to pure questions of law, the interpretation of the insurance contract in this context is not purely legal, as it involves specific terms and factual applications. The AAIC Policy is a follow-form to the Primary Policy, meaning that the terms are identical and should not be reexamined to avoid inconsistent results. Lastly, Hertz's claim regarding the exhaustion argument fails to exempt it from collateral estoppel, as it does not meet the necessary criteria for demonstrating lack of opportunity to contest the earlier determination.

Coney Island Fire Department's involvement is deemed irrelevant as Hertz's claims must be covered for exhaustion to matter. Hertz's claim that exhaustion was unavailable does not prevent collateral estoppel from applying. Hertz contends that because the New York federal court's finding on coverage was alternative, collateral estoppel should not apply. AAIC counters that preclusion can still apply to alternative holdings that are not seriously disputed. Hertz's reliance on the Tydings v. Greenfield, Stein, Senior, LLP case is noted, where the New York Court of Appeals indicated that if a trial court provides two grounds for a decision and only one is discussed on appeal, the other lacks preclusive effect; however, this applies only to the Claim against Insured Persons, not the Securities Claim against Hertz, as lack of coverage was merely an alternative holding.

Res judicata, which bars future litigation on claims arising from the same transaction, does not apply because AAIC was not a party to the New York litigation. For res judicata to be applicable, AAIC must be in privity with the primary and first excess insurers, which Hertz argues AAIC has not demonstrated. The New York courts have not clarified this issue, and the court currently cannot confirm AAIC's privity status. Given the doubt surrounding res judicata’s application, it will not be enforced. Thus, collateral estoppel prevents relitigation of the Securities Claim's coverage but does not affect the Claim against Insured Persons, and res judicata is inapplicable.

Regarding the SEC Matter, Hertz claims it constitutes a Claim against Insured Persons, asserting that the SEC Letter implies an investigation of both the corporate entity and its executives. Hertz argues that the SEC Letter’s request for identifying individuals suggests coverage for unnamed persons. However, a direct reading of the SEC Letter indicates it targets Hertz as an entity, not individuals. While Hertz points to the SEC Order as explicitly involving its executives, this interpretation does not alter the fact that the SEC Letter was directed at Hertz itself. Hertz's assertion that the mere potential of Insured Persons being implicated is enough for coverage is unsupported by the cited cases.

In Syracuse University v. National Union Fire Insurance Company of Pittsburgh, P.A., the New York Supreme Court ruled that coverage was established not by naming Syracuse University in an investigation but by the existence of allegations that could fall under the purchased protection. Coverage was triggered by subpoenas related to an investigation of the university's former associate basketball coach for sexual abuse, given that the coach's liability was linked to the university's potential vicarious liability. Conversely, in National Stock Exchange v. Federal Insurance Company, the U.S. District Court determined that an SEC Letter constituted a claim against insured individuals, as it specifically identified the company and its current and former officers and directors. The SEC Letter sent to Hertz, however, only addressed the company itself, lacking explicit claims against individuals or any subpoenas, thus failing to qualify as a claim against insured persons. The SEC Investigation Order, which authorized a private investigation without indicating any actual claims against insured persons, further supported the conclusion that no covered claim existed. Hertz's assertion that defense costs related to the SEC Matter should be covered because they were necessary for the defense of other claims was also rejected, as there was no established claim against insured persons for a wrongful act.

Hertz contends that the defense costs incurred in the SEC Matter are closely related to the Ramirez and Ansfield claims, arguing that this connection prevents summary judgment against them. AAIC refutes this claim, asserting that the SEC Matter does not qualify as a Securities Claim or a Claim against Insured Persons, thus disallowing coverage for those defense costs. According to the Primary Policy, "Defense Costs" are defined as reasonable fees resulting solely from the investigation, adjustment, defense, or appeal of a Claim against an Insured. For the SEC Matter's defense costs to be covered, they must have solely arisen from the Ramirez or Ansfield claims. Hertz fails to demonstrate that the costs were exclusively related to those claims, and the evidence does not support such a conclusion. Consequently, the lack of a valid defense for the incurred costs leads to the granting of AAIC’s Motion for Summary Judgment and the denial of Hertz’s Motion for Partial Summary Judgment. The ruling is finalized by Judge Paul R. Wallace.