Amtrust International Underwriters DAC v. 180 Life Sciences Corp.

Background

The case is an insurance-coverage dispute involving directors-and-officers liability policies issued to KBL Merger Corp. IV, referred to as KBL. AmTrust issued the primary policy, with $3 million in coverage. Freedom Specialty Insurance Company issued an excess policy that followed the AmTrust policy and provided $2 million in excess coverage.

KBL later changed its name to 180 Life Sciences Corp. in connection with a merger involving a biotechnology company and KBL’s wholly owned subsidiary. 180 Life argued that it remained the same corporate entity as KBL and therefore remained the named insured. The insurers argued that KBL ceased to exist and that 180 Life was a new entity that was not insured under the policies.

The Securities and Exchange Commission issued subpoenas to former KBL directors Marlene Krauss and George Hornig concerning the merger and related matters. After a Delaware court ordered 180 Life to advance Krauss’s and Hornig’s expenses, 180 Life advanced $2,432,002.47 to Krauss and $104,388.25 to Hornig. 180 Life sought reimbursement under the AmTrust and Freedom policies. AmTrust denied coverage, and Freedom did not respond to the coverage demand described in the opinion.

Issues and analysis

180 Life moved for partial summary judgment on five issues: whether it was an insured under both policies; whether the policies covered the subpoena-related expenses; whether AmTrust breached its policy by denying coverage; whether AmTrust had to pay the expenses; and whether Freedom would have to pay after the AmTrust policy was exhausted.

The court held that 180 Life met its initial burden of showing that it was the same entity as KBL operating under a new name. The court relied in part on the name-change documents and evidence that 180 Life continued using KBL’s employer identification number and Securities and Exchange Commission identification number. The insurers did not identify evidence showing that KBL’s corporate identity was extinguished or that a distinct new corporation was created. The court therefore granted 180 Life’s motion on the issue of insured status under both policies.

The court also held that the subpoena-related expenses fell within the basic scope of coverage. The AmTrust policy covered a company’s loss arising from a claim against an individual insured, and the policy defined claims to include certain Securities and Exchange Commission investigations after service of a subpoena. The court found that 180 Life had shown that the expenses were a covered type of loss and granted partial summary judgment on that issue.

The court nevertheless denied summary judgment on whether the policies actually provided coverage for the expenses because the insurers might be able to prove that the change-in-control exclusion applied. The court found that the merger involved a change in control and that the subpoenas sought documents concerning both pre-merger and post-merger periods. Because 180 Life did not show that the exclusion could not apply, the court denied its request for judgment that the policies provided coverage.

The court separately granted partial summary judgment that the insurers could not prove that the insured-versus-insured exclusion barred coverage for the subpoena-related expenses. The court reasoned that the Securities and Exchange Commission subpoenas were not claims brought by or on behalf of a company, executive, or other insured. The court did not decide coverage for expenses connected to other proceedings that were not part of this motion.

Because 180 Life had not established that the change-in-control exclusion was inapplicable, the court denied summary judgment on whether AmTrust breached its policy, whether AmTrust was obligated to pay the expenses, and whether Freedom would be obligated to pay after exhaustion of the AmTrust policy.

Other procedural rulings and disposition

The court declined to consider 180 Life’s argument, raised for the first time in its reply brief, that the policies required advancement whenever there was a potential for coverage. The court stated that 180 Life could raise that argument later if appropriate.

The insurers’ opposition suggested that additional discovery might be needed if 180 Life prevailed. The court concluded that this did not adequately present a request for discovery under Federal Rule of Civil Procedure 56(d). The court further stated that, even if such a request had been made, the supporting declaration did not identify the specific discovery sought, explain why it had not been taken, or show that it would prevent summary judgment. The court therefore denied the request to the extent it could be construed as a Rule 56(d) motion.

The final order states that 180 Life’s motion for partial summary judgment was GRANTED IN PART AND DENIED IN PART. It was granted as to 180 Life’s status as an insured under both policies, the basic scope of coverage for the subpoena-related expenses, and the inapplicability of the insured-versus-insured exclusion. It was denied as to the requested determination that the policies provided coverage despite the change-in-control exclusion, AmTrust’s alleged breach, AmTrust’s obligation to pay, and Freedom’s potential obligation to pay after exhaustion of the AmTrust policy.