Related Claim Exclusion Doesn’t Require ‘Fundamentally Identical’ Actions in Delaware

The Delaware Supreme Court has ruled that solar panel manufacturer First Solar, which faced two securities class actions, is not entitled to have its insurance policies cover both because the later-issued of its policies excluded coverage for related actions.

The state Supreme Court reached the same conclusion that the state Superior Court did in its ruling that was appealed by First Solar. But the two courts used different standards for assessing the relatedness of the two actions for the purposes of satisfying the exclusion provision

The Superior Court used a “fundamentally identical” standard in concluding that the two securities claims were sufficiently related to be excluded under the second policy. The Supreme Court said that a “generic fundamentally identical” measure is not the correct standard for judging relatedness; rather, the right way is to follow the actual language in the policies. In so ruling, the high court sided with the insurers.

The case (First Solar v. National Union Fire Insurance Co. and XL Specialty Insurance) involves March 2012 and June 2015 class action lawsuits filed against First Solar alleging that it violated federal securities laws by making false or misleading public disclosures.

The plaintiffs in the original March 2012 suit, known as the Smilovits action, alleged that from April 30, 2008, to February 28, 2012, First Solar: misrepresented that it “had a winning formula for reducing manufacturing costs so rapidly and dramatically as to make solar power competitive with fossil fuels;” “perpetuated [its] fraudulent self-portrayal by concealing and misrepresenting the nature and extent of major manufacturing and design defects in [its] solar modules;” misrepresented its financials; artificially inflated its stock prices; allowed individuals to engage in insider trading; manipulated the cost-per-watt metrics; and understated its expenses.

National Union Fire Insurance Co. provided insurance coverage for the Smilovits action under a 2011–12 claims-made directors and officers insurance policy with a $10 million limit.

On June 23, 2015, while the Smilovits action was pending, First Solar stockholders who opted out of the Smilovits action filed what has been referred to as the Maverick action, alleging violations of the same federal securities laws as the Smilovits action, as well as violations of Arizona statutes and claims for fraud and negligent misrepresentation.

When the plaintiffs filed the Maverick action in 2015, First Solar had a $10 million “claims made” primary policy with National Union for 2014–15 and a $10 million layer of excess coverage with XL Specialty Insurance Co. The 2014–15 primary policy excluded coverage for “related claims,” which the policy defined as claims “alleging, arising out of, based upon or attributable to” any facts or wrongful acts that are the same as or related to those alleged in a claim made against an Insured.

Both courts determined that the related claim exclusion barred coverage under the 2014–15 policies if the Maverick action is a related claim to the Smilovits action.

At first, First Solar obtained defense coverage for the Maverick action under its 2011–12 policies. In 2015, First Solar exhausted all coverage under the 2011–12 National Union policy. Chubb, the excess insurer next in line after the 2011–12 National Union policy, accepted coverage of the Maverick action because “the new Maverick litigation is based on the same facts and circumstances of the previously noticed Smilovits class action complaint,” and as such, Chubb treated this Maverick matter as a related claim. Chubb provided coverage for the Maverick action as the litigation progressed.

After years of litigation and after incurring more than $80 million in defense costs, First Solar settled the Smilovits action on January 5, 2020, for $350 million. All primary and excess insurers under the 2011–12 policies paid their policy limits.

Having settled the Smilovits action and exhausted all coverage under the 2011–12 policies, First Solar began to arbitrate a settlement of the Maverick action seeking coverage under the 2014–15 primary policy and the XL Specialty policy. After the insurers denied coverage under the policies, First Solar filed suit in the Superior Court asking for declaratory relief that the insurers were obligated to provide coverage under the policies.

The courts focused on the relatedness of the Smilovits and Maverick actions and whether the Maverick action fell within the primary policy exclusion for related claims.

First Solar argued that the Smilovits action and the Maverick action were not sufficiently related because they involved different operative facts—different plaintiffs, conduct, causes of action, and time periods.

The insurers responded that the Maverick action arose out of the Smilovits action and raised the same claims against the same parties in all material respects.

Relying on previous cases, the Superior Court reasoned that a complaint is “related to” or “aris[es] out of” a previous complaint if the claims are “fundamentally identical.” Fundamentally identical lawsuits, according to this court, require the “same subject” and “common facts, circumstances, transactions, events, and decisions.” The Superior Court noted that there must be more than “thematic similarities” for complaints to be sufficiently related under similar policy language because the words “arising out of” imply a causal connection.

The Superior Court concluded that the Maverick action was “fundamentally identical” to the Smilovits action in that the lawsuits stemmed from the same original suit, were against “identical defendants,” overlapped in time, contained allegations of the same securities law violations, and relied on the same specific disclosures. Also, the court found that the underlying wrongful conduct— allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports—was the same. While there were some differences, including the theory of damages claimed by the Maverick plaintiffs, the Superior Court held that the differences did not outweigh the similarities and thus Maverick was excluded as a related claim under the policies.

On appeal, First Solar argued that the Superior Court ruled incorrectly, claiming that the actions merely shared “thematic similarities” not “fundamental identity.”

The insurers, however, countered that the Maverick action meets the “fundamentally identical” standard because it is directed to the same wrongful act and fraudulent scheme as the Smilovits action. They further argued that the fundamentally identical standard had been taken out of context by the Superior Court. According to the insurers, the meaning of “related to” should come from the language of the insurance policy.

In response, First Solar contended that the plain language of the primary policy’s relatedness standard would render coverage “illusory.”

On appeal, the Supreme Court said it agreed with the insurers that the Superior Court’s use of the “fundamentally identical” standard disregards the plain language of the insurance policy. The court said that the error can be traced to a misunderstanding over the meaning of “arising out of” or “related to” for coverage of related complaints and claims. Whether a claim relates back to an earlier claim is decided by the language of the policy, not a generic “fundamentally identical” standard, the high court stated.

The primary policy’s broad related claim provision states that a related claim is a “claim alleging, arising out of, based upon or attributable to” any facts or wrongful acts that are the same as or related to those that were alleged in a claim made against an insured.

Thus, the question before the Supreme Court on appeal became whether the Maverick action raised claims that “aris[e] out of, [are] based upon or attributable to” any facts or wrongful acts “that are the same as or related to” the Smilovits action.

The high court found that both actions are based on the same alleged misconduct—First Solar’s misrepresentations about the cost-per-watt of its solar power. The court assembled a side-by-side comparison of the two complaints to make its point that while there might be minor differences between the claims, these were not meaningful to the relatedness inquiry:

“In other words, both actions allege that First Solar misrepresented its ability to achieve grid parity. Both actions allege that First Solar concealed defects in the design and manufacturing of modules and panels. Both actions allege that First Solar manipulated its costs, including cost-per-watt metrics. Both actions allege that First Solar issued false financial reports in violation of GAAP. Both actions allege that First Solar’s deceptions came to light on February 28, 2012.”

Although the actions are not identical in their claims or evidence, “absolute identity is not required,” the court found.

Using the primary policy’s related claim definition, the Maverick action raised claims “alleging, arising out of, based upon or attributable to any facts or wrongful acts that are the same as or related to those” raised in the Smilovits action, the court said in concluding that the Maverick claim is excluded from coverage and affirming the lower court’s ruling.