Delaware Supreme Court reverses trial court for failing to apply "Interrelated Wrongful Acts" analysis correctly

On February 4, 2025, the Delaware Supreme Court, sitting en banc, determined that the Wrongful Acts alleged in a securities class action against Alexion Pharmaceuticals, Inc. had a “meaningful linkage” with the Wrongful Acts giving rise to an earlier SEC subpoena served upon Alexion during an earlier policy year, which meant that potential director and officer (“D&O”) coverage for the securities action existed in the prior policy year’s tower of D&O insurance in place at the time of the SEC subpoena, rather than in a later D&O insurance tower in effect when the securities class action was filed. See In re Alexion Pharmaceuticals, Inc., Nos. 154, 2024 and 157, 2024 (Del. Feb. 4, 2025) (en banc). The Delaware Supreme Court accordingly reversed the judgment of the Delaware Superior Court, which had placed coverage for the securities class action in the later policy year.

Alexion, which manufactures the drug Soliris, was insured under two claims-made D&O liability insurance programs covering different periods. Tower 1 provided $85 million of coverage for claims made between June 27, 2014 and June 27, 2015, while Tower 2 provided $105 million of coverage for claims made between June 27, 2015 and June 27, 2017.

On March 9, 2015 (during the policy period of the Tower 1 policies), the SEC issued a formal investigation order against Alexion, raising possible violations of federal securities laws involving inaccurate annual 8-K, 10-K, and 10-Q reports; failure to maintain adequate books and records; failure to maintain an adequate system of internal accounting controls; and bribing foreign officials and political parties. Two months later, and still during the Tower 1 policy period, the SEC served Alexion with a subpoena and a document preservation demand seeking various documents regarding recalls of Soliris, alleged gifts and payments to foreign lobbying efforts, and purported gift and payments to public health institutions and government agents. On June 18, 2015, Alexion sent its Tower 1 insurers a “Notice of Circumstances” regarding the SEC subpoena foreshadowing other potential investigations, legal or regulatory proceedings, and lawsuits.

On December 29, 2016 (during the policy period of the Tower 2 policies), Alexion stockholders filed a federal securities class action alleging that Alexion and its directors and officers violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. They cited a series of alleged unethical and illegal sales and lobbying practices, including Alexion’s alleged procurement of data from partner labs to identify potential customers, its deployment of extreme fear tactics to garner patients, and its funding of foreign organizations. Alexion provided notice to its Tower 2 insurers of the securities action on January 5, 2017.

The primary insurer for both towers initially accepted coverage for the securities class action under Tower 2 but later reassigned coverage to Tower 1 on the ground that the securities class action “ar[o]se from the circumstances and anticipated Wrongful Acts reported during the 2014–2015 Policy Period, as well as many of the same Wrongful Acts and Interrelated Wrongful Acts.”

Alexion ultimately entered into settlements with the SEC and the securities class action plaintiffs for amounts totaling $146.5 million, an amount which exceeded the limits of both towers. Following the settlements, Alexion filed a coverage action in the Delaware Superior Court against the Tower 2 insurers alleging breach of contract and seeking a declaration that the securities class action was a claim first made during the Tower 2 policy period.

The Superior Court granted partial summary judgment to Alexion. Relying on the Delaware Supreme Court’s decision in ACE American Insurance Co. v. Guaranteed Rate, Inc., 305 A.3d 338 (Del. 2023), the Superior Court framed the inquiry as whether there  was a “meaningful linkage” between the SEC subpoena and the later securities class action. The Superior Court concluded there was not; it determined that the SEC subpoena and the later securities class action  were “only loosely connected by Alexion’s activities in Brazil.” The Superior Court also concluded that a Prior Notice Exclusion in the Tower 2 policies did not apply. Thus, the Superior Court held that the Tower 2 policies, and not the Tower 1 policies, provided coverage for the class action settlement.

The Delaware Supreme Court, sitting en banc, reversed. The Supreme Court observed that the policies in both towers defined “Interrelated Wrongful Acts” as “all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause, or series of related facts, circumstances, situations, events, transactions or causes.” The court further observed that both sets of policies provided that “[a]ll Claims arising out of the same Wrongful Act and all Interrelated Wrongful Acts of the Insureds shall be deemed to be one Claim,” which “shall be deemed to be first made on the date the earliest of such Claims is first made….”

Initially, the Supreme Court agreed with the Tower 2 insurers’ argument that the Superior Court had erred by treating the 2015 Notice as a “Claim” rather than merely as Notice of Circumstances that could give rise to a Claim, which had the improper effect of narrowing the “Interrelated Wrongful Acts” inquiry solely to a comparison of the SEC Subpoena and the securities class action and inappropriately disregarded Alexion’s disclosure of the SEC investigation in the 2015 Notice of Circumstances. The Supreme Court explained that the Superior Court “should have asked whether the Securities Class Action is meaningfully linked to any of the alleged wrongful acts disclosed in the 2015 Notice.”

Turning to those alleged Wrongful Acts, the Supreme Court observed that the 2015 notice disclosed that the SEC subpoena had sought information about Alexion’s activities, policies and procedures worldwide, especially in Brazil, Japan, Russia, and Turkey.” The court further observed that the class action plaintiffs “alleged the same wrongdoing investigated by the SEC and disclosed by Alexion in the 2015 [n]otice,” i.e., “Alexion’s improper sales tactics worldwide, including its grantmaking efforts in Brazil and elsewhere.” Because both investigations involved the same Wrongful Acts, the Supreme Court concluded that, “[a] meaningful linkage exists between the Securities Class Action and the SEC investigation as disclosed by Alexion in its 2015 Notice.” Thus, the court determined that “the Securities Class Action claim is deemed to have been first made at the time the 2015 Notice was received by Chubb – during the Tower 1 coverage period” and “coverage is under Tower 1.” Applying a Prior Notice Exclusion set forth in the Tower 2 policies, the Supreme Court held that no coverage for the securities class action is available under Tower 2.

Several aspects of the Supreme Court’s decision are noteworthy. First,  the court made clear that the focus of the “meaningful linkage” inquiry when determining whether there are ”Interrelated Wrongful Acts” is on the alleged Wrongful Acts themselves and not the nature of the investigations or actions that arise from those Wrongful Acts, the identity of the parties bringing the resulting Claims, the relief sought, or the relevant time period: “it does not matter whether the SEC and stockholder plaintiffs are different parties, asserted different theories of liabilities, or sought different relief. It is the common underlying wrongful acts that control.” Further, the Supreme Court stated that the SEC Investigation and the Securities Class Action alleged non-identical time periods that meaningfully overlapped. In this case, the Supreme Court found that one Wrongful Act -- “Alexion’s grantmaking activities” -- was sufficient to show the required meaningful linkage between the securities class action and the 2015 Notice. The Supreme Court’s decision in Alexion Pharmaceuticals is consequently an example of a broad application of the “meaningful linkage” test the Court previously prescribed in ACE American Insurance Co. v. Guaranteed Rate, Inc., 305 A.3d 338 (Del. 2023). Finally, the Supreme Court further concluded that the pertinent policy language, i.e., the notice provisions of the policies, the Limit of Liability Provisions, the Prior Notice Exclusion, and the definition of “Interrelated Wrongful Acts” were not ambiguous.