Legal/Regulatory

Verizon Wins $40 Million in Long-Standing Court Battle with Insurers

Verizon Communications was awarded defense costs in excess of $40 million after years-long battle over securities claim litigation.
By: | May 21, 2018 • 5 min read

In a court battle with its insurers spanning nearly 10 years, the score was finally settled when the Delaware Superior Court awarded Verizon Communications $40 million in unreimbursed defense costs plus millions more in prejudgment interest.

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The telecommunications conglomerate went up against its primary and excess liability insurance carriers after they denied coverage to Verizon for an underlying securities claim litigation from 2009.

Liability Claims and Bankruptcy 

Verizon sued its insurers after a long list of internal company decisions, new business adventures, policy language disputes and court battles. The main underlying actions at hand were:

  1. Verizon decided to create a standalone company as a “spin-off” of its print and electronic yellow-pages directories business. The company was called Idearc Inc. and was spun-off in 2006.
  2. Next, Verizon transferred its directories business to Idearc in exchange for Idearc’s common stock and promissory notes.
  3. Verizon distributed all its outstanding shares of Idearc common stock to Verizon shareholders. It took Idearc’s notes and transferred them to its own banks. In exchange, the banks gave the company debt securities they had purchased in the open market.
  4. The banks took the Idearc debt securities and sold them to previously solicited purchasers and lenders.

After the spin-off, Idearc functioned as an independent company. Then it defaulted on its promissory notes. Idearc filed for bankruptcy in 2009 with a total debt of $9.5 billion and assets of $1.8 billion, leading to a number of suits filed against Verizon alleging liability in connection to the spin-off.

Policies: Doing Due Diligence 

Before the bankruptcy, when litigation was a mere concept and the spin-off’s prospects looked promising, Verizon and Idearc purchased primary and excess liability policies to protect against potential litigation risks and liabilities that could arise.

Illinois National Insurance Company held the primary policy. Excess policies were issued by a number of insurers, prominently XL Specialty Insurance Company, Zurich American Insurance Company and Twin City Fire Insurance Company. Requests for comment on the case by the carriers and/or their parent companies were declined.

Verizon and Idearc purchased primary and excess liability policies to protect against potential litigation risks and liabilities that could arise. It’s primary policy covered up to $15 million in liability limits.

These policies, collectively referred to as the Runoff Policies, would provide coverage for liability resulting from claims made during the policy period, November 2006 to November 2012. They allowed Verizon to recover defense costs in the event a securities claim was brought against the company and an insured person and they shared a joint defense.

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When Idearc defaulted on its notes and was forced to file bankruptcy, one of the more prominent suits that came against the spin-off and Verizon was filed by U.S. Bank National Association.

U.S. Bank was appointed litigation trustee in Idearc’s bankruptcy. Its job was to recover funds for Idearc’s debt securities holders. It demanded $14 billion in damages from Verizon and John Diercksen, an executive and Idearc’s sole director. This flung the parties into a court battle spanning five years.

Ultimately, Verizon obtained dismissal of the initial claims in 2012.

Legal Fees and Denied Coverage

However, the years of litigation added up and legal costs were getting steep. At the start of the process, Verizon notified its primary carrier, along with the Runoff Policy holders, about the U.S. Bank suit. The primary carrier issued coverage for Diercksen’s defense costs, but it left Verizon hanging.

The policy, said the insurer, did not cover Verizon’s defense costs, because “the U.S. Bank complaint does not constitute a securities claim.”

Meanwhile, U.S. Bank was not satisfied. In 2013, it filed a second lawsuit, naming both Verizon and now Andrew Coticchio, former chief financial officer of Idearc, as defendants. It sought more than $2.85 billion in damages, including the non-payment of the Idearc debt securities from the first suit.

Verizon turned to its policy issuers, this time filing an instant suit that said it was entitled to $48 million in defense costs. The Runoff Policy holders held firm, claiming both U.S. Bank suits did not involve a securities claim.

At the end of 2014, the Runoff Policy holders conceded that, “if US. Bank fit within the Policy’s definition of ‘Securities Claim,’ [Verizon] would be entitled to defense costs.”

The telecommunications conglomerate was tasked with proving the underlying suits were, in fact, a securities claim.

The Final Leg of the Legal Race 

Collectively, the Runoff Polices decided to let Illinois National, the primary policy holder, take the lead and speak on behalf of all the insurers, excess included, during the hearings. For over a year, Verizon and Illinois National worked hard to define the parameters surrounding the underlying suit.

In Verizon Communications, Inc. v. Illinois National Insurance Company, et al., waiting for the primary carrier to decide hurt the excess carriers big time.

In a court hearing in March 2017, Verizon reminded its excess carriers that if the “Defendants’ counsel [in this case, Illinois National] again conceded that if the Court ruled in favor of Verizon on the ‘Securities Claim’ issue, Verizon would be entitled to 100% of its costs.”

The excess carriers didn’t sway on their counsel, instead leaving the decision in Illinois National’s hands; the court found the U.S. Bank suits constituted as a securities claim. The excess carriers were on the hook.

The Runoff Policy holders then tried to fight the ruling, but the court wouldn’t budge. Because the excess carriers chose to let Illinois National handle counsel, they were not entitled to challenge rulings where they had already played a role.

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The Delaware Superior Court laid down the law: “It is the Court’s opinion that it is simply time to stop this litigation Ferris wheel.

“If the Excess Insurers believe that they will overpay the Plaintiffs’ Defense Costs, now is not the time to address that concern,” said Judge J. Carpenter at the May 7, 2018 hearing. “This litigation has been pending for many years and even after concluding that the U.S. Bank Action is a Securities Claim, [Verizon and co.] have still not been advanced their costs.”

All excess carriers are obligated to pay prejudgment interest from January 9, 2014 until March 24, 2017, with a fixed interest rate of 5.75 percent. Illinois National was on the line for its full $15 million in policy limits plus prejudgment interest. In total, Verizon was awarded $40 million in unreimbursed defense costs, plus millions more in prejudgment interest.

McKool Smith represented Verizon in this case. Attorneys representing the excess carriers were unavailable or declined to comment. To read the court’s opinion, see Verizon Communications, Inc. v. Illinois National Insurance Company, et al. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The End of Summer

A failure to purchase product contamination insurance results in a crushing blow.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]