2222222222

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.

Advertisement




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.

Advertisement




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.

Advertisement




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 digital producer and staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

Advertisement




I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

Advertisement




Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

Advertisement




A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]