Legion Partners Asset Management, LLC v. Underwriters at Lloyds London

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

LEGION PARTNERS ASSET )
MANAGEMENT, LLC, a Delaware )
Limited Liability Company, )
)
Plaintiff, )
v. ) C.A. No. N19C-08-305 AML CCLD
)
UNDERWRITERS AT LLOYDS )
LONDON, )
)
Defendant. )

Submitted: June 22, 2020
Decided: September 25, 2020

MEMORANDUM OPINION

Upon Plaintiff’s Motion for Partial Summary Judgment: GRANTED

David J. Soldo, Esquire, Patricia A. Winston, Esquire, of MORRIS JAMES LLP,
Wilmington, Delaware, Attorneys for Plaintiff Legion Partners Asset Management,
LLC.

Carmella P. Keener, Esquire, of COOCH AND TAYLOR, P.A., Wilmington,
Delaware, Kim W. West, Esquire, Alec H. Boyd, Esquire, of CLYDE & CO US
LLP, San Francisco, California, Attorneys for Defendant Underwriters at Lloyd’s,
London.

LEGROW, J.
 This insurance coverage dispute requires the Court to determine whether a

directors’ and officers’ insurance policy covers costs incurred by the insured

organization in defending claims brought by the insured’s former employee. Upon

receiving notice that the organization’s former employee filed a lawsuit against the

organization and its principals, the insurer agreed to pay defense costs the principals

incurred in the lawsuit. On the same day as the filing of the former employee’s

lawsuit, the insured organization brought an arbitration action against the former

employee.

After his suit was stayed in favor of the arbitration, the former employee filed

a counterclaim against the organization in the arbitration action. In both his

complaint and counterclaim, the former employee alleged that the principals had

breached their fiduciary duties to investors and violated federal laws and regulations.

The arbitrator ultimately rejected the former employee’s claims and allegations.

Before the arbitration concluded, the insured organization notified the insurer

that it was seeking coverage for the costs incurred in defending the counterclaim.

This dispute arose after the insurer denied the organization coverage for the costs it

incurred defending the counterclaim.

The issue before the Court is whether the allegations in the counterclaim,

when read as a whole, assert a risk within the policy’s coverage, thereby implicating

the insurer’s obligation to advance defense costs. As explained below, the

1
counterclaim alleges the organization and its principals engaged in wrongful acts

within the scope of the coverage. Accordingly, the insurer must indemnify the

organization for the defense costs it incurred relating to the counterclaim. The

allocation issues that remain between the parties cannot be resolved on the present

record.

FACTUAL AND PROCEDURAL BACKGROUND

The following facts are drawn from the complaint and the record the parties

provided.

A. The LASC Action and the Arbitration
On May 14, 2018, Justin P. Albert, a former employee of Legion Partners

Asset Management, LLC (“Legion”), initiated an action in Los Angeles County

California Superior Court, Case No. BC706306 (the “LASC Action”) against Legion

and its two principal officers, managers, and directors, Raymond T. White and

Christopher S. Kiper.1 On May 22, 2018, Albert filed an amended complaint (the

“Amended Complaint”), in which he asserted the following four counts: (1) Breach

of Fiduciary Duty against White and Kiper; (2) Violation of California's

Whistleblower Statute against Legion; (3) Wrongful Termination in Violation of

1
Declaration of Ryan Keech (“Keech Decl.”) ¶ 3.

2
Public Policy against Legion; and (4) Declaratory Judgment against Legion, White,

and Kiper.2

On the same day that Albert initiated the LASC Action, Legion filed a demand

for arbitration (the “Arbitration Demand”) with the American Arbitration

Association.3 The Arbitration Demand asserted that Albert was employed by Legion

as an Equity Analyst from February 2014 to October 2017,4 and that he violated the

Employment Agreement and Confidentiality and Intellectual Property Agreement

that governed his employment with Legion.5 Both agreements contained arbitration

clauses requiring arbitration of all disputes arising from Albert’s employment.6

Legion alleged Albert tortiously interfered with Legion’s business partnerships and

revealed confidential information to third parties.7 Specifically, Legion alleged the

following claims for relief against Albert: (1) Breach of Contract; (2) Intentional

Interference with Contractual Relations; (3) Intentional Interference with

Prospective Economic Advantage; and (4) Misappropriation of Trade Secrets.8

On June 11, 2018, Legion filed a Petition to Compel Arbitration and Stay the

LASC Action on the basis that Albert’s claims against Legion were subject to

2
See Plf.’s Op. Br. in Supp. of its Mot. for Partial Summ. J. (“Plf.’s Mot.”), Ex. 4.
3
Plf.’s Mot., Ex. 2 at 1.
4
Id. at 3.
5
Id.
6
Id.
7
Id.
8
Plf.’s Mot., Ex. 2 at 3–9.

3
binding arbitration.9 On July 27, 2018, the Superior Court of California issued a

Minute Order (the “Minute Order”)10 and a Final Order (the “Final Order”)11 staying

the LASC Action and compelling Albert and Legion to enter into binding arbitration

to resolve their claims against each other. The Minute Order stated, in relevant part,

as follows:

Each of Plaintiffs claims against Defendant Legion Partners Asset
Management, LLC are ordered to binding arbitration pursuant to the
Agreement to Arbitrate between them. Plaintiffs Claims against the
individual Defendants shall remain in this action. The entire action is
stayed pending the outcome of the arbitration between [Albert] and
[Legion].12

The Final Order stated:

1. The claims asserted by plaintiff Justin Albert in his Complaint and
First Amended Complaint on file in the above-captioned action are the
subject of a valid and enforceable arbitration agreement between
plaintiff and Legion (only as to Defendant Legion Partners Asset
Management, LLC);

2. Plaintiff is required and shall arbitrate those claims in the pending
AAA arbitration proceedings filed by Legion (the claims against
Defendants White and Kiper are excluded); and

3. Pursuant to CAL. CIV. PROC. CODE § 1281.4, [the LASC Action] is
stayed in its entirety until the above-ordered consolidated arbitration is
had. A Status Conference Re: Arbitration is set for May 20, 2018, 9:00
am. Counsel for Defendants to give Notice.13

9
Plf.’s Mot., Ex. 5 at 17–20.
10
Plf.’s Mot., Ex. 7.
11
Declaration of Kim W. West (“West Decl.”) Ex. A.
12
Plf.’s Mot., Ex. 7.
13
West Decl., Ex. A.

4
B. Albert’s Counterclaim
Consistent with the Final Order, Albert subsequently filed a

counterclaim (the “Counterclaim”) against Legion in the arbitration

proceeding (the “Arbitration”).14 The Counterclaim asserted the following

two counts against Legion: (1) Violation of California’s Whistleblower

Statute; and (2) Wrongful Termination in Violation of Public Policy.15 To

establish the grounds for these two counts, the Counterclaim alleged at

paragraphs 1, 2, and 6 as follows:

1. This is an action to that stems from multiple breaches of fiduciary
duty and violations of federal laws and regulations by two self-dealing
hedge fund managers who abused their roles as fiduciaries to clients,
including Respondent as well as the public school teachers of the State
of California.16

2. Respondent, who attempted to act to protect his, the teachers’, and
the managers’ other clients’ interests was instead subjected to
retaliation when he attempted to blow the whistle on the principals’
illegal and improper conduct.17

6. White and Kiper abused the powers they had as officers, including
White’s role as Chief Compliance Officer, of Legion Partners to
improperly oust non-party Bradley Vizi from the management of the
companies based on falsified accusations of wrongdoing and a
fraudulent investigation by Legion Partners’s outside counsel. And
White and Kiper operated the companies for personal gain by
disclosing confidential, material information belonging to Legion

14
See Katz Decl., Ex. 8.
15
Id.
16
Id. ¶ 1.
17
Id. ¶ 2.

5
 Partners’s investors to the detriment of those investors—including
Respondent and CalSTRS.18

The Counterclaim further explained that a reporter published an article in

Activistmonitor concerning Legion’s Investment Committee and its positions,

valuation, and strategy of its investment in BroadSoft, Inc. (the “BroadSoft

Article”).19 The specific details about the transactions in the BroadSoft Article were

closely held confidential information that previously had not been made public.20

Paragraph 59 of the Counterclaim details Albert’s response to his concerns regarding

a possible leak of material, nonpublic information by Legion’s Investment

Committee:

59. Respondent became concerned about the likely [Legion]
Investment Committee leak of material, non-public information
regarding the critical BroadSoft investment when he first saw the
Activistmonitor article on or about September 8, 2017. Respondent
immediately took action in response to having seen that article.
Believing that the leak could only have come from White and Kiper,
Respondent approached the one remaining uninvolved member of
[Legion’s] leadership team, his supervisor Bradley Vizi. Respondent
expressed to Mr. Vizi his concerns about this leak and requested
assistance on how best to handle the situation considering the key
[Legion] individuals Respondent believed were involved. Respondent
believed the Activistmonitor article revealed violations of Legion’s
Code of Ethics, and potentially federal and/or state laws and
regulations. Respondent’s disclosure to Mr. Vizi occurred before he
was aware of the fraudulent investigation that eventually led to the
ouster of Mr. Vizi.21

18
Id. ¶ 6.
19
Id. ¶ 41.
20
Id. ¶ 42.
21
Id. ¶ 59.

6
 Count I of Albert’s Counterclaim for Violation of California’s Whistleblower

Statute against Legion Partners alleges, in pertinent part:

85. Respondent engaged in activity protected by California’s
whistleblower statute, in that he disclosed, was about to disclose, or
[Legion] believed he had disclosed information related to conduct that
violated state or federal laws or regulations and/or that Respondent
believed violated state or federal laws or regulations. ….22

88. [Legion’s] adverse employment actions were taken because of
Respondent’s engagement in protected activity.23

Count II for Wrongful Termination in Violation of Public Policy against Legion

Partners alleges:

92. [Legion’s] adverse employment actions disregarded the public
policy of this State.24

93. [Legion's] conduct was authorized or ratified by an officer, director,
or managing agent of [Legion].25

94. As a direct and proximate result of [Legion’s] conduct, Respondent
was harmed.26

C. Legion’s affirmative defenses to the Counterclaim
Legion argues in this action that its responses to certain allegations made in

the Counterclaim also responded to allegations in the corresponding LASC Action.

Legion contends that paragraphs 6, 8, 9, 10, 11, and 12 of its answering statement to

22
Id. ¶ 85.
23
Id. ¶ 88.
24
Id. ¶ 92.
25
Id. ¶ 93.
26
Id. ¶ 94.

7
the Counterclaim were in response to Albert’s claims that explicitly rested on proof

that White and Kiper breached their fiduciary duties to clients:

6. Legion further alleges that if it failed to perform any contractual or
other legal duties, which it expressly denies, said performance was
excused by Albert's own breaches or misconduct in this matter.27

8. Legion further alleges that Albert’s counterclaims are barred because
Legion has complied with and has fully performed any and all
obligations imposed upon it by law, contract or equity such that any
obligation owed to Albert has been satisfied, released or otherwise
discharged.28

9. Legion further alleges that Albert’s counterclaims are barred because
Albert has or had unclean hands with respect to the matters alleged in
the counterclaims and, therefore, Albert is barred from recovering any
relief referenced in the counterclaims or any purported claim for relief
alleged therein.29

10. Legion further alleges that Albert is estopped, by his conduct, from
asserting the counterclaims upon which he seeks relief.30

11. Legion further alleges that Albert’s counterclaims are barred, in
whole or in part, to the extent that the relief requested against Legion
would result in unjust enrichment.31

12. Legion further alleges that Albert’s counterclaims are barred, in
whole or in part, because any loss or damages sustained by Albert, if
27
Plf.’s Mot., Ex. 11 ¶ 6. Specifically, Legion alleges that its defense responded to the following
Counterclaim and LASC Action paragraphs (in parentheses): ¶¶ 1(¶ 1), 2(¶ 2), 6(¶ 6), 8(¶ 8), 9(¶
2), 10(¶ 10), 11(¶ 11), 32(¶ 37), 33(¶ 38), 41(¶ 46), 42(¶ 47), 43(¶ 48), 48(¶ 53), 51(¶ 56), 52(¶
57), 53(¶ 58), 56(¶ 61), 57(¶ 62), 63(¶ 68), 64(¶ 69), 65(¶ 70), 66(¶ 71), 67(¶ 72), 68(¶ 73). Keech
Decl. ¶¶ 11–12. Nearly all of Albert’s allegations against Legion Partners in the Counterclaim,
including but not limited to paragraphs 6, 9, and 43, explicitly rest on proof of White and Kiper’s
breach of fiduciary duties to their clients. Legion’s Mot. for Summ. J. at 20.
28
Id. at 21. Specifically, Legion alleges that it responded to the following Counterclaim and LASC
Action paragraphs (in parentheses): ¶¶ 6 (¶ 6), 8 (¶ 8), 9 (¶ 9), 32 (¶ 37), 33 (¶ 38).
29
Plf.’s Mot., Ex. 11 ¶ 9.
30
Id. ¶ 10.
31
Id. ¶ 11.

8
 any, was proximately caused or contributed to by Albert's own
wrongful conduct.32

D. The D & O Policy
Legion contends its defense of the counterclaim implicated a directors’ and

officers’ liability policy (the “Policy”) issued by Underwriters at Lloyd’s London

(“Underwriters”). Section I.A of the Policy establishes the three different

circumstances under which Underwriters has an obligation to pay losses incurred by

Legion or one of its insured persons:

(1) The Insurer shall pay, on behalf of any Insured Person, Loss
which is not indemnified by the Insured Organization arising from
Claims against such Insured Person for a Wrongful Act.

(2) The Insurer shall pay, on behalf of the Insured Organization for
Loss which the Insured Organization pays as indemnification to any
Insured Person arising from a Claim for a Wrongful Act.

(3) The Insurer shall pay, on behalf of the Insured Organization,
Loss arising from Claims against any Insured Organization for a
Wrongful Act (Privately Owned Managers).33

Legion argues its defense of the Counterclaim fell within Sections I.A.2 or I.A.3.

Section II.2 of the Policy defines “Claim,” in relevant part, to include a

“written demand, notice of complaint, suit or counterclaim . . . made against an

Insured” and “formal notice of any arbitration . . . against an Insured.”34 “Wrongful

Act” means “any actual or alleged breach of duty, neglect, error, misstatement,

32
Id. ¶ 12.
33
Plf.’s Mot., Ex. 1 § I.A.
34
Id. § II.2

9
misleading statement, omission or act committed (or omitted)” by the Insured

Organization or an Insured Person “solely in their respective capacities as such . . .

.” 35 It is undisputed that Legion is the Insured Organization and White and Kiper

are Insured Persons.36 To summarize, under the Policy, Legion, White, and Kiper

are insured against Losses, including attorneys’ fees and costs, incurred in defense

of a Claim for a Wrongful Act. A Claim includes a counterclaim advanced in an

arbitration.

The Policy is not a duty to defend policy, but instead creates a duty to advance

“Defense Costs” with an express allocation provision.37 The allocation provision

specifies that Underwriters is not obligated to make payments associated with “any

portion(s) of Claims not covered by [the] Policy.”38 The parties agreed to allocate

covered and uncovered losses based on the parties’ relative financial and legal

exposures and to use “reasonable best efforts” to agree on an allocation.”39

E. The November 2, 2018 Letter
On June 21, 2018, Arthur J. Gallagher & Co. Insurance Brokers of California,

Inc. (“AJG”), Legion’s U.S. broker for the Policy, first filed notice for coverage

35
Id. § II.37.
36
Id. at 12; id. at §II.19(1).
37
Plf.’s Mot., Ex. 1 § V.B; Id. § V.C (“The Insurer shall advance covered Defense Costs no later
than sixty (60) days after receipt from the Named Insured of sufficient information confirming its
obligation to advance such Defense Costs, including but not limited to invoices and fee statements
describing attorney work performed.”).
38
Plf.’s Mot., Ex. 1 § VI.
39
Id.

10
regarding Albert’s Claim.40 At the time of the tender, the Claim consisted of Albert’s

Amended Complaint filed in the LASC Action.

On November 2, 2018, Clyde & Co, on behalf of Underwriters, transmitted

Underwriters’ coverage position in a letter to AJG (the “November 2, 2018

Letter”).41 In that letter, Underwriters acknowledged a coverage obligation for

White and Kiper for the LASC Action, subject to a reservation of rights.42

Underwriters informed Legion there was no coverage for White and Kiper for the

Counts asserted against Legion in the Arbitration because Albert did not assert a

“Claim” against White or Kiper.43 Underwriters also advised there was no entity

coverage for Legion with respect to the LASC Action or the Arbitration.44 That is,

Underwriters took the position that, under the Policy, only the breach of fiduciary

duty claim against the Individual Insureds in the LASC action was covered. On

December 21, 2018 and January 23, 2019, Underwriters repeated its refusal to

defend Legion at all or to defend White and Kiper in the Arbitration.45

F. The Arbitration Award
In the Final Award dated August 6, 2019 (the “Arbitration Award”), the

arbitrator held that Albert had not proved his counts against Legion for Violation of

40
West Decl., Ex. B.
41
Plf.’s Mot., Ex. 9.
42
Id. at 7.
43
Plf.’s Mot., Ex. 9 at 5, 7–8.
44
Id. at 6.
45
Declaration of David Katz (“Katz Decl.”) ¶ 12; See Plf.’s Mot., Ex. 10.

11
California’s Whistleblower Statute and for Wrongful Termination in Violation of

Public Policy.46 The arbitrator held Albert failed to establish that Legion’s response

to his “whistleblowing” warranted Albert’s resignation from Legion.47 The

arbitrator held that Albert could not prove that he suffered an “adverse employment

action” because the evidence showed he had not been discharged constructively.48

The arbitrator noted that both sides devoted a significant portion of the hearing

and their closing briefs to disputing whether the BroadSoft Article contained

unlawfully leaked material, nonpublic information. The arbitrator, however, found

the “dispositive inquiry” was “whether Albert reasonably believed the conduct he

complained of was illegal and whether [Legion’s] response to Albert’s complaint

created an intolerable working condition warranting his resignation.”49 Both Albert

and Legion ultimately were unsuccessful in proving their respective claims against

each other. On December 4, 2019, the Los Angeles Superior Court confirmed the

Arbitration Award as a judgment after the parties stipulated to confirm the

Arbitration Award and dismiss the LASC Action (“Stipulation and Final

Judgment”).50

46
Plf.’s Mot., Ex. 3 at 22–25.
47
Id. at 24–25.
48
Id. at 25.
49
Id. at 23 (emphasis added).
50
West Decl., Ex. E.

12
G. Procedural background
In response to the November 2, 2018 Letter, Legion initiated this action

against Underwriters on September 5, 2019. On October 1, 2019, Legion filed its

amended complaint. A year later, Legion moved for partial summary judgment,

seeking an order declaring that Underwriters has a duty to pay defense costs incurred

by Legion in the LASC Action and the Arbitration. After briefing and oral argument,

the Court took this matter under advisement. This opinion resolves the pending

motion.

In its motion, Legion seeks reimbursement of defense costs for expenses

incurred in the LASC Action. Legion first argues Underwriters must reimburse the

arbitration expenses as defense expenses because (1) the arbitration expenses were

“conducted against liability” in the LASC Action; (2) the “parallel legal proceeding”

doctrine under California law supports Underwriters’ obligation to reimburse

arbitration expenses where the Arbitration and LASC arise from a common core of

operative facts; and (3) the stay granted in the LASC Action did not end

Underwriters’ reimbursement obligations.51 Under its “parallel legal proceeding”

theory, Legion argues the defenses raised in the Arbitration are responsive to the

51
Legion argued in its brief that the contractual choice of law provision in the Policy compelled
the application of California law. At oral argument, however, Legion conceded that the Court
need not decide the issue and could apply Delaware law to the coverage dispute for purposes of
the pending motion. Underwriters consistently has argued that Delaware law governs this dispute.

13
LASC Action and thus Underwriters must consider at least the allegations made in

“parallel judicial proceedings.”

In response, Underwriters argues Legion is not entitled to coverage under

Section I.A.1 or Section I.A.2 because (1) the policy is not a duty to defend policy;

(2) the “conducted against liability” and “parallel legal proceeding” theories do not

apply to give coverage; and (3) the Arbitration Award does not support issue

preclusion in a California court both procedurally and substantively. Underwriters

contends this Court should issue a declaration that no coverage obligation is owed.

In its reply, Legion clarifies that it is seeking defense reimbursement under

both Sections I.A.2 and I.A.3. It argues Section I.A.3 applies because it covers

“Wrongful Acts” that include Albert’s factual allegations of wrongful conduct by

Legion, acting through its officers White and Kipper.

ANALYSIS

Summary judgment may be granted when there is no genuine issue of material

fact and the moving party is entitled to judgment as a matter of law.52 Here, neither

side contends there are any material facts in dispute. Both parties agree the coverage

issue is ripe for decision on the record before the Court.

52
E.I. du Pont de Nemours & Co. v. Stonewall Ins. Co., 2009 WL 1915212, at *4 (Del. Super.
June 30, 2009) (citing Super. Ct. Civ. R. 56(c)).

14
A. The allegations in the Counterclaim assert a risk within the policy’s
coverage.
The policy imposes on Underwriters a duty to advance defense costs. This

means Underwriters has a duty to reimburse reasonable defense costs arising out of

a covered Claim while the litigation underlying that Claim is ongoing. Although a

duty to defend policy is implicated when the “factual allegations in the underlying

complaint potentially support a covered claim,” a policy that contains a duty to

advance is implicated when “an action states a claim covered by the policy.”53

Nevertheless, Delaware recognizes that both duties arise “whenever the underlying

complaint alleges facts that fall within the scope of coverage,” and Delaware courts

construe both duties “broadly in favor of the policyholder.”54 A duty to advance is

distinct from the duty to indemnify because the duty to advance defense costs is

triggered at the beginning of the case, as opposed to the duty to indemnify, which is

triggered at the end of the case.55 Under a policy that contains a duty to advance, an

53
Verizon Commc'ns Inc. v. Illinois Nat'l Ins. Co., 2017 WL 1149118, at *6 (Del. Super. Mar. 2,
2017), rev'd on other grounds, 222 A.3d 566 (Del. 2019) (citing Cont'l Cas. Co. v. Alexis I. DuPont
Sch. Dist., 317 A.2d 101, 105 (Del. 1974)) (emphasis added) (internal quotations omitted);
Ferrellgas Partners L.P. v. Zurich Am. Ins. Co., 2020 WL 363677, at *9 (Del. Super. Jan. 21,
2020), appeal denied, 2020 WL 764155 (Del. Super. Feb. 17, 2020).
54
Verizon Commc'ns, 2017 WL 1149118 at *6 (quoting Federal Ins. Co. v. Kozlowski, 792
N.Y.S.2d 397,401-03 (N.Y. App. Div. 2005)) (finding that the same law applies in Delaware and
New York regarding the duty to defend and to advance defense expenses); IDT Corp. v. U.S.
Specialty Ins. Co., 2019 WL 413692, at *10 (Del. Super. Jan. 31, 2019).
55
See id.; In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d 455, 464 (S.D.N.Y. 2005) (with duty
to advance costs, insurer must pay defense costs as soon as attorney’s fees are incurred regardless
of the final disposition of the case).

15
insurer has an absolute duty to advance costs for any litigation that falls within the

policy terms.56

Although the underlying litigation—the Arbitration—has concluded, both

sides agree that the issue before the Court is whether Underwriters’ duty to advance

was triggered, thereby requiring Underwriters to reimburse Legion for the defense

costs it incurred relating to the Counterclaim. This Court must determine what

claims, if any, could result in indemnity.57 How the arbitrator ultimately resolved

the Counterclaim is not relevant to this analysis.

Legion, as the insured, ultimately “bears the burden of proving that a claim is

covered by an insurance policy,” and if satisfied, “the burden shifts to the [I]nsurer

to prove that the event is excluded under the policy.” 58 Where defense costs are

concerned, the Court must look to the underlying complaint’s allegations in order to

determine whether the action states a claim covered by the policy. 59 But, the Court

is not limited by how the claims are characterized or formally titled in the

pleadings.60 Instead, a reviewing court considers the facts alleged and the reasonable

56
See In re WorldCom, 354 F. Supp. 2d at 464; see also W. Cas. & Sur. Co. v. Adams Cty., 534
N.E.2d 1066, 1068 (Ill. App. Ct. 1989) (duty to defend is broader than duty to indemnify because
the claims do not necessarily need to result in indemnification in order to trigger the duty to
defend).
57
Sun-Times Media Grp., Inc. v. Royal & Sunalliance Ins. Co. of Canada, 2007 WL 1811265, at
*11 (Del. Super. June 20, 2007).
58
See Virtual Bus. Enterprises, LLC v. Maryland Cas. Co., 2010 WL 1427409, at *4 (Del. Super.
Apr. 9, 2010).
59
See Cont'l Cas. Co., 317 A.2d at 103.
60
Verizon Commc'ns, 2017 WL 1149118, at *6; IDT, 2019 WL 413692, at *10.

16
inferences to be drawn from them to determine whether the complaint’s allegations,

when read as a whole, assert a risk within the policy’s coverage.61

1. Underwriters must indemnify Legion under Section I.A.3 of the
Policy for its defense against the Counterclaim.
Section I.A.3 requires Underwriters to cover Legion under the following

circumstances:

The Insurer shall pay, on behalf of the Insured Organization, Loss
arising from Claims against any Insured Organization for a
Wrongful Act (Privately Owned Managers).62

The Court initially must determine whether Legion sustained a “Loss” in

accordance with the terms of the Policy. Relying on Sections I.A.1 and I.A.2 of the

Policy, Underwriters argues Legion must prove it has actually paid as

indemnification Loss arising from a Claim against White and Kiper for a Wrongful

Act before Underwriters’ reimbursement obligation is triggered. Underwriters

explains that White and Kiper could not have sustained a Loss to be indemnified

because they were not parties in the Arbitration.

Underwriters’ argument is inconsistent with the Policy’s unambiguous

terms.63 Section I.A.3 expressly provides coverage to the Insured Organization

61
See Blue Hen Mech., Inc. v. Atl. States Ins. Co., 2011 WL 1598575, at *2 (Del. Super. Apr. 21,
2011) (“The Court may review the complaint as a whole, considering all reasonable inferences
that may be drawn from the alleged facts.”), aff'd, 29 A.3d 245 (Del. 2011); Verizon Commc'ns,
2017 WL 1149118, at *7 (citing Cont'l Cas. Co., 317 A.2d at 103).
62
Plf.’s Mot., Ex. 1 § I.A.3.
63
The Court should interpret contract language as it “would be understood by any objective,
reasonable third party.” Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014). In reviewing

17
(Legion) for “Loss arising from Claims against any Insured Organization for a

Wrongful Act.”64 “Claim” includes a “counterclaim … made against an Insured.”

The Counterclaim is “made against” Legion and thus constitutes a “Claim” under

the Policy. The issue is whether this Loss arises from a Claim “for a Wrongful Act.”

Underwriters cannot avoid the broad definition of “Wrongful Act” contained

in the Policy. With respect to this case, “Wrongful Act” means:

any actual or alleged breach of duty, neglect, error, misstatement,
misleading statement, omission or act committed (or omitted) … by the
Insured Organization or any Insured Person solely in their
respective capacities as such, or any matter claimed against them solely
by reason of their status as an Insured Person or as a Controlling Person
or selling shareholder….”65
The Policy defines “Wrongful Acts” in the same manner as the insurance policy in

IDT Corp. v. U.S. Specialty Ins. Co.66 There, this Court found that “Wrongful Acts”

the terms of an insurance policy, the Court considers the insured’s reasonable expectations at the
time it executed the policy to determine whether the policy’s terms are ambiguous, confusing, or
misleading. See E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., 1996 WL 111205, at *2
(Del. Super. Jan. 30, 1996) (citing Hallowell, 443 A.2d at 927); see also Steigler v. Ins. Co. of N.
Am., 384 A.2d 398, 401 (Del.1978) (“[A]n insurance contract should be read to accord with the
reasonable expectations of the purchaser so far as the language will permit.”) (quoting State
Farm Mutual Auto. Ins. Co. v. Johnson, 320 A.2d 345 (Del. 1974)). Absent ambiguity, contract
terms should be accorded their plain, ordinary meaning. Alta Berkeley VIC. V. v. Omneon,
Inc., 41 A.3d 381, 385 (Del. 2012); see also Goggin v. Nat'l Union Fire Ins. Co. of Pittsburgh,
2018 WL 6266195, at *4 (Del. Super. Nov. 30, 2018); IDT, 2019 WL 413692, at *7. Ambiguity
exists when the disputed term fairly is susceptible to more than one meaning. Id. If the language
is “clear and unequivocal,” the Court will read the terms of the policy in accordance with their
plain meaning. See Admiral Ins. Co., 1996 WL 111205, at *2 (quoting Hallowell v. State Farm
Mut. Auto. Ins. Co., 443 A.2d 925, 926 (Del. 1982)).
64
Plf.’s Mot., Ex. 1 § I.A.3.
65
Id. at § II.37.
66
IDT, 2019 WL 413692, at *9.

18
were not limited only to conduct that constitutes a “breach of duty.” 67 This Court in

IDT explained:

Rather, Wrongful Acts encompass a broad array of specifically
enumerated conduct. The types of conduct preceding in the list connects
to “breach of duty” via a disjunctive “or.” And so, each term in the
string must be afforded a separate and independent meaning. “Breach
of duty” does not absorb, or incorporate, or otherwise make the other
exemplified conduct duplicative or meaningless. To the contrary, each
term represents a separate, independent act that, if other requirements
are satisfied, is capable of triggering coverage obligations under the
U.S. Specialty policy. Therefore, in construing the language of the U.S.
Specialty Policy, the Court finds that a “Wrongful Act” is not limited
to a “breach of duty.” Any conduct that is an “act,” or an “error,” or a
“misstatement,” or a “misleading statement,” or “neglect,” or an
“omission” could be a “Wrongful Act.”68

Similarly, this Court broadly construes “Wrongful Act” and examines

whether the underlying Counterclaim “alleges facts that fall within the scope of

coverage.”69 In the Counterclaim, Albert makes factual allegations that Legion

committed Wrongful Acts through its controlling members, White and Kiper.

Specifically, Albert alleges his Counterclaim “stems from multiple breaches of

fiduciary duty and violations of federal laws and regulations by two self-dealing

hedge fund managers who abused their roles as fiduciaries to clients[.]” 70 The

Complaint also alleges:

34. During the second and third quarters of 2017, [Legion] was engaged
in a strategy of acquiring a large equity position in a company called
67
Id.
68
Id.
69
Id. (quoting Verizon Commc’ns, 2017 WL 1149118, at *6).
70
Plf.’s Mot., Ex. 8 ¶ 1.

19
 BroadSoft, Inc., traded on the NASDAQ under the symbol BSFT.
[Legion’s] goal was to acquire at least 5% of the outstanding stock of
BroadSoft, which would require, within ten days of achieving that
result, a disclosure of its ownership to the SEC on a beneficial
ownership report, commonly called a “Schedule 13D.”71
36. The investment vehicles used by [Legion] for the accumulation of
BroadSoft stock were L.P. I, L.P. II, and Spec Ops VI. All three
vehicles were limited partnerships set up with Legion Partners
Holdings, through its subsidiary Legion Partners Fund GP, as the
general partner. White and Kiper were managing members of Legion
Partners Holdings and were, therefore, responsible for the conduct of
the general partner of these funds.72
40. The confidentiality of [Legion’s] strategy of acquiring, reforming,
and selling BroadSoft was of paramount importance to the investors in
L.P. I, L.P. II, and Spec Ops VI. If the investing public, or any
significant subset, were to learn of [Legion’s] acquisition strategy,
these third-party investors could crowd into the stock, prematurely
driving up the stock price. Such an increase in share price during an
acquisition attempt would make acquisition costlier for the funds’
investors, possibly to the point of making the completed acquisition
infeasible.
41. Nevertheless, by no later than September 8, 2017, on information
and belief, while still in the process of accumulating the BroadSoft
position, someone within [Legion] leaked the details of [Legion’s]
acquisition strategy. A reporter published these details in an article in
Activistmonitor entitled “BroadSoft under activist scrutiny, source
says,” a true and correct copy of which is attached hereto as Exhibit A.
The article disclosed key details of [Legion’s] strategy including: (1)
that it intended to acquire at least 5% of BroadSoft and file a Schedule
13D; (2) the value of [Legion’s] current stake in BroadSoft; (3)
[Legion’s] purchase price strategy with respect to BroadSoft stock; (4)
[Legion’s] activist steps and communications with BroadSoft
management; and (5) that [Legion] was working in concert with other
activist investors.73

71
Id. ¶ 34.
72
Id. ¶ 36.
73
Id. ¶ 41.

20
 Read as a whole, the Counterclaim asserts a risk within the policy’s

coverage.74 Looking beyond Albert’s characterization of his claims, the Court

reasonably can infer from the Counterclaim that Legion, acting through White and

Kiper, allegedly acted against its investors’ interests and violated federal laws and

regulations by leaking material, nonpublic information.75 Such acts fall within the

scope of “Wrongful Acts” as contemplated by the Policy.76

Furthermore, this Court broadly has construed the phrase “for a Wrongful

Act” so that a Claim need only arise from Wrongful Acts. For instance, under the

D & O policy at issue in Ferrellgas Partners L.P. v. Zurich American Insurance Co.,

the Underwriter was obligated to pay “all Loss for which the Company becomes

legally obligated to pay on account of a Claim first made against the Company …

for a Wrongful Act.”77 The Court interpreted the phrase “for a Wrongful Act” to

mean that the “duty to advance defense costs is triggered by a Claim arising from

Wrongful Acts.”78 Critically, that phrase was not interpreted to require the Claim to

74
Verizon Commc'ns, 2017 WL 1149118, at *7 (citing Cont'l Cas. Co., 317 A.2d at 103, 105).
75
See IDT, 2019 WL 413692, at *10.
76
It is undisputed that wrongful termination and whistleblower violations are not covered by the
Policy. Contrary to Underwriters’ argument that the lack of coverage over these matters is
equivalent to an exclusion from the Policy, Section V of the Policy has a detailed list of exclusions.
If it was Underwriters’ intent to completely exclude from coverage any loss incurred in a lawsuit
alleging wrongful termination and whistleblower violations, it would have drafted the Policy
accordingly.
77
Ferrellgas Partners L.P. v. Zurich Am. Ins. Co., 2020 WL 363677, at *5 (Del. Super. Jan. 21,
2020), appeal denied, 2020 WL 764155 (Del. Super. Feb. 17, 2020).
78
Id. at *9 (emphasis added).

21
also request certain relief that would impose legal liability on the Insureds for the

Wrongful Act.79

In sum, Legion incurred defense costs (a Loss) arising from the Counterclaim

(a Claim) that was based on Legion’s errors, neglect, acts, or omissions, through

White and Kiper, arising from White and Kiper’s alleged leaking of confidential

information (a Wrongful Act). Accordingly, the Court finds that Legion has incurred

a loss that is covered under Section I.A.3 of the Policy.

2. Underwriters also must indemnify Legion under Section I.A.2 of the
Policy for its defense of factual allegations against White and Kiper.
Coverage for the Counterclaim also independently was triggered under

Section I.A.2 of the Policy, which states:

The Insurer shall pay, on behalf of the Insured Organization for Loss
which the Insured Organization pays as indemnification to any
Insured Person arising from a Claim for a Wrongful Act.

As stated above, the “Defense Costs” are a “Loss,” and Legion incurred the

Loss defending the factual allegations Albert lodged against White and Kiper. The

79
In Ferrellgas, the Court ultimately held that although the factual claim for fraudulent inducement
may have arisen from the “Wrongful Acts,” the duty to advance defense costs was not triggered.
The Policy defined “Loss” as “the amount the ‘Insureds’ become legally obligated to pay on
account of ‘Claims’ made against them for ‘Wrongful Acts.’” Id. at 5 Because the underlying
complaint only requested relief for breach of contract, as opposed to relief for fraudulent
inducement, there was no legal obligation for the Insureds to pay on account of a “Claim,” and,
consequently, no “Loss.” Id. at *10. That analysis does not apply in this case because the Policy
defines “Loss” to include “Defense Costs,” which are in turn defined to mean “reasonable legal
fees, costs and expenses … incurred by the Insured in the … defense ... of a Claim ….” Plf’s Mot.,
Ex. 1 §§II.4, II.21. Accordingly, there is no requirement for Legion to have a legal obligation to
pay on account of a Claim, and it is sufficient for Legion to incur reasonable legal fees, costs, and
expenses in defending a Claim that arises from a Wrongful Act.

22
Counterclaim is a “Claim,” as is the LASC Amended Complaint. The Counterclaim

alleged White and Kiper, who are “Insured Persons,” breached their fiduciary duties

and violated federal laws and regulations regarding the release of confidential

information. These allegations and the inferences to be drawn from them constitute

“Wrongful Acts” as defined by the policy.80 As Underwriters also admitted, the

LASC Amended Complaint alleged claims against White and Kiper that fell within

the Policy coverage. It is undisputed that the factual claims asserted against White

and Kipper in the LASC Amended Complaint are in substance the same factual

allegations contained in the Counterclaim.

The parties have debated whether the Arbitration Award would have any

collateral estoppel effect in the LASC Action, thereby compelling Legion to defend

White and Kiper or risk being collaterally estopped from doing so in the LASC

Action. But even if the Arbitration Award would have no preclusive effect on White

and Kiper’s defense in the LASC Action, the factual allegations against those two

individuals required Legion to defend their conduct in order to defend the

Counterclaim. Accordingly, the Claim was one for a “Wrongful Act” by Insured

Persons, even though those persons were not named as defendants in the Arbitration.

This meets the definition of Section I.A.2.

80
See Plf.’s Mot., Ex. 1 § II.37.

23
B. Although Underwriters must advance some of the Defense Costs incurred in
the Arbitration, allocating the costs between covered losses and uncovered
losses must await further proceedings.
The Court’s determination that the Defense Costs incurred in the Arbitration

constitute a “Loss” does not mean that issues regarding allocation also have been

determined.81 This Opinion’s scope is limited to whether at least some of the costs

incurred in defense of the Counterclaim constitute a “Loss” for purposes of

reimbursement. Although the answer to that question is “yes,” that conclusion does

not mean all the Defense Costs are covered. The Policy contains an allocation

provision that provides:

The Insurer will not make any payments on account of any portion(s)
of Claims not covered by this Policy. If the Insured incurs both covered
Loss and uncovered Loss in connection with the same Claim, whether
due to the presence of covered and uncovered persons or matters, the
Insurer and the Insured agree to allocate such amounts between covered
Loss and uncovered Loss, including Defense Costs, judgments, and/or
settlements, based on the Insurer and the Insured's relative legal and
financial exposures.82

The Allocation Provision requires Underwriters and Legion to attempt to allocate

the covered and uncovered claims using “reasonable best efforts.”83 The parties have

not yet undertaken that effort. Only if such efforts fail will the Court be required to

determine allocation.84

81
See Arch Ins. Co. v. Murdock, 2019 WL 2005750, at *10 (Del. Super. May 7, 2019).
82
Plf.’s Mot., Ex. 1, § VI.
83
Id. § VI.B.
84
Arch Ins. Co., 2020 WL 1865752, at *8.

24
 Moreover, in duty to advance cases, an insurer is entitled to differentiate

between covered and non-covered claims from the outset.85 In addition to the

Counterclaim, Legion seeks coverage for at least some of the affirmative defenses it

asserted in the Arbitration. “Contract language that is clear and unambiguous should

be given its ordinary and usual meaning.”86 Furthermore, in a litigation context,

Delaware recognizes a broad meaning of defense costs.87 The cost of prosecuting

counterclaims may be covered if conducted in defense of liability.88

Here, certain affirmative defenses may be covered if they were conducted in

defense of liability for alleged wrongful acts. The parties, however, have not briefed

the specific affirmative defenses Legion asserted or whether they were conducted in

defense of liability for the covered Wrongful Acts. Legion conceded at the Hearing

that the Court need not determine at this stage which affirmative defenses, if any,

were conducted against liability.

85
AR Capital, LLC v. Xl Specialty Ins. Co., 2018 WL 6601184, at *8 (Del. Super. Dec. 12, 2018).
86
Delaware Fin. Mgmt. Corp. v. Curtis W. Steen, 1998 WL 961772, at *4 (Del. Super. Oct. 13,
1998), aff'd sub nom. Delaware Fin. Mgmt. Corp. v. Steen, 734 A.2d 640 (Del. 1999).
87
Citadel Holding Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992). “Defense” is defined as “[t]hat
which is offered and alleged by the party proceeded against in an action or suit, as a reason in law
or fact why the plaintiff should not recover or establish what he seeks. That which is put forward
to diminish plaintiff's cause of action or defeat recovery. Evidence offered by accused to defeat
criminal charge.” Black's Law Dictionary 377 (5th Ed.1979). See also Nat'l Union v. Rhone-
Poulenc, 1994 Del. Super. LEXIS 734 (Super. July 29, 1994) (“It seems clear as a general matter
that compulsory counterclaims are part of the “defense” which the insurers have agreed to provide,
and that all expenses reasonably necessary to conduct the defense are covered, whether or not they
have an ancillary benefit to the insured.”).
88
Id.

25
 Moreover, Section VI of the Policy appears to contemplate that the parties

will attempt to reach an agreement on allocation “based on the Insurer and the

Insured’s relative legal and financial exposure.”89 It is clear that the parties must

allocate the covered costs Legion incurred in defense of the Counterclaim and the

uncovered costs Legion incurred pursuing its claims that Albert violated the

Employment Agreement and the Confidentiality and Intellectual Property

Agreement. Those negotiations also should address and attempt to resolve what

affirmative defenses were conducted against liability.

CONCLUSION

For the foregoing reasons, Legion’s motion for partial summary judgment is

GRANTED. The amounts Underwriters owes Legion can be determined separately

between the parties.

89
Plf.’s Mot., Ex. 1 § VI.

26