After settling a shareholder class action, Genzyme Corporation was denied coverage for its payment under its corporate and director and officer liability policy with Federal Insurance Company. Genzyme Corp. v. Federal Ins. Co., 2010 U.S. App. LEXIS 21079 (1st Cir. Oct. 13, 2010). The district court held Genzyme's loss was not insurable as a matter of Massachusetts public policy. The coverage dispute was appealed to the First Circuit.
Genzyme facilitated a share exchange, including cancellation of some shares, which was unpopular with many shareholders. A class action suit was filed against Genzyme, its board of directors and its officers. The complaint alleged that Genzyme and its officers and directors violated the securities laws by causing Genzyme to engage in insider trading and by failing to disclose material information to the public. They also alleged that the directors and officers breached their fiduciary duties of loyalty, candor, good faith and due care to the shareholders. Further, the class action plaintiffs alleged that Genzyme engaged in unfair and deceptive trade practices under state law.
Genzyme eventually settled all of the class members' claims by making a one-time payment of $64 million. It then sought to recover from Federal. Federal's policy covered losses for which Genzyme granted indemnification to its directors and officers. It also covered losses suffered by Genzyme on account of securities claims. Federal denied coverage, stating that the settlement payment was not an insurable loss under the policy. Genzyme then sued, alleging that Federal breached the policy by denying coverage.
Federal's motion to dismiss Genzyme's complaint was granted when the district court agreed that the settlement payment was not an insurable loss. The district court concluded that a payment to resolve a claim that benefited one group of shareholders at the expense of another group of shareholders was not legally insurable as against public policy.
The First Circuit reversed. There was no support in Massachusetts statutory or case law for the public policy rationale. Therefore, the district court's ruling was reversed.
