Facts

AMS had a total of $15 million of D&O insurance issued by the defendants on a claims made basis, with a policy term beginning April 28, 2003. In July, 2003 a search warrant was executed at the premises of AMS, the U.S. Attorney issued a Grand Jury subpoena, and the SEC initiated a private investigation. The underlying facts concerned allegations of improper accounting for advertising materials.

In January, 2004 AMS announced that it would be restating earnings for several years. Various civil actions were then initiated, seeking class action status, for alleged violations of the securities laws and others on a derivative basis. AMS sought payment for attorney's fees which were being incurred on behalf of the company and on behalf of various past and present employees of the company. (Although the policies were generally referred to as "Directors and Officers Liability" they actually applied, by their express terms, to all employees in certain circumstances. They also covered civil and criminal investigations, even before the filing of complaints and/or indictments, in certain circumstances.)

The primary carrier (Columbia, Continental and CNA were sued on a single primary policy and are jointly referred to as "CNA") agreed to pay only those defense costs related to the civil litigation but not the investigations. AMS then sued CNA in San Diego Superior Court. CNA removed the matter to Federal Court based on an allegation that CNA (which was non-diverse with AMS) had been fraudulently joined with Columbia and Continental. AMS made a motion to remand. The court ruled that the joinder of CNA was proper, and the motion to remand was granted. Federal Insurance filed a separate action, in Federal court, against AMS. AMS then amended the state court complaint to name Liberty and Federal, so that the action would proceed in a single case. Liberty and Federal sought to name several AMS individuals in a cross-complaint, but the court sustained the demurrer to those cross-complaints on the basis that there was no showing that any of the individuals were asserting a claim against the carriers, so there was no present case or controversy.

The carriers then sought to take discovery from AMS regarding the facts of the underlying allegations against AMS, in an effort to support their defense that they had the right to rescind the policies and in an effort to find facts which would support their cross-complaints against the individuals. AMS moved for a protective order pursuant to the holding in Haskel v. Superior Court (1995) 33 Cal.App.4th 963. The trial court denied the protective order.

On July 25, 2005, AMS filed a Writ with the Court of Appeal requesting an emergency stay of a deposition of AMS set to begin on Aug. 10, 2005. On Aug. 5, 2005 the Court of Appeal issued the emergency stay. After full briefing and hearing the Court of Appeal issued an opinion (unpublished) holding that AMS (the insured) could not be required to provide any discovery responses to the carriers regarding the underlying claims until after the underlying claims (including the investigations) had been resolved. Shortly thereafter AMS initiated direct settlement discussions with the defendants.

CONTENTIONS:
Plaintiff contended the policies provided coverage not only for the civil litigation against AMS (for which AMS had been reimbursed by the primary carrier) but also for the attorney's fees expended in response to the SEC and criminal investigations. Further, the policies, by their express terms, waived the right to rescission. The policy language specifically indicated that only the person making a false representation, and only those invididuals who were aware of such false representation, could lose coverage (plus AMS, but not any of the other individuals, and only if it was an executive officer who made the knowingly false representation).

Settlement Discussions

The parties engaged in direct negotiation and resolved the matter.

Result

All three carriers settled for a total of $10.15 million

Other Information

The details of the settlement are set forth in documents filed with the SEC. AMS filed an 8-K on May 19, 2006 with copies of the settlement documents.