Facts

National Union issued a non-duty-to-defend D&O loss reimbursement policy to plaintiffs Acacia Research Corporation and CombiMatrix Corporation. The policy had a $150,00 self-insured retention. National Union received notice from plaintiffs in December 2000 of an underlying breach of contract/trade secret misappropriation lawsuit filed against plaintiffs and its director Dr. Donald Montgomery by Nanogen, Inc. (Dr. Montgomery's former employer).

Nanogen alleged that Dr. Montgomery breached the confidentiality agreement with his former employer and a prior settlement agreement between the parties by misappropriating and disclosing confidential trade secret information to plaintiffs in furtherance of patenting certain technology which Nanogen claimed it owned. National Union acknowledged notice of the Nanogen lawsuit in December 2000 and issued what it called a "reservation of rights letter" in March, 2001 and took no further action.. Plaintiffs continued to litigate the underlying Nanogen action and subsequently incurred approximately $2 million in defense costs and entered into a $20+ million settlement consisting of a $1 million cash payment, $17.9 million in common stock and $855,000 in royalty payments without notifying National Union or otherwise seeking its consent.

After receiving notice of the settlement from plaintiffs in November 2002, National Union investigated the claim and ultimately denied coverage in November 2003 based on plaintiffs' violation of the consent to settle provision in the policy and certain applicable policy terms and exclusions which barred coverage for the claims asserted in the Nanogen lawsuit.

PLAINTIFFS' CONTENTIONS:
Plaintiffs contended (and the Court ultimately found) that National Union had breached the insurance policy, and violated the covenant of good faith and fair dealing, by: (1) failing to investigate the claim until the case has settled; (2) only assigning an adjuster to the claim for three months; (3) failing to respond to plaintiffs' multiple written requests for assistance and payment; (4) taking no coverage position until three years after tender, and more than a year after settlement; (5) denying coverage based upon nonexistent policy exclusions; and (6) refusing to pay any defense and indemnity costs.

DEFENDANT'S CONTENTIONS:
At trial, National Union contended that its contractual duty to reimburse plaintiffs for covered "Loss" (as defined in the Policy) did not arise until plaintiffs first established that they had satisfied the $150,000 self-insured retention. As a result, any failure by National Union to timely communicate with plaintiffs during the self-insured retention period could not as a matter of law result in breach of any contractual obligation owed under the policy.

National Union also disputed plaintiffs' theory that a non-duty-to-defend D&O loss reimbursement policy (which contains an express allocation provision regarding covered and non-covered fees/costs) is subject to a "potential for coverage" standard applicable to duty-to-defend liability policies for purposes of evaluating the scope and extent of National Union's reimbursement obligation to plaintiffs. Given plaintiffs' decision to incur approximately $2 million in defense costs in excess of the self-insured retention and enter into a $20+ million settlement agreement without notifying National Union or seeking its consent, National Union further contended the policy's consent to settle provision should be enforced to bar coverage for plaintiffs' claim.

National Union also argued that the limited entity reimbursement coverage afforded under the policy did not cover plaintiffs' separately incurred defense costs and/or contributions toward the underlying settlement. Additionally, plaintiffs' issuance of common stock and payment of royalties did not constitute covered "Loss" under the policy or applicable law. To the extent that the Court found coverage for some aspect of the Nanogen lawsuit, the allocation provision in the policy should be enforced such that National Union was entitled to allocate between covered and uncovered fees and costs tendered by plaintiffs.

With respect to Plaintiffs' claim for extra-contractual damages, National Union argued that its claims handling conduct was reasonable under the circumstances and that no "bad faith" damages could be awarded based on communication deficiencies with plaintiffs during the period of time that they were "self-insured" (i.e. prior to exhaustion of the $150,000 retention amount). The "genuine dispute" doctrine applied to bar any award of extra-contractual damages given the legitimate factual and legal disputes between the parties regarding the applicability of the consent to settle provision, the prior/pending litigation exclusion and issues relating to whether the alleged wrongful acts of Dr. Montgomery occurred in his capacity as an officer/director for plaintiffs. Finally, National Union argued that there was no basis for awarding punitive damages.

Settlement Discussions

The plaintiffs demanded $4,995,000. The defendant offered $250,000.

Damages

The plaintiffs had incurred defense costs of $1,793,158; settlement costs of $19,821,326; and are obligated for future payments of no less than $310,493.

Result

The District Court awarded to plaintiffs the entirety of their claimed damages of $21,774,977, plus prejudgment interest of $10,288,656. The court found that defendant National Union had breached the insurance contract, and the implied covenant of good faith and fair dealing.

Other Information

Prefiling mediation before Gerald F. Phillips, Esq., and pretrial mediation before Robert J. Kaplan, Esq., were unsuccessful. The plaintiffs have filed for attorneys' fees and costs totaling $4,915,236. Defendant National Union has filed a motion to amend the court's Findings of Fact and Conclusions of Law. EXPERT TESTIMONY: The plaintiffs' expert testified that National Union had breached its duties by failing to investigate the claim and respond to plaintiffs. The defense expert testified that National Union's claims handling conduct was consistent with industry custom and practice for the handling of non-duty-to-defend D&O insurance claims under the circumstances presented in this case. The defense expert also testified that National Union acted appropriately in reserving its rights and waiting for the plaintiffs to provide them with information and documentation showing exhaustion of the self-insured retention, which plaintiffs failed to do prior to January 2003. Finally, the defense expert testified that plaintiffs were obligated to first notify National Union prior to entering into the underlying settlement with Nanogen, which plaintiffs failed to do. FILING DATE: April 22, 2005.