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NY Investment Firm Entitled to Entity Defense Costs for Lawsuits and SEC Investigations (DE)

January 10, 2019

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A Delaware Court held that New York Investment Firm AR Capital LLC and Phoenix-based Vereit Inc., were entitled to entity defense costs in connection with lawsuits and U.S. Securities and Exchange Commission investigations.

This litigation, <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2019/01/AR-Capital-v-XL.pdf">AR Capital v XL</a>,</em>  stems from an agreement between AR Capital LLC and Phoenix-based Vereit, Inc., a real estate operating company, according to Wednesday’s ruling by the Delaware Superior Court in Wilmington.

In 2014, an audit committee began a investigating reporting irregularities, and an SEC investigation followed.  Subsequently, shareholders filed a lawsuit which resulted in a class-action and seven opt-out actions. In turn, AR Capital retained two law firms to defend its interest and approximately 14.5 million in defense costs were incurred.

Primary and Excess insurance coverage through XL insurance was purchased by Vereit and the term was from February 2014 through February 2015. Vereit’s primary insurer, provided $10 million in coverage and seven excess insurers provided another $70 million in coverage. AR capital was an additional insured under the policies.

XL insurance began providing coverage on behalf of 6 of AR Capital’s officers and directors, however, it denied coverage to the corporate entity.  AR Capital ended up filing suit against all the insurers and requested indemnification from Vereit.   AR Capital subsequently settled with XL and Beazley Insurance Co., which insured the first excess layer.

All the parties involved in the litigation came to an agreement that AR Capital may be entitled to partial coverage, however, there were disagreements  as to the entity coverage.

Finally, the court held AR was entitled to entity coverage based on policy language. AR Capital is to be paid for their claims up to the same amount Vereit has already been paid by the excess insurers. Thereafter, AR Capital and Vereit shall be paid defense costs as they are incurred and submitted (first in, first out.) said the ruling.  Some well-reasoned policy interpretation in the attached case.

Thanks to Jon Avolio for his contribution to this post.  Please email <a href="mailto:BGibbons@wcmlaw.com">Brian Gibbons</a> with any questions.

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