Delaware Court Ruling on Insurance Exclusions in SPAC Transactions

The Delaware Superior Court has determined that a public offering exclusion in an insurance policy does not apply to de-SPAC mergers, distinguishing these transactions from public offerings of the insured entity's securities. In the case of View Operating Corp. v. Starstone Specialty Insurance Co., the court concluded that despite changes in ownership structure, the transaction did not qualify as a public offering under the exclusion terms.

This legal dispute arose from a 2021 transaction in which a private entity merged with a special purpose acquisition company (SPAC), leading to a public parent company issuing publicly traded shares. The merger prompted accounting discrepancies related to warranty liabilities, triggering investigations and legal actions, including an SEC enforcement action against a former officer.

During subsequent coverage litigation, the insured sought coverage for defense and settlement costs. The insurance carrier rejected the claim, citing the policy’s exclusion for losses related to public offerings. The plaintiffs contended that the exclusion should not apply as it pertained solely to their own securities, not those issued by the parent company. Conversely, the insurer argued that the transaction effectively equated the insured’s stock with the parent’s publicly traded shares.

The court dismissed the insurer’s argument, granting summary judgment to the insured. It clarified that the exclusion applied only to offerings of the insured’s securities, emphasizing that the parent company alone registered and offered securities publicly. The ruling highlighted the distinction between parent and subsidiary obligations, particularly in terms of insurance exclusions.

Additionally, the court required the insurer to cover defense expenses for the former officer, even before the insured made actual payments. The policy specified coverage for losses resulting from claims against insured individuals, contingent upon the company's indemnification obligation. The court’s interpretation mandated immediate advancement of defense costs.

The insurer's motion for summary judgment on claims of bad faith was denied, as unresolved factual disputes remained about the insurer's conduct. This decision underscores crucial considerations for insurers regarding policy exclusions and defense cost advancements, particularly in SPAC-related mergers.