USA – NEW YORK Trends and Developments Contributed by: Bradley Nash, John Curley and Dorothea Regal, Hoguet Newman Regal & Kenney, LLP
not have been harmed. This element of overlapping causation among the three actions appears to have distinguished the GAC case from previous New York decisions holding that mere allegations that separate transactions “were part of a larger scheme” are “insuf- ficient to enmesh otherwise distinct claims” under a policy’s related claims provision ( Alvarez v XL Special - ty Ins. Co. , 202 A.D.3d 566, 567 (1st Dep’t 2022); see also Home Ins. Co of Ill. (N.H.) v Spectrum Information Techs. , 930 F. Supp. 825, 851 (E.D.N.Y. 1996) (“bald allegations” of a common “conspiracy are insufficient to enmesh otherwise distinct claims”)). This decision highlights the fact-intensive nature of the relatedness issue, and the court’s careful consid- eration of the precise wording of the policy provisions. Loss Allocation Under D&O Policies Flextronics Int’l, Ltd. v Allianz , 2025 WL 3168187 (S.D.N.Y. Nov. 13, 2025), examines an often disput- ed, but less-frequently litigated, issue in the realm of D&O coverage: the allocation of a settlement payment between covered and non-covered loss. Some poli- cies have express provisions mandating a particular allocation methodology or requiring the insurer and the insureds to use “best efforts” to negotiate a rea- sonable allocation. In the absence of an express policy provision, the courts have taken two main approaches. The larger settlement rule The first allocation method – originally articulated by the Seventh and Ninth Circuits and later adopted by the Delaware Supreme Court – is the so-called larger settlement rule. Under this approach, the insurer must pay for the full loss, unless it can demonstrate that non- covered claims, or the conduct of non-covered parties, increased the amount of the loss (see Harbor Ins. Co. v Cont’l Bank Corp. , 922 F.2d 357, 367 (7th Cir. 1990) (“To the extent that the amount for which Continental settled was larger than it would have been but for the misfeasance of these other persons—either nonin- sured persons or persons against whom no claim was made—Continental’s entitlement to reimbursement in this suit would be cut down”); Nordstrom, Inc. v Chubb & Son, Inc. , 54 F.3d 1424, 1433 (9th Cir. 1995) (“Only if the corporation were liable for a claim for which the directors and officers lacked any responsibility, or if
the corporate liability increased the amount of loss, would the amount of liability exceed that amount for which Federal was ‘legally obligated’ to pay”); RSUI Indem. Co. v Murdock , 248 A.3d 887, 908 (Del. 2021) (“broadly speaking, a loss is fully recoverable unless the insurer can show that the liability for non-covered conduct increased the insurer’s liability”)). Under this approach, if the settlement amount would have been the same whether or not the underlying complaint named non-covered individuals or asserted non- covered theories of liability, the insurer must fund the entire settlement. The relative exposure rule Other courts have apportioned the insurer’s respon- sibility for a settlement involving covered and non- covered parties “according to the relative exposures of the respective parties” in the underlying litigation. See, e.g., PepsiCo, Inc. v Cont’l Cas. Co. , 640 F. Supp. 656, 662 (S.D.N.Y. 1986); see also Clifford Chance Ltd. Liab. P’ship v Indian Harbor Ins. Co. , 41 A.D.3d 214 (1st Dep’t 2007) (“insurer is only required to pay a portion of its insured’s claim for reimbursement of the settlement amount based on a determination of the insured’s and the uninsured’s relative exposures in the litigation and the benefits received from the set- tlement”). Again, the insurer must “bear the ultimate burden of proving what amount of the settlement cost should be excluded from the policy coverage” ( Pep - siCo , 640 F. Supp. at 662). The Flextronics case The Flextronics case arose from a USD42 million set- tlement of an underlying trade secrets litigation. The insured negotiated allocation with its primary insurer and two of its excess insurers, but proceeded to arbi- tration with Allianz. The matter ultimately came before Judge Engelmayer of the Southern District of New York (SDNY) on Allianz’s motion to vacate the arbitral panel’s award. The panel applied the relative exposure rule, but nevertheless made a 100% allocation to cov- ered loss, finding that the insurer failed to meet its bur- den to prove the amount that should be excluded from coverage. Applying the deferential standard for judicial review of arbitration awards, Judge Engelmayer held that the panel “did not manifestly disregard the law or the parties’ agreement” (2025 WL 3168187, at *20). Even under the relative exposure rule, a 100% alloca-
561 CHAMBERS.COM
Powered by FlippingBook