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A Philadelphia judge’s ruling in favor of an assets management company that had settled a securities fraud class action for $7 million could force the company’s secondary excess liability insurer, Lloyd’s of London, to contribute as much as $2 million to that settlement. In Resource America Inc. v. Certain Underwriting Members of Lloyd’s, Judge Albert W. Sheppard Jr. granted summary judgment as to Resource America’s breach of contract claim. The case was handled in the Philadelphia Commerce Case Management Program. RAI sought the $2 million contribution from Lloyd’s in order to finalize the settlement, to which the company’s primary directors and officers insurer and first excess D&O insurer had contributed the initial $5 million, according to Sheppard’s opinion, which was filed Nov. 12. Sheppard rejected Lloyd’s argument that RAI had breached its contractual duty to cooperate with Lloyd’s with regard to the settlement in a number of ways, including not keeping Lloyd’s abreast of the status of the settlement negotiations and requesting that the class action mediator make the settlement public, despite the objection of Lloyd’s. “Lloyd’s has not offered sufficient evidence to substantiate its claim that RAI failed to cooperate with Lloyd’s and thereby prejudiced Lloyd’s,” Sheppard wrote, adding later, “Lloyd’s … did send a representative to attend the mediation that produced the settlement at issue. It is submitted that Lloyd’s cannot seriously claim that RAI failed to keep Lloyd’s informed on how the underlying class action and the possible settlement of it were progressing.” However, Sheppard did side with Lloyd’s on one part of its summary judgment motion, dismissing RAI’s claim for reimbursement of fees and costs incurred during the underlying class action. The class action against RAI, which was brought in the U.S. District Court for the Eastern District of Pennsylvania, was based on allegedly improper accounting practices, according to the opinion. During the subsequent mediation, the mediator recommended a $7 million settlement, to which Lloyd’s objected. RAI was covered by its primary D&O insurer, Admiral Insurance Co., for $3 million, the same amount for which first excess D&O insurer National Union Fire Insurance Co. issued the company a policy, according to the opinion. The Lloyd’s policy provided $4 million in coverage. Roughly $1 million from the Admiral policy went to RAI’s legal fees; the rest of both policies’ coverage — $5 million — went toward the settlement. After Lloyd’s refused to participate in the settlement, according to the opinion, RAI and the class plaintiffs reached a two-tiered settlement agreement, under the terms of which RAI would pay the class plaintiffs $7 million if it obtained the $2 million from Lloyd’s, and $6 million if it did not. Senior U.S. District Judge Jan E. DuBois granted preliminary approval of the settlement arrangement in January 2003. Reviewing the language of Lloyd’s RAI policy, Sheppard noted that in issuing its policy to RAI, Lloyd’s had adopted the terms and conditions of the Admiral policy, according to the opinion. Under the policy, a coverable “loss” is defined to include settlements, but only those settlements that have been consented to by the insurer. The policy further mandates that “the insurer’s consent should not be unreasonably withheld,” so long as the insurer is provided with all information it seeks in reaching its decision and is permitted to be involved in the negotiation of any settlement, Sheppard wrote, quoting the policy’s language. Lloyd’s had asserted that ways in which RAI had breached its duty to cooperate included not providing Lloyd’s with a settlement recommendation, and basis thereof, three weeks prior to mediation; requesting that the settlement recommendation be made public, and entering into a settlement different from the one it proposed to Lloyd’s after mediation. “The fact that RAI … requested, over Lloyd’s objection, that the mediator make his settlement recommendation public [does] not demonstrate lack of cooperation by RAI,” Sheppard wrote. “Instead, [it shows], at most, a disagreement between RAI and Lloyd’s as to what methodology to employ to settle the case. Since the conduct of settlement negotiations is an art rather than a science, Lloyd’s cannot show that RAI’s choice of alternative tactics resulted in prejudice to Lloyd’s.” Sheppard also called attention to the fact that RAI and the class plaintiffs were forced into the two-tiered settlement because of Lloyd’s “recalcitrance.” “Lloyd’s should not in good faith be permitted to complain about [RAI's entering into a different settlement],” Sheppard wrote. Sheppard then refuted Lloyd’s argument that the two-tiered settlement was proof that the class plaintiffs would have settled for less than $7 million. “In the absence of Lloyd’s participation, class plaintiffs decided to accept what they could get from RAI and opted not to try to get blood from a stone,” Sheppard wrote. He also noted that the 3rd U.S. Circuit Court of Appeals has, in several past cases, permitted Pennsylvania courts to enforce two-tiered settlement arrangements. But Sheppard did conclude that Lloyd’s had not acted in bad faith in refusing to immediately consent to the settlement “because it put forth legitimate, albeit not winning, arguments to justify its refusal to consent to the settlement RAI entered into with the plaintiff class.” Sheppard ordered that if Lloyd’s and RAI are not able to agree on the amount of damages, RAI has 30 days to request the amount sought from the court after presenting supporting documentation. RAI’s lead counsel in the matter, William Slaughter of Ballard Spahr Andrews & Ingersoll, said he has not yet set up a time with Lloyd’s representatives to discuss Sheppard’s order. He would not comment on whether RAI would be willing to accept less than the full $2 million from Lloyd’s in the interest of resolving the dispute. “I think that [Judge Sheppard] recognized that the settlement the company was able to negotiate … was favorable, given the size of the claim,” Slaughter said. The class plaintiffs had originally sought in excess of $100 million, according to Slaughter, who handled the case with associate Douglas Flitter. Lloyd’s was represented by attorneys from Wilson Elser Moskowitz Edelman & Dicker. Calls to the firm seeking comment were not immediately returned.

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