New York Appellate Court Requires Insurers to Indemnify Hedge Fund-Controlled Company for Attorneys’ Fee Award against Company in a Shareholder Derivative Action

Plaintiffs in shareholder derivative actions often seek, and courts are empowered to award, a variety of remedies – including an award of attorneys’ fees to a prevailing plaintiff.  In a recent decision, the New York Appellate Division, First Department, reaffirmed insurance protection to a corporate policyholder, in which private investment funds had invested, facing the threat of paying attorneys’ fees in a derivative suit.  The Appellate Division held that – notwithstanding the fact that no other damages were awarded in the underlying derivative suit – the derivative plaintiffs’ attorneys’ fees constituted a “Loss” for which the policyholder was entitled to reimbursement from its insurers.  The decision is an important win for policyholders because it represents the first time a New York appellate court has recognized that an underlying plaintiff’s attorneys’ fees awarded in a securities or derivative action are indemnifiable under the terms of the insured defendant’s insurance policy.  In so doing, the Appellate Division placed New York law in line with decisions that are favorable to policyholders on this issue in jurisdictions across the country.  In a guest article, Jared Zola and Andrew N. Bourne, Partner and Associate, respectively, at Dickstein Shapiro LLP, describe the facts and holding of the decision and its implications for hedge funds involved on either side of a derivative suit.

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