The court authorized the funding of a settlement reached in a derivative action commenced in the State of Delaware. The process of settlement met the test of commercial reasonableness. The mere fact that other insureds had, or may have, claims that were not finally determined, could not operate to prevent those otherwise entitled to indemnity from receiving it.

Hollinger International Inc. v. American Home Assurance Co., [2006] O.J. No. 140 Ontario Superior Court of Justice

Hollinger International Inc. (“International”) and its primary insurers brought applications for declaratory relief authorising the funding of a settlement reached in a derivative action commenced in the State of Delaware for the sum of US $50 million dollars. The issue before the court was whether International and the primary insurers reasonably and fairly concluded the settlement taking into consideration the potential rights and entitlements of other insureds as well as excess insurers.

The primary insurance policies afforded a total limit of US $50 million dollars. A further US $80 million dollars coverage was available under the policies issued by the excess insurers.

The excess insurers were aware of, but not directly involved in, the mediation/settlement process. The excess insurer submitted that under recent appellate authority in the Delaware Court, a motion for summary judgment brought on behalf of the outside directors would likely succeed, thereby rendering the payment under the settlement in effect improvident.

The court held that the process of the settlement met the test of procedural reasonableness. The court accepted that the conclusion reached by the parties to the mediation that there was risk that the summary judgment motion would not succeed, was reasonable. This was not a case of an improvident settlement.

The mere fact that other insureds had, or may have, claims that were not finally determined, could not operate to prevent those otherwise entitled to indemnity from receiving it. The court chose not to follow the American decisions that questioned the “first pass the post” principle given that those cases were not in accord with authorities in, or adopted in, Canada.

In the result, the court granted the declaratory relief authorising the funding of the settlement.

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