Free Answering Brief in Opposition - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
The American Legacy Foundation,
Plaintiff,
v.
) ) ) ) )

National Union Fire Insurance Company of Pittsburgh, Pennsylvania,
and

)
) Civil Action No. 07-248 (SLR)

)
)

)

The Travelers Indemnty Company of America, )

Defendants.

) ) )

AMERICAN LEGACY FOUNDATION'S OPPOSITION TO MOTION OF NATIONAL UNION FIRE INSURACE PITTSBURGH. PA FOR PARTIAL DISMISSAL
COMPAN OF

GILBERT RAOLPH LLP
Richard Shore Kami E. Quinn
New York Avenue, NW Suite 700 Washington, DC 20005 1100

Telephone: (202) 772-2200

and

P ACHUSKI STANG ZIEHL & JONES LLP Laura Davis Jones (Bar No. 2436) Timothy P. Cairns (Bar No. 4228)
919 North Market Street, 17th Floor

P.O. Box 8705 Wilmington, DE 19899-8705 Telephone: (302) 652-4100 Facsimile: (302) 652-4400

Counsel for Plaintiff American Legacy Foundation
Dated: February 8, 2008

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TABLE OF CONTENTS

NATURE AN STAGE OF THE PROCEEDINGS............................ 2

I . STATEMENT OF FACTS ..................................... 4
A. The Tobacco Litigation and the Creation of the

American Legacy Foundation... . . . . . . . . . . . . . . . . . . . . . 4
B. The truth~ Public Education Campaign ............... 4
C. Lorillard' s Efforts to Destroy the truth~ Campaign . 5

D. The Foundation's Litigation with Lorillard ......... 6
E. The National Union D&O Policy and National Union's
Refusal to Provide the Promised Coverage .......... 7

I I . ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. Summary of Argument ................................ 9
B. Standard Governing a Motion to Dismiss ............ 10

C. Standard Applicable to National Union's Duty to Advance Defense Costs under the D&O Policy....... 10

III. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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TABLE OF AUTHORITIES

Page

Cases
Aetna Commercial Ins. Co. v Am. Sign Co.,

687 So. 2d 834 (Fla. Dist. Ct. App. 1996) .............................................................................. 19
Am. Continental v. Pooya, 666 A.2d 1193 (D.C. 1995) ................................................................................................13,20
Am. Ins. Group v. Risk Enter. Mgmt., Ltd., 761 A.2d 826 (Del. 2000) ........... ........ ........................ ...... ..... ........ ....... ...... ...... ........ ....... ......... 12

Am. Legacy Found. v. Lorilard Tobacco Co., No. 579,2005 (Del. Feb. 9, 2006) .......................................................................................18, 19
Am. Registry of Pathology v. Ohio Cas. Ins. Co. 461 F. Supp. 2d 61 (D.D.C. 2006) ............................................................................................25 AT&T Corp. v. Clarendon Am. Ins. Co.,
931 A.2d 409 (Del. 2007) ......... ........ .................. ..... ........... ....... .......... ...... ........ ........... .... ........ 24

Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1969 (2007) .............................. ..... ............... ............... .................. .... ...... ....... 10
Brown v. Am. Intl Group, Inc.,
339 F. Supp. 2d 336 (D. Mass. 2004) .......................:...............................................................25

Centaur Partners, IVv. Natl Intergroup, Inc.,
582 A.2d 923 (DeL. 1990) ......................................................................................................... 17

Chase v. State Farm Fire & Cas. Co., 780 A.2d 1123 (D.C. 2001) ................................................................................................12, 19
Cheney v. Canfield,
111 P. 92 (Cal. 1910) ................................................................................................................18

Continental Cas. Co. v. Alexis I DuPont Sch. Dist.,
317 A.2d 101 (DeL. 1974) .................. .... ............. ............... .............. ......... ....... .... ..... ...... ..... ..... 14

Continental Ins. Co. v. Burr, 706 A.2d 499 (DeL. 1998)...... ..... ......... ............................. ....... .......... ........... .... ..... ................... 19
Delledonne v. State Farm Mut. Auto. Ins. Co., 621 A.2d 350 (DeL. Super. Ct. 1992) ........................................................................................19

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Doe v. Cahil,
884 A.2d 451 (DeL. 2005) . ............... ..... .............. ...... ........ ....... ............................... .................. 22

E.l du Pont de Nemours & Co. v. Admiral Ins. Co.,
711 A.2d 45 (DeL. 1995) ........................................................................................................... 12

Emmons v. Hartford Underwriters Ins. Co.,
697 A.2d 742 (DeL. 1997) ......................................................................................................... 11

Hurley v. Columbia Cas. Co.,
976 F. Supp. 268 (D. DeL. 1997)......................................................................................... 12,25

In re Am. Metrocomm Corp., 274 B.R. 641, 659 (Bankr. D. DeL. 2002) ................................................................................. 11
In re WorldCom, Inc. Sec. Litig.,

354 F. Supp. 2d 455 (S.D.N.Y. 2005) ......................................................................................25
Interstate Fire & Cas. Co. v. 1218 Wisconsin, Inc.,

136 F.3d 830, 833 (D.C. Cir. 1998) .......................................................................................... 14
Johnston v. Tally Ho, Inc., 303 A.2d 677 (DeL. Super. Ct. 1973) .................................................................................. 14,22

Leatherman v. Tarrant County Narcotics Intellgence & Coordination Unit,
507 U.S. 163 (1993). .......... ...... .... ........ .................... ........ ..... ..... ....... ...... ............ .... ..... ............. 10
Meade v. Prudential Ins. Co. of Am., 477 A.2d 726 (D.C. 1984) .. ..... .... ......... ......... .................. ................. ......... .................... ..... ...... 11

New Castle County, Delaware v. Nat'l Union Fire Ins. Co. of Pittsburgh, P A, 243 F.3d 744 (3d Cir. 2001) ....................................................................................... 12, 13,20
NY Times v. Sullvan, 376 U.S. 254 (1964) ........ ..................... ........... ..... ............... ..... .......... ....... ...................... ..... ..... 23

Oliver B. Cannon & Son, Inc. v. Dow-Oliver, Inc.,
394 A.2d 1160... ........ ............... ...... ....... ...... ...... ................... .... ..... ......... ....... ..... .... ...... ......... ... 19

Penn Mut. Life Ins. Co. v. Oglesby,
695 A.2d 1146(Del. 1997) ........................................................................................................ 1 I

Philadelphia Newspapers v. Hepps, 475 U.S. 767 (1986) ..........................................................23
Sherman v. Ambassador Ins. Co.,
670 F .2d 251 (D.C. Cir. 1981)... ... ..... ... ....... .......... ....... ..... ..... ....... ........ ................ .............. ..... 12

State Farm Mut. Auto. Ins. Co. v. Johnson,
330 A.2d 345 (DeL. 1974)....................... ... ....... ......................... ..... ...... ...... ............... ...... ........ 19

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Steigler v. Ins. Co. of N Am., 384 A.2d 398 (Del. 1978) ......................................................................................................... 11
Stevens v. United Gen. Title Ins. Co.,
801 A.2d 61 (D.C. 2002) .................................................................................................... 14,22

Travelers Indem. Co. of Illnois v. United Food Commercial Works Int'l Union, 770 A.2d 978 (D.C. 2001) ............................................................................................ 11, 19,21
Twin City Fire Ins. Co. v. Del. Racing Ass 'n, 840 A.2d 624 (Del. 2003) ......................................................................................................... 11

Willams v. Stone, 109 F.3d 890 (3d Cir. 1997) ..................................................................................................... 11

Statutes
Fed. R. Civ. P. 12(b) (2008)...... .................... .......................... ............ ........... ..... ............ .............. 23
Unreported Cases
8 Wiliam Meade Fletcher, et al., Fletcher Cyclopedia ofthe Law of

4198 (Westlaw 2007)..................................................;.......... ........ ................ ....... .................... 18
Am. Chern. Soc y v. Leadscope, Inc.,

Private Corporations, §

No. 04AP-305, 2005 WL 1220746, at *4-7 (Ohio Ct. App. May 24, 2005) .:.................,........ 25

Dover Downs, Inc. v. TIG Ins. Co., ._
No. 04-199-SLR, 2004 WL 1812703, at *5 (D. DeL. Aug. 11,2004) ........:............................. 13
HOechst Celanese Corp. v. Nat'l Union Fire Ins. Co. of

Pittsburgh, PA, No. 89C-SE-35, 1994 WL 721651, at *5 (Del. Super. Ct. March 28, 1994) (citations omitted) ................................. 11

Home Ins. Co. v. Am. Ins. Group, No. 97C-04-024, 2003 WL 22683008, at *2 (Del. Super. Ct.

Oct. 30, 2003) .........................~.. .................................................................. ................. ...... ...... 24
Perlegos & Perlegos v. Atmel Corp., No. 2320-N, 2007 DeL. Ch. LEXIS 25, at *105 n.184 (Del. Ch. Feb. 8,2007)........................ 17

Salaman v. Natl Media Corp., No. 12365 DeL. Ch. LEXIS 4, at * (Del Ch. Jan. 14, 1992) .................................................... 17

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NATURE AND STAGE OF THE PROCEEDINGS
This is an insurance coverage action brought by the American Legacy Foundation (the

"Foundation"), a non-profit chartable organization whose mission is "building a world where
young people reject tobacco and anyone can quit." The Foundation seeks to recover the
approximately seventeen million dollars it spent successfully defending itself against an attack
by Lorillard Tobacco Company ("Lori

lIard") on truth1Y, the proven-effective and award-winning

centerpiece of its youth anti-smoking campaign. The Foundation and truth(ß were vindicated
after five years of

hard-fought litigation in Delaware state courts: both the Chancery Cour and

the Supreme Cour (in a unanimous decision) ruled that Lorillard's claims were without merit.
The Foundation purchased insurance coverage to protect itself

from claims such as those

asserted by Lorillard, including the directors' and officers' ("D&O") liability insurance policy
issued by National Union Fire Insurance Company of

Pittsburgh, Pennsylvania ("National

Union") that is at issue here (the "National Union D&O Policy" or the "D&O Policy"). When
Lorillard informed the Foundation that it intended to pursue litigation over the trth(ß campaign,

the Foundation promptly notified National Union. Rather than standing by its insured, however,
National Union refused to advance the Foundation's defense costs, as it had promised to do in

the D&O Policy. Instead, National Union disclaimed its coverage obligations, leaving the
Foundation to fend for itself.

In its Motion, National Union seeks partial dismissal ofthe Foundation's complaint,
arguing that it does not have to pay the Foundation's defense costs under the D&O Policy

because the underlying litigation was "largely contractual" and the D&O Policy excludes

coverage for contractual liability arising out of an "express contract." It is a fundamental
principle of insurance law that in order to avoid its duty to pay defense costs, an insurer must

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show that the allegations made in the underlying case fall entirely outside the coverage of

the

policy. Where, as here, the insurer relies on an exclusion to avoid its obligations to pay defense
costs, the insurer must show that the allegations made in the underlying case are entirely within

the exclusion on which it relies. National Union cannot meet this burden.
Lorillard alleged that the Foundation was bound by the contract on which National Union

relies not because the Foundation was a party or signatory to that contract, but as a result ofthe

Foundation's conduct. Any alleged contractual liability ofthe Foundation thus was based not on
an "express contract," but rather on an implied-in-fact contract not within the exclusion. Indeed,
Lorillard specifically alleged that the Foundation's liability arose out of an implied contract.

Moreover, even ifthe contract were deemed to be an "express contract," the exclusion provides
specifically that it does not apply if the alleged liability would attach in the absence of

the

"express contract," and here, Lorillard's claims also were based on the Foundation's non-

contractual governng documents and on allegations that the Foundation published disparaging
and defamatory material about Lorillard.

Apparently recognizing that it cannot demonstrate that the allegations made by Lorillard

are within the "express contract" exclusion, National Union attempts to bring the entire record of

the underlying litigation - a proceeding that lasted five years and generated a record of tens of
thousand pages - before the cour. This is improper on a motion to dismiss, which with certain

limited exceptions must be based exclusively on the allegations in the Foundation's complaint.
More important, it is contrary to the fundamental principle of

insurance law that an insurer's duty

to pay defense costs depends solely on the complaint in the underlying case, not on the entire
record ofthe underlying proceedings. In any event, the underlying record merely confirms that

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the Foundation's alleged liability was not within the "express contract" exclusion on which
1 National Union relies.

I. STATEMENT OF FACTS
A. The Tobacco Litigation and the Creation of the American Legacy Foundation

In November 1998, Lorillard and the three other major U.S. tobacco companies entered
into a historic settlement agreement with nearly all of

the states and U.S. terrtories known as the

Master Settlement Agreement (the "MSA"). Complaint for Damages ("CompL."). ir 9 (Appendix

Exhibit A). The MSA resolved dozens of claims brought against the tobacco companies by the

states to recover billons of dollars they had spent on their citizens due to the adverse health

effects oftobacco products. ¡d. ir 8-9. The Foundation did not exist when the aforementioned

paries entered into the MSA, and the Foundation is not a signatory or pary to the MSA. The
parties to the MSA agreed to direct a portion ofthe states' recovery to create a non-profit
charitable organization dedicated, in significant part, to the reduction of

youth smoking. ¡d. ir 10.

Accordingly, in March 1999, the National Association of Attorneys General (''NAAG'') created

the Foundation. The Foundation received the funding earmarked for that purpose under the

MSA. The MSA provides that the National Public Education Fund, the main source ofthe

Foundation's fuding under the MSA, shall not be used for "vilification" or "personal attack" of
tobacco companies. ¡d. ir 11. The Foundation's bylaws and aricles of

incorporation have

provisions to the same effect. Id.
B. The truth(l Public Education Campaign

i National Union also asserts that the "propert damage" exclusion applies to Lorillard's allegations. The

Foundation does not deny that the D&O Policy excludes propert damage claims. As National Union itself admts,
the "propert damage" porton ofLorilard's allegations were dismissed for lack of

prosecution and accounted for

virally none of the expenses incurred by the Foundation in defending itself. National Union Motion at 21-22.

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Recognizing the deadly toll of tobacco on the United States and the fact that the vast
majority of smokers begin smoking before they turn eighteen, the mandate of

the Foundation is,

among other things, to carry out a nationwide public education program to counter the use by

youth oftobacco products. ¡d. ir 10. The Foundation's truth(I campaign, launched in February
2000, does precisely this. ¡d. ir 12. Composed of, among other things, television and radio
broadcasts, the truth(I campaign discourages youth from smoking by providing straightforward
information about the health effects, addictiveness, and social costs related to tobacco products

and the marketing practices associated with those products. ¡d. ir 13. The spots are blunt, hardedged, fast-paced, and sometimes humorous, designed to capture and hold the attention of

the

target teen audience. ¡d. Published, peer-reviewed research establishes that the trth1Y campaign
accounted for 22% of

the decline in youth smoking, or 300,000 fewer youth smokers, in its first

two years. See M. Farelly, et al., Evidence of a Dose-Response Relationship Between 'truth'
AntismokingAds and Youth Smoking Prevalence, 95 Am. J. Pub. Health 425,429 (March 2005).
C. Lorilard's Efforts to Destroy the truth(l Campaign

Dismayed by the truth1Y campaign, the Lorillard Tobacco Company began a series of

escalating attacks on the Foundation and the campaign. CompL. ir 16. Initially, Lorillard focused on

one radio broadcast known as "Dog Walker." ¡d. In Dog Walker, an obvious parody, a telephone
caller identifies himself to a tobacco company receptionist as a professional dog walker and offers to

collect urine produced by the dogs he walks and sell it to the tobacco company because "dog pee is
full of

urea, one ofthe chemicals that (tobacco companies) put in cigarettes." ¡d. ir 15. The

receptionist at the tobacco company identifies the company as Lorillard. ¡d.

In November 2001, Lorillard threatened the Foundation with a defamation action based on

Dog Walker. ¡d. ir 16. The Foundation provided notice ofthis threat to National Union. In January

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of2002, Lorillard went fuher and provided the Foundation with notice of

Lorillard's intent to

initiate civil litigation challenging virtally the entire trth(ß campaign, litigation which could have
been brought simultaneously in over forty-six differentjursdictions.2 ¡d.
D. The Foundation's Litigation with Lorilard

Lorillard provided the Foundation with 30 days notice before initiating a suit against it.
Compl. ir 16. The Foundation, not subject to this notice requirement, fied the declaratory
judgment action captioned

American Legacy Foundation v. Lorilard Tobacco Company, C.A.

No. 19406-NC, DeL. Ch. Ct. (Feb. 13,2002) (the "Delaware Action") in Delaware Chancery
Cour, both to avoid the possibility of a nationwide litigation blitz and to avail itself of

the

Delaware foru.3 Id. ir 17. The Foundation sought a declaration that Lorillard had no basis to
sue the Foundation and that, in the alternative, the Foundation had engaged in neither
"vilification" nor "personal attack" in the truth(ß campaign. ¡d.

Lorillard filed a counterclaim, seeking damages and other relief from the Foundation. ¡d.
ir 19. Lorillard alleged, among other things, that, in "broadcasts reaching milions of

members of

the public," the Foundation had accused tobacco companies of

"lying to the public," engaging in

the "destruction of evidence" and "add(ing) dog urine to (their) cigarettes." Answer and
Counterclaims of

Defendant Lorillard Tobacco Company (the "Countercl.") at 24-25 ir 31

2 Indeed, after Lorillard's notification and before the Foundation fied suit, a Lorillard spokesperson was quoted in

the New York Times as saying that "(i)t is conceivable that Lorilard might have to sue in all of those states, which it has not yet decided to do. . . ." Bernard Stamler, "Lorilard Tobacco Threatens Legal Action Against a Foundation for Its Tough Antismokig Campaign," N Y. Times, Jan. 23, 2002, at ClO.
3 On February 19,2002, Lorilard fied a lawsuit in the Wake County Superior Cour of

Nort Carolina, Lorilard

Tobacco Co. v. American Legacy Foundation, 02 CvS 02170 (Feb. 19,2002) (the ''Nort Carolina Action"). The
Delaware Chancery Cour denied Lorillard's motion to dismiss the Delaware case in favor of

the North Carolina case. Am. Legacy Found. v. Lorilard Tobacco Co., No. 19406,2002 WL 927383 (DeL. Ch. Apr. 29, 2002). The
the Delaware Action and eventually was

Nort Carolina Action subsequently was stayed during the pendency of

dismissed.

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(Appendix Exhibit B). It accused the Foundation's President and CEO of

"makng malicious

statements about Lorillard to the public." ¡d. at 27 ir 40. Lorillard also asserted that the

Foundation created and facilitated through its website "vitrolic, hateful and vulgar personal
attacks upon Lorillard's employees," id. at 18 ir 8, and "in broadcasts reaching millions of
members of

the public. . . personally attacked and vilified Lorillard, its executives and tobacco

companies. . . ." ¡d. at 24 ir 31. It went on to allege that these acts violated the Foundation's
bylaws, articles of

incorporation, and the MSA. ¡d. at 27 ir 41. The Foundation provided notice
these developments.

to National Union of each of

On August 22,2005, truth(I was vindicated in the Delaware Chancery Court, which ruled

in the Foundation's favor on cross-motions for sumary judgment, finding that Lorillard's
attacks on the Foundation's radio and television broadcasts were without merit. See Am. Legacy

Found. v. Lorilard Tobacco Co., 886 A.2d 1,45-46 (DeL. Ch. 2005). Lorillard did not stop its

crusade against the Foundation there, however. First, it filed a motion for rearguent, which
was denied by the Chancery Cour. Am. Legacy Found. v. Lorilard Tobacco Co., 895 A.2d 874
(DeL. Ch. 2005). Then Lorillard appealed the decision to the Delaware Supreme Cour. On July
17,2006, the Delaware Supreme Court unanimously agreed that Lorillard's allegations were

without merit and affirmed the Chancery Court's decision. Lorilard Tobacco Co. v. Am. Legacy
Found., 903 A.2d 728, 745 (DeL. 2006). In all, the Foundation spent more than five years and

approximately $17 millon dollars in legal fees and expenses defending itself against Lorillard's
unfounded allegations. Compl. ir 25. The record in the case ultimately totaled tens of

thousands

of pages.

E. The National Union D&O Policy and National Union's Refusal to Provide the Promised Coverage

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The Foundation purchased insurance to protect itself from potential claims, including

the types of claims asserted by Lorillard, and to provide or pay for a defense against such

claims. ¡d. ir 26. This insurance includes the National Union directors' and officers' liability
policy

at issue here, which covers the period from August 26,2001 through August 26,

2002.4 ¡d. ir 31. The National Union D&O Policy applies when there is a "Claim first made

against the (Foundation) . . . for any actual or alleged Wrongful Act ofthe (Foundation)"

durng the policy period. National Union D&O Policy ir 1 (Coverage C). "Wrongful Act" is
defined to include "any breach of duty. . . error. . . omission or act by or on behalf of

the

(Foundation); . . . (and) shall specifically include: . . . libel, slander, (and) defamation." ¡d. ir

2(u)(2) and ir 2(u)(4)(d) (Appendix Exhibit C). The D&O Policy requires National Union to
either defend the Foundation in the event of a Claim or to advance the costs of defending the

Claim. Specifically, the D&O Policy states that when National Union "has not assumed the

defense of a Claim. . . (it) shall advance nevertheless. . . Defense Costs prior to the final
disposition ofa Claim," subject to the $15,000,000 limit ofthe National Union D&O Policy.
¡d. ir 8. Notwithstanding its clear obligation to do so, National Union refused to either defend
the Foundation or advance defense costs as promised.

National Union argues in its Motion that it is not required to pay defense costs

because of Exclusion (k) of the D&O Policy. Exclusion (k) is a limited exclusion applicable
to contractual liability under an "express contract or agreement" ("express contract") which
states that National Union shall not be liable to make any payment for Loss in connection with a Claim made against (the Foundation) . . . alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of (the
4 The Foundation also purchased a series of comprehensive general

which it seeks coverage in this action, but which are not the subject of

liability policies from National Union, under National Union's Motion.

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Foundation) under any express contract or agreement; provided, however, that this exclusion shall not apply to liability which would have attached in the absence of such express contract or agreement.

National Union D&O Policy ir 4(k) ("express contract" exclusion). For the reasons given below,
National Union's reliance on Exclusion (k) is misplaced; the exclusion does not negate National

Union's obligation to pay the $17 milion in defense costs incured by the Foundation in the
underlying litigation.

II. ARGUMENT
A. Summary of Anmment
As set forth in greater detail below, National Union cannot meet its burden to show the

applicabilty ofthe "express contract" exclusion for at least four reasons:
· First, Lorillard alleged that the MSA was animplied-in-fact contract, not an
"express contract" as the exclusion requires. Countercl at 28 ir 47 and 29 ir 51.

· Second, the liability alleged by Lorillard "would have attached in the absence" of
the MSA even ifthe MSA were an "express contract," and thus pursuant to its
explicit terms, the "express contract" exclusion does not apply. See National
Union Policy ir 4(k). Lorillard's allegations were based not only on the MSA, but
also on the Foundation's bylaws and articles of

incorporation. See id. at 34-36

irir 73-80. Notwithstanding National Union's argument, the bylaws are not a
contract, express or otherwise; and National Union does not even attempt to argue
that the articles of

incorporation are a contract, let alone an "express contract."

· Third, even if the "express contract" exclusion applied to the claims made by
incorporation and bylaws, National Union nevertheless should have advanced (and now must pay)
Lorillard related to the MSA and the Foundation's articles of

the Foundation's defense costs because the exclusion does not apply to every

claim or theory advanced by Lorillard. Lorillard's allegations are fundamentally
that the Foundation disseminated damaging statements about Lorillard and its

executives, and its products to the public. ¡d. at 24-25 ir 31. These allegations
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state a claim (albeit one without merit) for defamation, slander or libel that is not

within the "express contract" exclusion and is covered by the D&O Policy.

· Fourth, at best for National Union, the "express contract" exclusion is ambiguous
as applied to Lorillard's allegations and must be constred in favor of coverage

for the Foundation.

National Union, apparently recognizing that Lorillard's allegations do not, on their face,

fall entirely and unambiguously within the "express contract" exclusion, seeks to introduce the

entire record in the underlying action - which lasted 5 years - to support its Motion to Dismiss.
This is improper. It is a fundamental principle of insurance law that the duty of an insurer to pay
defense costs is determined by the allegations in the complaint and not by later developments in

the record. In any event, even if considered the record ofthe underlying case here only supports
the proposition that the "express contract" exclusion does not apply.
B. Standard Governing a Motion to Dismiss
In considering a motion to dismiss under Federal Rule of

Civil Procedure 12(b)(6),Gourts

presume the plaintiffs factual allegations to be true, and liberally construe the complaint in the

light most favorable to the plaintiff. E.g., Leatherman v. Tarrant County Narcotics Intellgence
& Coordination Unit, 507 U.S. 163, 164 (1993). Consequently, "(a) motion to dismiss should not be granted so long as the plaintiffs claim 'may be supported by showing any set
of facts consistent with the allegations in the complaint.'" Bell Atlantic Corp. v. Twombly, 127
S. Ct. 1955, 1969 (2007).
C. Standard Applicable to National Union's Duty to Advance Defense Costs under the

D&O Policy
1. Basic principles of insurance policy construction.

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It is well settled that insurance policies are to be constred in favor of coverage for the
insured. Steigler v. Ins. Co. ofN Am., 384 A.2d 398,400 (DeL. 1978); Meade v. Prudential Ins.
Co. of Am., 477 A.2d 726, 728 (D.C. 1984).5 If

there is ambiguity in an insurance contract, the

contract language is constred strongly against the insurance company that drafted it. E.g.,

Emmons v. Hartford Underwriters Ins. Co., 697 A.2d 742, 745 (DeL. 1997); Travelers Indem.
Co. of

Illnois v. United Food Commercial Works Int'l Union, 770 A.2d 978,986 (D.C. 2001).

"(I)fthe contract. . . is ambiguous, the principle of contra proferentem dictates that the contract
must be construed against the drafter," and that "( c )onvoluted or confusing terms are the problem

ofthe insurer. . . not the insured." Penn Mut. Life Ins. Co. v. Oglesby, 695 A.2d 1146, 11491150 (DeL. 1997); see also Twin City Fire Ins. Co. v. Del. Racing Ass 'n, 840 A.2d 624,630 (DeL.

2003); United Food, 770 A.2d at 986. It also is well settled that "an insurance contract should be
read to accord with the reasonable expectations of the (insured)" and that the plain language of

the policy controls. Steigler, 384 A.2d at 401; see also United Food, 770 A.2d at 986. The
policy must be interpreted in a common sense manner, so that a reasonable policyholder can

understand the scope and limitations of coverage. Emmons, 697 A.2d at 745. Moreover, the
insurer bears the burden of demonstrating the applicability of policy exclusions, and that they are

subject to no reasonable interpretation other than that asserted by the insurer. Chase v. State

5 National Union assumes, without discussion, that Delaware law

applies to this matter. The Foundation's pricipal
place of

business has been held to be a significant contact by Delaware cours in determning the applicable law in an insurance dispute. See Hoechst
Celanese Corp. v. Natl Union Fire Ins. Co. of

business, however, is in Washington, D.C., and the insured's principal place of

Pittsburgh, PA, No. 89C-SE-35, 1994 WL 721651, at *5 (DeL. Super.

Ct. March 28, 1994) (citations omitted). Because relevant Delaware and D.C. law do not confict here, the Cour
need not determne whether Delaware or D.C. law applies to decide this Motion. See In re Am. Metrocomm Corp.,

274 B.R. 641, 659 (Bankr. D. DeL. 2002) ("the first step in a choice-of-law analysis is to determne whether a tre
confict exists between applicable state laws."); Wiliams v. Stone, 109 F.3d 890, 893 (3d Cir. 1997) (where there is
no confict, this Court should not engage in "an extensive and complex analysis of questions"). If, however, this Cour finds that the law of

the thorny choice-of-law Delaware and D.C. law confict in any relevant respect,

fuher briefing may be required on this issue.

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Farm Fire & Cas. Co., 780 A.2d 1123, 1127 (D.C. 2001); E.I du Pont de Nemours & Co. v.
Admiral Ins. Co., 711 A.2d 45,53 (Del. 1995); Nat'l Union Fire Ins. Co. of Pittsburgh, PA v.
Rhone-Poulenc Basic Chems. Co., No. 87C-SE-l1, 1992 WL 22690, at *8 (DeL. Super. Ct. Jan.
16, 1992).

Thus where, as here, an insurer relies on an exclusion in order to avoid its duty to pay
defense costs, the insurer bears the burden of showing that all of the allegations of the underlying complaint clearly and unambiguously are within the exclusion on which the insurer relies, and
that the insurer's interpretation of

the exclusion is the only reasonable one.

2. An insurer's duty to defend or pay defense costs attaches when any of the

allegations made in the underlying case may be within the scope of the policy
at issue.

An insurer's duty to defend or advance defense costs is conceptually distinct from, and
broader than, its duty to indemnfy.6 Am. Ins. Group v. Risk Enter. Mgmt., Ltd., 761 A.2d 826,
830 (DeL. 2000) ("Risk Enterprise"); Sherman v. Ambassador Ins. Co., 670 F.2d 251,258-59

(D.C. Cir. 1981). Insurers must defend any action that arguably or potentially states a claim that

is covered under the policy. New Castle County, Delaware v. Nat'l Union Fire Ins. Co. of
Pittsburgh, PA, 243 F.3d 744, 749 (3d Cir. 2001); Sherman, 670 F.2d at 259 (holding that where

the "allegations of a plaintiffs complaint may bring the claim within the coverage of defendant's
policy, the insurance company must honor its duty to defend, even if

ultimately relieved of any

duty to indemnify") (emphasis added). Cours apply the following interpretive principles to

determine whether the underlying allegations may state a claim that is covered under the policy:

6 As discussed in more detail below, cours have consistently held that the duty to advance defense costs is judged
by the same standards as the duty to defend. See, e.g., Hurley v. Columbia Cas. Co., 976 F. Supp. 268, 275 (D. DeL.

1997) (applying Michigan law) ("there does not exist a significant difference between the duty to defend and the promise to advance defense costs, other than the difference between who will direct the defense").

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(a) where there exists some doubt as to whether the complaint against the insured alleges a risk insured against, that doubt should be resolved in favor of the insured;

(b) any ambiguity in the pleadings should be resolved against the carrer;
(c) if even one count or theory of plaintiff s complaint lies within the coverage ofthe policy, the duty to defend arises.
Am. Continental v. Pooya, 666 A.2d 1193, 1197(D.C. 1995); Dover Downs, Inc. v. TIG Ins. Co., No.

04-199-SLR, 2004 WL 1812703, at *5 (D. DeL. Aug. 11,2004); see also New Castle County, 243 F.3d

at 749; Twin City Fire Ins., 840 A.2d at 630. In sum, an insurer is excused from its duty to defend
only if it can be determined as a matter of law that there is no possible factual or legal basis upon
which the insurer might eventually be obligated to indemnfy the insured. Rhone-Poulenc, 1992 WL
22690, at *8; Sherman, 670 F.2d at 259. The underlying plaintiff

need not allege by name, or in a

specific count, a paricular claim covered by the policy, but rather, "it is appropriate to examine the
complaint for all plausible claims encompassed within the complaint." Am. Continental v. Pooya, 666

A.2d at 1197; see also New Castle County, 243 F.3d at 749. Thus, to avoid its obligations to pay

defense costs based on an exclusion in the D&O Policy, National Union must show that all ofthe
"allegations of

the underlying complaints are solely and entirely within specific and unambiguous

exclusions from coverage." Rhone-Poulenc, 1992 WL 22690, at *8.

3. Under the "eight corners" rule, this Court should consider only the allegations pled by Lorilard, and the D&O Policy, to determine whether National Union is required to pay the Foundation's defense
costs.

In determining whether an insurer has a duty to defend, the "eight corners" rule applies.
Cours focus solely on whether the allegations in the underlying complaint (the first four
"corners") are potentially within the coverage of

the insurance policy (the second four

"corners"); the insurer's defense obligation is not "affected by facts ascertained before suit or

developed in the process oflitigation or by the ultimate outcome ofthe suit." United Food, 770

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A.2d at 987; see also Interstate Fire & Cas. Co. v. 1218 Wisconsin, Inc., 136 F.3d 830,833
(D.C. Cir. 1998); Continental Cas. Co. v. Alexis I DuPont Sch. Dist., 317 A.2d 101, 103 (DeL.

1974); Stevens v. United Gen. Title Ins. Co., 801 A.2d 61,66 (D.C. 2002); Johnston v. Tally Ho,

Inc., 303 A.2d 677,679 (DeL. Super. Ct. 1973). Thus, to determine whether National Union has
an obligation to advance defense costs to the Foundation with respect to the allegations made by
Lorillard, this Court must compare those allegations to the coverage of

the D&O Policy, and if

those allegations are not entirely and unambiguously outside the scope of coverage, National

Union must advance defense costs. Because National Union relies on an exclusion to avoid its
obligation to pay defense costs, in order to prevail National Union must show that Lorillard's
allegations are entirely and unambiguously within the exclusion on which National Union relies.
D. National Union Has Not Met Its Burden to Show that the "Express Contract"

Exclusion Unambiguously Applies

As set forth above, to succeed on the Motion, National Union must demonstrate that
Lorillard fails to allege any set of facts that, if

proved, would permit the Foundation to prevaiL.

National Union therefore must show that, taking each ofthe facts alleged by the Foundation to
be true, and drawing all reasonable inferences in its favor, every claim or theory encompassed by
Lorillard's allegations "aris(es) out of, (is) based upon or attbutable to. . . alleged contractual

liability of (the Foundation) under any express_contract or agreement" and that the alleged

liability would not have "attached in the absence of such express contract or agreement."

National Union D&O Policy ir 4(k). National Union cannot do so. Accordingly, this Court
should deny the Motion.
1.

The "express contract" exclusion does not relieve National Union of its duty to advance defense costs to the Foundation because the MSA is not an "express contract."

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Exclusion (k) permits National Union to avoid liability only ifit can prove that the
underlying allegations are based on or attbutable to an "express contract or agreement."

National Union D&O Policy ir 4(k) (emphasis added). The D&O Policy does not define the term
"express contract or agreement." The term "express" in the exclusion must be given meaning.

In re Integrated Health Servs., Inc., 375 B.R. 730, 738 (D. DeL. 2007); Chase, 780 A.2d at 1132.

It is black letter law that an "express contract" (or agreement) requires that the Foundation's

assent to be bound to the contract be manifested through an explicit wrting or oral agreement to
be bound, and not by its conduct as alleged by Lorillard. RESTATEMENT (SECOND) OF

CONTRCTS, § 4 cmt. a (1979) (stating that where the evidence that a pary has accepted a

contract is based on the party's conduct, the contract is implied-in-fact and not express); see also

Baltimore & o.R. Co. v. u.s., 261 U.S. 592, 597 (U.S. 1923); Staley v. Taylor, 994 P.2d 1220,
1224 (Or. Ct. App. 2000).

Here, Lorillard did not allege at any time that the MSA constitutes an "express contract"
of

the Foundation. To the contrary, Lorillard specifically alleged that there was an "implied"

agreement between Lorillard and the Foundation. See Countercl. at 29 ir 51 ("In the alternative,
an implied agreement has arisen between Lorillard and (the Foundation) pursuant to which (the
Foundation) agreed to abide by the terms of

the MSA in exchange for the payments made by

Lorillard."). Moreover, the facts alleged by Lorillard assert that the Foundtltion was subject to
suit under the MSA based on its conduct, not that the MSA was an express contract between

Lorillard and the Foundation. For example, Lorillard alleged that, "by its conduct, (the
Foundation) has adopted and ratified the MSA, and is bound." Id. at 28 ir 46 (emphasis added).
That alleged conduct included incorporating the MSA into the bylaws and accepting funds paid
under the terms of the MSA with full knowledge of

the MSA's terms. See id. at 28 irir 44,45.

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In short, Lorillard does not assert that the Foundation's alleged liability arises out of an

"express contract or agreement" between Lorillard and the Foundation, and National Union
therefore canot rely on the "express contract" exclusion to avoid its obligations to pay defense

costs.7
2. The "express contract" exclusion does not apply where, as here,

liabilty would have attached in absence of the contract.
Exclusion (k) ofthe National Union D&O Policy also provides on its face that it does not
apply where the alleged liability "would have attached in the absence of such express contract or
agreement." Even if

the MSA were an express contract between Lorillard and the Foundation,

Lorillard also asserted that the Foundation's liability for the alleged "vilification" or "personal

attacks" in the trth(ß campaign was based on violations ofthe Foundation's aricles of
incorporation and bylaws, which are not contracts, express or otherwise. See Counterc1 at 34-36
irir 73-80. The language of

the prohibitions in the MSA, the bylaws, and the aricles of

incorporation, and the alleged breaches by the Foundation with respect to each, were virtually
identicaL. Id. at 17 ir 3 and 34 irir 73-74. Thus, the alleged liability and the costs required to
defend against that liability would "attach" even if

Lorillard had alleged only that the Foundation

breached its bylaws or its articles of incorporation and had never mentioned the MSA. The
exclusion therefore does not apply.

7 Even if this Cour were to go beyond the "eight corners" as it is urged to do by National Union, the Delaware

Cours fully agreed that it was the Foundation's conduct - and not its express agreement, either written or oralwhich bound it to the MSA. The Chancery Court confired that there is "no doubt that (the Foundation) was not a signatory to the MSA." Am. Legacy Found., 831 A.2d at 343. It fuer concluded that ". . . to a large extent, the
legal conclusion that (the Foundation) has 'adopted' the M.S.A. flows directly from the parties' perfonnnce of

their obligations under that contract." ¡d. Moreover, the Chancery Cour found that, "(a)s both parties admt, no single provision in the M.S.A expressly subjects (the Foundation) to enforcement actions by the tobacco companies under the MSA." ¡d. at 344 (emphasis added).

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a. The Foundation's Bylaws are not an Express Contract which would

trigger the Exclusion.
In addition to the allegations regarding the MSA, Lorillard also asserted that the

Foundation breached its bylaws. Id. at 34 ir 74 and 35 ir 77. This assertion forms another basis of liability "which would have attached" in the absence ofthe MSA, thus rendering the exclusion
inapplicable. Seeking to avoid this result, National Union attempts to shoehorn Lorillard's bylawsrelated allegations into the "express contract" exclusion by arguing that the bylaws themselves are

yet another express contract under which the Foundation's alleged liability arses. National Union
Motion at 17-18. National Union is simply wrong in its assertion that the "express contract"
exclusion applies to the bylaws-based allegations made by Lorillard. Although in some
circumstances bylaws are interpreted like contracts, we are aware of

no case, and National Union

has identified none, holding that bylaws of

non-profit organizations such as the Foundation are

contracts; and in any event bylaws are not contracts for the purose of interpreting the terms of an
insurance policy.

To support its argument that the bylaws claims are in fact "contract" claims, National
Union cites three cases and a brief filed by the Foundation, all of

which stand for the irrelevant

proposition that, in some circumstances, the bylaws of a for-profit, private corporation can be

viewed as contracts among its shareholders or between the corporation and its shareholders. See
Centaur Partners, iv v. Natl Intergroup, Inc., 582 A.2d 923,928 (DeL. 1990) (finding that by-

laws are contracts among the shareholders of a wholesale pharmaceutical distributor traded on the
New York Stock Exchange); see also Salaman v. Nat'l Media Corp., No. 12365, 1992 DeL. Ch.
LEXIS 4, at * (Del Ch. Jan. 14, 1992) (finding that bylaws of

National Media "have force of

contract" with respect to indemnfication for suit by shareholders); Perlegos & Perlegos v. Atmel
Corp., No. 2320-N, 2007 DeL. Ch. LEXIS 25, at *105 n.184 (DeL. Ch. Feb. 8,2007) (finding that

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rules of contract interpretation apply to bylaws of public, stock-issuing company, but that bylaws

"also govern the relationship between a corporation and its offcers").
The Foundation, however, is a not-for-profit corporation that has no shareholders. National
Union notably cites no support for the proposition that the bylaws of a non-profit entity without

members or shareholders can be construed as a contract. Such a proposition would be nonsensical;

bylaws canot be an "express contract" where the alleged "contracting parties" (the shareholders)
do not exist. The Foundation brief quoted by National Union says this explicitly: "(i)n the case of
private, for-profit entities bylaws are sometimes understood as contracts between a corporation and
its members. . . ." National Union Motion at 18 (emphasis added). Tellingly, National Union

omits the following sentence, which goes on to distinguish the case of nonprofit corporations such
as the Foundation. See Answering Brief and Cross-Appeal Opening Brief of

Defendant Below,

Appellee/Cross-Appellant American Legacy Foundation at 78, Am. Legacy Found. v. Lorilard

Tobacco Co., No. 579,2005 (Del. Feb. 9,2006) ("But in the case of

nonprofit corporations such as

the Foundation, private individuals and entities generally have no enforceable rights in bylaws, and

their enforcement lies exclusively with the Attorney General or other state official responsible for
supervising the conduct of charitable corporations in a state.").

Moreover, even if the bylaws of a non-profit organization with no shareholder could be
understood as a contract, there simply is no basis to assert, and National Union has not asserted,

that the bylaws are an unambiguous express contract as required by the exclusion. See, e.g., 8
Wiliam Meade Fletcher, et aI., Fletcher Cyclopedia of the Law of

Private Corporations, § 4198

(Westlaw 2007) ("( a) bylaw is not, however, a contract in the strict sense in which the word is

sometimes used as designating a formal agreement") citing Cheney v. Canfeld, 111 P. 92 (Cal.
1910).

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Furhermore, courts have found specifically that bylaws are not a contract for the purpose
of interpreting the terms of an insurance policy. Aetna Commercial Ins. Co. v Am. Sign Co., 687

So. 2d 834, 836 (Fla. Dist. Ct. App. 1996) (finding that bylaws were not a contract in interpreting

an exception to an insurance policy exclusion). Aetna Commercial relied on the definition of

"bylaws" in Black's Law Dictionar as "(r)egulations, ordinances, rules or laws adopted by an
association or corporation or the like for its internal governance." Id. Delaware cours also look to
dictionary definitions to interpret the plain meaning of

undefined terms in a contract, including

insurance policies. Am. Legacy Found., 903 A.2d at 738; Oliver B. Cannon & Son, Inc. v. Dow-

Oliver, Inc., 394 A.2d 1160, 1163 (Del. 1978) (insurance policies). A Delaware cour therefore
would similarly find that, in the insurance context, bylaws are not "contracts" within the meanng
of the D&O Policy.

Finally, as discussed above, insurance policies must be interpreted consistently with the

expectations of a reasonable policyholder. Chase, 780 A.2d at 1132; State Farm Mut. Auto. Ins.

Co. v. Johnson, 330 A.2d 345,347 (Del. 1974). A reasonable policyholder would not expect that a
claim against its organization for a breach of its governing bylaws would fall within a general exclusion for "contractual liability" claims, without a clear and express statement to that effect.
Insurance policies are constred to avoid subjecting policyholders to such a "hidden trap or

pitfall." Delledonne v. State Farm Mut. Auto. Ins. Co., 621 A.2d 350,352 (DeL. Super. Ct. 1992).
Indeed, whatever bylaws' technical character may be as between stockholders with respect to for-

profit entities, an ordinar businessperson would not understand the organization's bylaws to be a
"contract" in the context of an insurance policy exclusion, let alone an "express contract" to which
the "express contract" exclusion applies. United Food, 770 A.2d at 986 (internal quotations
omitted); see also Continental Ins. Co. v. Burr, 706 A.2d 499,500-01 (DeL. 1998) (insurance

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policies are interpreted in a manner consistent with the understanding of

the ordinary

businessperson). If

National Union sought to exclude bylaws-based claims, it was obligated to

employ clear language revealing its intent to do so. It did not.
Thus, National Union cannot demonstrate, as it must to avoid its obligation to pay defense

costs under the D&O Policy, that the "express contract" exclusion unambiguously applies to the
bylaws-based claims against the Foundation.
b. The alleged breach of the Foundation's Articles of

Incorporation.

Lorillard alleged in its counterclaims that the same facts that gave rise to its claim under the

MSA supported independent claims that the Foundation had violated the "personal attack" and
"vilification" provisions included in its articles of

incorporation. Countercl. at 34 ir 74 and 35 ir 77.

National Union makes no arguent that the allegations by Lorillard that the Foundation violated
its articles of

incorporation are subject to the "express contract" exclusion. It could not, because
incorporation are not a contract, and no case that we are aware of

the aricles of

has ever held to

the contrary. Because liability for violation of

the articles of

incorporation "would have attached
8

in the absence of' the MSA, the exclusion does not apply.

3. The Counterclaims also assert allegations of libel and

defamation, wholly unrelated to any alleged contract.
As set forth above, if any plausible or arguable theory alleged by Lorillard falls within the
scope of

the coverage, National Union is required to defend the claim. New Castle County, 243

F.3d at 749; Pooya, 666 A.2d at 1197. Here, Lorillard's allegations of disparagement and
vilification are tantamount to claims (albeit meritless ones) of slander or defamation, both of which
are expressly covered by the D&O Policy. National Union D&O Policy ir 1 (u)( 4) (Wrongful Act
includes "any act by or on behalf ofthe (Foundation) . . . specifically includ(ing) . . . libel, slander,
8 In the Answer and Counterclaims of

Defendant Lorilard Tobacco Company to First Amended Complaint, fied on January 14,2005, Lorilard did not allege that the Foundation violated its artcles of incorporation.

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defamation.. ."). Thus, even ifthe "express contract" exclusion were applicable to any

of

Lorillard's other claims, National Union could not prove that the exclusion unambiguously applies

to the defamation and slander claims. National Union therefore should have advanced the
Foundation's defense costs and must pay them now.

Whether National Union's duty attaches does not depend on whether Lorillard included

express counts for slander or defamation. "So long as facts are alleged which could form a basis
for recovery within the coverage ofthe policy, the duty to defend exists." United Food, 770
A.2d at 987 (stating also that "in interpreting the allegations of

the complaint, which are neither

drafted by the insured nor advanced in contemplation of an insurer's role, excessively literal or
rigid construction is to be avoided.").

When ascertaining the scope of the duty to defend, a cour "examine( s) the complaint for

all plausible claims encompassed within the complaint." Id. (emphasis added); see also New
Castle County, 243 F.3d at 749 ("an insurer is required to defend any action which

potentially

states a claim which is covered under the policy") (emphasis added; internal quotations omitted).

For example, in United Food, the D.C. Cour of Appeals held that a complaint filed against an
insured and containing a claim for "abuse of process" adequately alleged an action for libel that

was covered under the policy. 770 A.2d at 990 ("(b)ecause (plaintiffs) complaint alleges that
(the insured) intended to damage (plaintiffs) reputation through the knowing and unprivileged
wrtten publication of defamatory material that on its face suggests that (plaintiff) physically and
emotionally injured its employees and, in effect, stole from them as well, it has adequately

alleged a libel"). The complaint need not specifically allege each of the legal elements of a
particular cause of action in a technical way for the complaint to give rise to coverage under the

insurance policy; "libel" and "defamation" must be read to have their common, not technical,

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legal meaning. Johnston v. Tally Ho, Inc., 303 A.2d 677,679 (DeL. Super. Ct. 1973); Stevens v.
United Gen. Title Ins. Co., 801 A.2d 61,67 (D.C. 2002).
The Merriam- Webster Dictionary defines "libel" as "a spoken or wrtten statement or a

representation that conveys an unjustly unfavorable impression of a person or thing.,,9 MerriamWebster Dictionary 283 (Merram-Webster, Inc. ed., 6th ed. 2005). Thus, if

the complaint

plausibly states a claim within the lay understanding of a libel or defamation claim, National

Union is obligated to advance the costs of defending the claim. Lorillard's allegations plausibly
state such a claim.1O Indeed, the close relationship between defaiation and the prohibitions
against vilification and personal attack is demonstrated by the Delaware Supreme Court's
interpretation ofthe MSA's terms. In particular, it concluded that: "... the meaning of

'vilification' according to Lorillard's own dictionary citations is a statement that is slanderous,

defamatory, or abusive that unustly denounces its target. The core ordinary meaning of
vilification is a denouncement that is both unfounded and abusive or slanderous." 903 A. 2d at

9 "Defame" is defined as "to injure or destroy the reputation of

by libel or slander" and refers to the definitions for "libel" and "slander," while the defmition for "slander" refers to the definition for "defame." See Merriam-Webster Dictionary 128,463. io Even if proof of each element of a libel or defamation claim were requied, the elements of such causes of action

are within the allegations contained in Lorillard's counterclaims. The elements of such claims under Delaware law
include: 1) a defamatory statement; 2) made concerning the plaintiff; 3) that was published; 4) that a thd part

would understand as defamatory. Doe v. Cahil, 884 A.2d 451,463 (DeL. 2005). Lorilard alleges that the
Foundation improperly publicly damaged the reputation of

Lorillard, its executives and employees, and its product. In partcular, Lorilard alleges that the Foundation made "vitriolic, hateful and vulgar" personal attacks on
members of

Lorilard's employees. Countercl. at 18 ir 8. It fuer alleged that "in broadcasts reaching millions of the public," the Foundation's broadcasts, for example, "accuse tobacco companies of

implying the intentional and improper destrction of evidence" and "strongly imply that Lorillard adds dog urine to its cigarettes." Countercl. at 24-25 ir 31. These allegations provide more than sufficient notice of a plausible claim under the complaint for defamation or slander.

shredding documents, thereby

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7 42 (emphasis added).ll Thus, Lorillard' s allegations of vilification and personal attack are

synonymous with slander and defamation, and National Union is obligated to advance defense

costs to the Foundation. Accordingly, the Motion should be denied.
4. This Court should ignore National Union's attempt to introduce

hundreds of pages of documents from the underlying litigation.
Apparently recognizing that Lorillard's allegations are not unambiguously and entirely

within the "express contract" exclusion, National Union engages in a vain attempt to bring

before the Cour the entire record in the underlying case. National Union Motion at 8-10. Not
only would consideration of these documents be inconsistent with both Federal Rule of

Civil

Procedure 12(b)(6) (which tests the sufficiency of

the Foundation's complaint, not the

underlying evidence), but, more importantly, it would violate the "eight comers" rule discussed

above. See Fed. R. Civ. P. 12(b) (2008). Thus, this Cour should not consider the record ofthe
Lorillard case in determining National Union's obligation to advance defense costs. (Of course,
as discussed above, even were the Court to do so, National Union cannot show that Lorillard's

allegations fall entirely within the "express contract" exclusion.) National Union argues that, under Risk Enterprise, the "eight corners" rule does not apply
where the insurer's duty to defend is not litigated until the conclusion of

the underlying case.

See 761 A.2d 826. But Risk Enterprise is a narrow exception to the "eight corners" rule, and it is

plainly inapplicable here. At most, Risk Enterprise applies only in the "unusual situation,"
761 A.2d at 829, where the policyholder did not notify the insurer of

the underlying action until

discovery in that action was complete. See Home Ins. Co. v. Am. Ins. Group, No. 97C-04-024,

11 The United States Supreme Court also has noted the close relationship between vilification and libeL.

Philadelphia Newspapers v. Hepps, 475 U.S. 767, 782 (1986) ("While deliberate or inadvertent libels vilify private
personages, they contrbute little to the marketplace of

ideas."); see also NY Times v. Sullvan, 376 U.S. 254, 271 (1964); Cantwell v. Connecticut, 310 U.S. 296, 310 (1940).

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2003 WL 22683008, at *2 (DeL. Super. Ct. Oct. 30, 2003) ("When the demand for

indemnification or defense is made after development of a complete discovery record, this Cour
should not limit its analysis solely to the allegations in the complaint.") (emphasis added).
Delaware courts recently have reiterated that the "eight comers" rule is the law of

Delaware.

See, e.g., AT&T Corp. v. Clarendon Am. Ins. Co., 931 A.2d 409 (DeL. 2007) (comparng all
allegations of the complaint to the terms of

the policy in the context of directors and offcers

insurance). This is true even where coverage determinations are made after the conclusion of the
underlying case. Dover Downs, 2004 WL 1812703, at *5.
Here, as set forth above, the Foundation notified National Union of

Lorillard's

allegations, and demanded coverage, as soon as Lorillard threatened to file the underlying case

and again after the lawsuits were fied. Thus, the "unusual situation" that confronted the court in
Risk Enterprise is not present here.

National Union also argues that the rationale behind the "eight comers" rule has lesser

force here in par because the D&O Policy only requires it to "reimburse" the defense costs of
the Foundation, and thus, it would not have an immediate obligation to the policyholder in any

event. This argument misstates the clear terms of the D&O Policy, which expressly requires that

National Union "shall advance. . . Defense Costs prior to the final disposition of a Claim."

National Union D&O Policy ir 8 (emphasis added). Cours repeatedly have found that this duty

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Page 29 of 29

to advance defense costs holds the insurer to the same standard as the duty to defend.12 Thus,
National Union's obligations are not reduced by virte of

its promise to advance defense costs
13

rather than defend its policyholder.

Accordingly, National Union's reliance on documents and assertions reflecting the
conduct of

the underlying litigation is misplaced, and the well-established "eight corners" rule

must apply to determine National Union's obligation to advance defense costs. This Cour

should limit its inquiry to Lorillard's allegations and the National Union D&O Policy, and need

not - indeed, should not - canvas or consider any of the myrad of documents discovered or
created in the Delaware Action, including those relied on in the Motion.

III. CONCLUSION
To succeed in its efforts to avoid its obligations to the Foundation under the National

Union D&O Policy for which it accepted premiums, National Union must show that the "express

contract" exclusion unambiguously applies to every plausible theory or claim asserted by

Lorillard. It has not met that burden, and the Foundation therefore respectfully submits that the
Cour should deny National Union's Motion.

12 See, e.g., Hurley, 976 F. Supp. at 275 ("there does not exist a significant difference between the duty to defend

and the promise to advance defense costs, other than the difference between who wil direct the defense"); Am. Chem. Soc y v. Leadscope, Inc., No. 04AP-305, 2005 WL 1220746, at *4-7 (Ohio Ct. App. May 24, 2005)
(holding that there is no distinction between "advance defense costs" policies and "duty to defend" policies with
respect to the application of the basic principles of

the duty to defend); In re WorldCom, Inc. Sec. Litig., 354 F.

Supp. 2d 455, 464 (S.D.N.Y. 2005) (applying the same general priciples where insurer's duty was to advance legal costs as the court would to a duty to defend provision); Brown v. Am. Intl Group, Inc., 339 F. Supp. 2d 336, 346

(D. Mass. 2004) (interpreting policy with duty to advance defense costs and applying the same priciples as applied to duty to defend cases).
13 If ths Cour agrees with National Union's interpretation of Risk Enterprise, then the law of

D.C. and Delaware do

differ in this respect and a choice of law analysis must be undertaken. See e.g., Am. Registry of Pathology v. Ohio

Cas. Ins. Co. 461 F. Supp. 2d 61,66 (D.D.C. 2006) (holding that D.C. follows the "eight corners" rule). The Foundation would respectfully request that this Cour order fuer briefing on the choice oflaw issue in that event.

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

The American Legacy Foundation, )

v.

Plaintiff,

)

) )
)

National Union Fire Insurance Company of Pittsburgh,
Pennsyl vania,

)

) ) )

Civil Action No. 07-248 (SLR)

and

)
)

The Travelers Indemnity Company)
)

of America, )
Defendants.
)

AFFIDAVIT OF SERVICE

Louise L. Tuschak, being duly sworn according to law,
deposes and says that she is employed by the law firm of

Pachulski Stang Ziehl & Jones LLP, and that on the 8th day of
February, 2008 she caused a copy of the fOllowing document to be
served upon the attached service list in the manner indicated:

American Legacy Foundation's Opposition to Motion of National Union Fire Insurance Company of PittSburgh, PA for Partial Dismissal.

v: £~ r'l~ ,(A ~L
Sworn to and subscribed before th day February, 2008

~ouise L. Tuschak

MARY E. CORCORA

Expires:
0369 1-00 I \DOCS_DE:

11/4h1

NOTARY PUBLIC STATE. OF DELAWAR
My commission expires Nov. 4, ..

13051 1.6

Case 1:07-cv-00248-SLR

Document 25-2

Filed 02/08/2008

Page 2 of 2

American Legacy Foundation - Special Service List Document No. 130442 02 - Hand Delivery 01 -First Class

Hand Delivery

Richards Layton & Finger, P. A.
John A. Parkins, Jr. Chad M. Shandler Todd A. Coomes One Rodney Square, P.O. Box 551

Wilmington, DE 19899
Hand Delivery Fox Rothschild, LLP Neal J. Levitsky, Esquire 919 N.