Court to Decide Which D&O Insurer Must Pay for Sprint Nextel Suits

Since none of Sprint Nextel Corp.'s nine D&O insurers has agreed to cover underlying securities fraud suits, the telecom may ask a court to determine which of them must pay up, a federal judge in Kansas has ruled.

U.S. District Judge Carlos Murguia's ruling came in response to a motion by two of the insurers seeking dismissal from Sprint's declaratory judgment action in the U.S. District Court for the District of Kansas over which of 20 D&O policies can be tapped.

The judge said that since Sprint already has run up more than $2 million in legal costs in the underlying shareholder securities fraud suits and faces substantial future fiscal outlays, the relief it seeks is not an "advisory" ruling.

In the underlying suits, various shareholders claimed that Sprint misled them about the significance of a financial crisis faced by two of its top officers.

The shareholders charged that William Esrey and Ronald Lemay, Sprint's most senior officers, faced fiscal ruin over more than $100 million in unpaid taxes because of bad advice on tax shelters from the company's auditor.

As a result, the two officers made bad decisions that hurt the company, leading to their ouster, the suits said.

When shareholders filed several securities fraud suits in 2003, Sprint turned to its insurers, which had written 20 policies for primary and excess coverage during the relevant period. However, all nine either reserved the right to deny coverage or simply failed to respond, Sprint claimed in this coverage action.

Two of them, St. Paul Mercury Insurance Co. and Travelers Indemnity Co., moved for dismissal on the grounds that no viable issue exists as to whether their polices cover the underlying suits and that, in any event, the question is not ripe for adjudication.

In its brief in opposition to dismissal, Sprint argued that "faced with D&O insurers pointing fingers at each other in connection with a securities class action seeking substantial damages, Sprint was left with no choice but to bring this action."

Sprint says it has "a compelling need for resolution of its insurers' obligations and to avoid being whipsawed by carriers taking inconsistent positions or reserving rights to deny coverage."

Judge Murguia said the insurers advocate a "wait and see" approach to the question of which of them, if any, should be forced to pay.

"This is a substantial controversy, and no other remedy would more efficiently and effectively resolve this dispute between the parties," he said in denying the motion to dismiss.

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Sprint is represented by Benjamin Razi, Mitchell Dolin and Sarah Hall of Covington & Burling in Washington and J. Eugene Balloun and Zach Chaffee-McClure of Shook, Hardy & Bacon in Kansas City, Mo.Travelers and St. Paul are represented by Lee Baty and Theresa Otto of Baty, Holm & Numrich in Kansas City and Thomas Spitaletto and James Collins of Wilson Elser Moskowitz Edelman & Dicker in Dallas.