A Jewel of a Decision – No Coverage for Loss After Expiration of a Policy

Zale Patibulated on its Own Gibbit After it Asked to Change Policy After Merger

An insured that defeats its claim by changing its policies after a merger was hung on a gallows it had constructed and lost more than $35 million in Zale Corporation v. Berkley Insurance Company And Starr Indemnity & Liability Company, No. 05-19-00730-CV, Court of Appeals Fifth District of Texas at Dallas (July 30, 2020).

Zale Corporation (“Zale”) appealed summary judgment orders in favor of Berkley Insurance Company (“Berkley”) and Starr Indemnity and Liability Company (“Starr”) (collectively referred as “appellees”), in a contract dispute involving excess insurance policy coverage.


Zale is a retailer of jewelry in North America. From July 31, 2013 to July 31, 2014, Zale had directors’ and officers’ liability insurance through Liberty Insurance Underwriters Inc. (“Liberty Policy”), which had a policy limit of liability of $10,000,000.00. The Liberty Policy’s definition for “Loss” includes “sums which . . . the Insured Organization are legally obligated to pay solely as a result of any Claim insured by the Policy.” However, “Loss” excludes “matters uninsurable pursuant to any applicable law, including … settlements which are in the nature of restitution….” “Loss” further excludes changes to or portions of any judgment or settlement relating to the amount by which price or consideration was changed or modified as a result of a claim alleging that the price or consideration paid or proposed to be paid for the acquisition of any securities issued by or assets owned by any natural person or entity is inadequate, excessive, or improper.

Beyond the Liberty Policy, Zale had excess insurance through Berkley, which was immediately excess of the Liberty Policy and had a policy limit of liability of $5,000,000.00 (“Berkley Policy”). The Berkley Policy’s insuring followed in form the Liberty policy. Zale had further excess insurance through Starr, which was immediately excess of the Berkley policy and had a policy limit of liability of $5,000,000.00 (“Starr Policy”). The Starr Policy’s insuring agreement was also a follow form policy.

From November 2013 to early February 2014, Signet Jewelers Limited (“Signet”) made merger offers to Zale’s board. On February 19, 2014, Zale and Signet jointly announced a merger wherein (a) Signet would purchase Zale’s outstanding common stock at a rate of $21 per share, and (b) Zale would merge with a subsidiary of Signet. Signet further agreed to pay an amount as required by a Delaware appraisal action, should dissenting Zale shareholders perfect and raise an appraisal action pursuant to the Delaware Code (governing corporations).

On May 1, 2014, Zale gave notice that the merger vote would occur on May 29, 2014. Before the merger vote, several dissenting Zale shareholders filed stockholder litigation complaints in the Delaware Court of Chancery. The dissenting Zale shareholders alleged breaches of fiduciary duties and moved to enjoin the merger. The dissenting Zale shareholders alleged that Zale’s directors and officers failed to maximize stockholder value, agreed to an inadequate merger price, agreed to deal terms that deterred higher bids, and issued misleading and incomplete proxy statements regarding the merger.

On May 29, 2014, a majority of Zale’s shareholders voted to approve the merger with Signet, thereby executing the merger in which Signet became a parent company to Zale. In accordance with the merger, on May 29, 2014, Zale amended its insurance policies. Zale extended the term of the Liberty Policy to May 29, 2020. However, the Liberty Policy was also partially amended by a Run-off Endorsement as follows that provided coverage only for losses due to a wrongful act that occurred on or after May 29, 2014.

After the merger was consummated on May 29, 2014, three groups of dissenting shareholders (“Appraisal Action Petitioners”) brought separate appraisal action petitions against Zale. In December 2014, Zale began settlement discussions with the Appraisal Action Petitioners. On July 29, 2015, without the insurers’ consent(s), Zale and the Appraisal Action Petitioners agreed to settle the Appraisal Action. Signet, Zale, and their respective merger subsidiary agreed to pay the Appraisal Action Petitioners $24.90 per share to settle the Appraisal Action, and this figure included any statutory interest that may have accrued on the Appraisal Action Petitioners’ shares.

The trial court granted appellees’ motions for summary judgment by separate written orders. Neither summary judgment order specified the grounds for granting summary judgment.


Zale’s Insurance Policy Period Precludes Coverage

Initially, the insured has the burden of establishing coverage under the terms of the policy.  Zale seeks insurance coverage for the appraisal litigation—chiefly the $34,246,984.20 amount that the Appraisal Action Petitioners received in settlement. Zale contends that the $34,246,984.20 paid to settle the Appraisal Action was a “loss” that stemmed from a “wrongful act” that occurred during the “policy period.”

For shareholders that disagree with a merger based on a stock purchase, the Delaware Code provides shareholders with appraisal rights. Through an appraisal action, dissenting shareholders can petition the Delaware Court of Chancery to “determine the ‘fair value’ of the dissenting stockholders’ shares.

It was undisputed that the merger occurred on May 29, 2014. Therefore, the earliest date in which the Appraisal Action Petitioners could commence an appraisal action was May 29, 2014. It is further undisputed that the Appraisal Action Petitioners did not file their respective appraisal action suits until after May 29, 2014.

The May 29, 2014, Liberty Policy Run-off Endorsement effectively ended Zale’s insurance coverage policy period on May 28, 2014, and explicitly excluded claims “based upon, arising from or in any way related to any Wrongful Act committed or allegedly committed on or after May 29, 2014.”

The right to an appraisal in a merger proceeding is entirely a creature of statute. The appraisal action statute does not require a “wrongful act” or fiduciary breach. For dissenting shareholders that have otherwise perfected their appraisal rights, the instrumental act that confers appraisal litigation rights is not the merger process but the execution of the merger, which did not occur in this case until after Zale’s excess insurance coverage policy period ended.

The merger execution triggered the appraisal litigation. There is no evidence that the merger execution, which gave rise to the appraisal litigation, occurred during the insurance policy period. Since the triggering merger execution occurred on May 29, 2014—the day after coverage ended under the insurance policy period—there was no evidence that Zale was entitled to coverage for the Appraisal Action under the Berkley and Starr excess insurance policies.

The record shows that both Berkley and Starr reviewed the Appraisal Action petitions in arriving at their respective denial of coverage positions. Since there was no evidence of coverage under the Berkley and Starr excess insurance policies, the court concluded that Zale has not established a right to receive benefits under the Berkley and Starr insurance policies and therefore cannot recover benefits as “actual damages.”

Zale failed to produce more than a scintilla of evidence to raise a fact issue.


When seeking to modify an insurance policy an insured, like Zale, should be careful to not deprive itself of the coverages it had to protect itself against personal injuries like those claimed by the “Appraisal” plaintiffs. By agreeing to the endorsement upon the completion of the Merger Zale agreed it had no coverage for any wrongful act or claim after the expiration date. Since the appraisal actions had not been filed – but had been threatened – Zale bought the rope, tied it into a noose and hung the right to insurance proceeds – the meaning of being patibulated on their own gibbit.

© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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