TIG INSURANCE COMPANY OF MICHIGAN v. HOMESTORE, INC

Filed 3/13/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

APPEAL from a judgment of the Superior Court of the County of Los Angeles, Jon M. Mayeda, Judge. Affirmed.

Covington & Burling, Donald W. Brown and Julian A. Biggs for Defendants and Appellants Homestore, Inc., Barbara Alexander, Michael A. Buckman, M. Jeffrey Charney, L. John Doerr, Joseph E. Hanauer, William E. Kelvie, Kenneth M. Klein, Terrence M. McDermott, Allan P. Merrill and Evelyn Yalung.

Morgan Lewis & Bockius, David M. Halbreich, Thomas M. Peterson and Jennifer L. Shoda for Defendant and Appellant Stuart H. Wolff.

Tucker Ellis & West, Kim W. West, Janice R. Hugener, Samantha M. Ball and Jully Yoon for Plaintiff and Respondent TIG Insurance Company of Michigan.

_____________________________

Homestore, Inc. and several of its officers and directors, Barbara Alexander, Michael A. Buckman, M. Jeffrey Charney, L. John Doerr, Joseph E. Hanauer, William E. Kelvie, Kenneth M. Klein, Terrence M. McDermott, Allan P. Merrill, Evelyn Yalung and Stuart H. Wolff (Appellant Insureds), appeal from the judgment entered after an order granting summary judgment for TIG Insurance Company of Michigan (TIG) in an action seeking rescission of Homestore's directors and officers (D&O) liability insurance policy. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Securities Claims and Criminal Investigation

Homestore, a publicly traded company, is an internet-based provider of residential real estate listings and related content. Homestore appeared to be performing well during fiscal year 2000 and the first quarter of 2001. However, in December 2001 Homestore announced the audit committee of its board of directors had begun an inquiry into the company's accounting methods and it would restate certain of its financial statements.[1]

Soon after Homestore's announcement shareholders began filing federal securities class-action and derivative liability lawsuits against Homestore and many of its current and former officers and directors. The plaintiffs alleged, among other things, Homestore had materially overstated its revenues and its financial statements were materially inaccurate and misleading.

In September 2002 the United States Attorney for the Central District of California filed a criminal information alleging a scheme to commit securities fraud and naming Homestore's former chief financial officer, Joseph Shew, and two other former Homestore officers. Shew pleaded guilty to one count of conspiracy to commit securities fraud and admitted that from March through December 2001 he had conspired to overstate Homestore's advertising revenue and filed false Form 10-Qs (quarterly financial reports) with the Securities and Exchange Commission.

2. The Insurance Policies

On August 2, 2001 Shew signed a renewal application for a primary level D&O liability policy with Genesis Insurance Company for the policy year August 2001 through August 2002. As part of the underwriting process Genesis required Homestore to submit its most recent Form 10-Q with the application. Homestore provided the Form 10-Q it had filed for the quarter ended March 31, 2001.

Genesis issued a $10 million D&O policy, which included coverage for securities claims. Section VIII (General Conditions), subparagraph C(1) of the policy states, â€