UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY : : : : : : : : : : : : : : : : : : : : :

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1 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 1 of 44 UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY U.S. SPECIALTY INSURANCE COMPANY, v. Plaintiff, AT&T CORP., Defendant. AT&T CORP., v. Counter-Plaintiff, U.S. SPECIALTY INSURANCE COMPANY, Counter-Defendant. : : : : : : : : : : : : : : : : : : : : : Civil Action No. 3:10-cv (GEB)(DEA) AT&T CORP. S ANSWER AND AFFIRMATIVE DEFENSES TO PLAINTIFF S COMPLAINT AND COUNTERCLAIM AGAINST U.S. SPECIALTY INSURANCE COMPANY Defendant AT&T Corp. ( AT&T ), by and through its attorneys, Reed Smith LLP, for its answer and affirmative defenses to the complaint of U.S. Specialty Insurance Company ( USSIC ), and for its counterclaim against USSIC, states as follows: ANSWER AND AFFIRMATIVE DEFENSES TO U.S. SPECIALTY S COMPLAINT 1. This is an action by USSIC pursuant to 28 U.S.C and 2202 for declaratory judgment regarding its rights and obligations under Excess Indemnity Policy No. 24-MGU-02-A3071 (the USSIC Excess Policy ), issued to defendant AT&T Corp. ( AT&T ), for the amended policy period of July 31, 2002 to November 18, A true and accurate copy of the USSIC Excess

2 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 2 of 44 Policy (excluding the Application) is attached hereto as Exhibit 1. AT&T admits that USSIC purports to bring this action pursuant to 28 U.S.C and 2202 for declaratory judgment regarding its rights and obligations under the USSIC Excess Policy issued to AT&T for the amended policy period of July 31, 2002 to November 18, AT&T denies that Exhibit 1 is a true and accurate copy of the USSIC Excess Policy. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 2. This action arises out of a now-settled lawsuit against AT&T and others captioned Richard Williamson, et al. v. AT&T Corp., et al., Case No. CV (Sup. Ct., Santa Clara, Cal.) (the Williamson Action ). AT&T contends that the Williamson Action asserts a so-called zone of insolvency claim that is covered under the USSIC Excess Policy, and AT&T has demanded coverage under the USSIC Excess Policy for this purported claim. AT&T admits that this action arises out of the nowsettled Williamson Action, that AT&T contends that the Williamson Action asserts a zone of insolvency claim that is covered under the USSIC Excess Policy, and that AT&T has demanded coverage under the USSIC Excess Policy for the zone of insolvency claim. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 3. In this action, USSIC seeks a declaration that the USSIC Excess Policy affords no coverage for the Williamson Action, including the so-called zone of insolvency claim purportedly alleged therein. Alternatively, USSIC seeks a declaration that it has no indemnification obligation under the - 2 -

3 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 3 of 44 USSIC Excess Policy in connection with the Williamson Action, including the so-called zone of insolvency claim, because the insurance policies underlying the USSIC Excess Policy have not been exhausted by the actual payment of losses by the underlying insurers as required for coverage under the USSIC Excess Policy. AT&T admits that USSIC seeks a declaration that the USSIC Excess Policy affords no coverage for the Williamson Action, including the zone of insolvency claim alleged therein. AT&T admits that USSIC seeks a declaration that it has no indemnification obligation under the USSIC Excess Policy in connection with the Williamson Action, including the zone of insolvency claim, on the purported basis that the insurance policies underlying the USSIC Excess Policy have not been exhausted by the actual payment of losses by the underlying insurers. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. The Parties 4. Plaintiff USSIC is a corporation organized and existing under the laws of Texas with its principal place of business in Houston, Texas. AT&T is informed and believes that the allegations in this paragraph are true and admits these allegations on this basis. 5. On information and belief, defendant AT&T is a corporation organized and existing under the laws of New York with its principal place of business in Bedminster, New Jersey. AT&T admits the allegations in this paragraph

4 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 4 of 44 Jurisdiction and Venue 6. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 1332(a)(1). There is complete diversity of citizenship between USSIC and AT&T, and the amount in controversy exceeds the sum of $75,000, exclusive of interest and costs. An actual controversy within the meaning of 28 U.S.C exists between the parties. AT&T admits that there is an actual controversy between the parties regarding the existence of coverage for the Williamson Action under the USSIC Excess Policy. The remaining allegations in this paragraph consist of legal conclusions as to which no response is required. Except as specifically admitted herein, the allegations of this paragraph are denied. 7. Venue is proper in this District pursuant to 28 U.S.C. 1391(a)&(c) in that the defendant resides in this District. AT&T admits that it has its principal place of business in this District. The remaining allegations in this paragraph consist of legal conclusions as to which no response is required. Except as specifically admitted herein, the allegations of this paragraph are denied. The USSIC Excess Policy 8. The USSIC Excess Policy is a fifth level excess policy that was initially issued to AT&T for the claims made policy period of July 31, 2002 to July 31, By operation of a Cancellation Endorsement, the policy period was amended to conclude on November 18, AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately state the provisions of the USSIC Excess Policy, which speaks for itself, - 4 -

5 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 5 of 44 but otherwise denies those allegations. 9. Subject to its terms, conditions, and limitations, the USSIC Excess Policy provides $10,000,000 in coverage excess of $50,000,000 (plus any applicable underlying retentions) of underlying insurance provided by the following insurance policies: (i) a $10,000,000 primary policy issued by National Union Fire Insurance Company of Pittsburgh, Pa. (the National Union 2002 Primary Policy ) (a true and accurate copy of the National Union 2002 Primary Policy is attached as Exhibit 2); (ii) a $10,000,000 excess policy issued by Continental Casualty Company (the Continental 2002 Excess Policy ) (a true and accurate Policy is attached as Exhibit 3); (iii) a $10,000,000 excess policy issued by Zurich American Insurance Company (the Zurich 2002 Excess Policy ) (a true and accurate copy of the Zurich 2002 Excess Policy is attached as Exhibit 4); (iv) a $10,000,000 excess policy issued by Greenwich Insurance Company (the Greenwich 2002 Excess Policy ) (a true and accurate copy of the Greenwich 2002 Excess Policy is attached as Exhibit 5); and (v) a $10,000,000 excess policy issued by Twin City Fire Insurance Company (the Twin City 2002 Excess Policy ) (a true and accurate copy of the Twin City 2002 Excess Policy is attached as Exhibit 6). The National Union 2002 Primary Policy and the insurance policies that are excess to the National Union 2002 Primary Policy, including the USSIC Excess Policy, are referred to herein as the 2002 AT&T Program. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately state the provisions of the insurance policies which USSIC refers to as the 2002 AT&T Program, which policies speak for themselves, but otherwise denies those allegations. AT&T denies that Exhibit 2 is a true and accurate copy of the National Union 2002 Primary Policy. AT&T denies that Exhibit 4 is a true and accurate copy of the 2002 Zurich Excess Policy. AT&T states that Exhibit 5 appears to be a true and correct copy of the Greenwich 2002 Excess Policy and admits this allegation on such basis. AT&T - 5 -

6 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 6 of 44 denies that Exhibit 6 is a true and correct copy of the Twin City 2002 Excess Policy. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 10. Except as specifically set forth in the terms, conditions, or endorsements of the USSIC Excess Policy, coverage under the USSIC Excess Policy applies in conformance with the terms, conditions, limitations, and endorsements of the [Twin City 2002 Excess Policy], except that coverage under the [USSIC Excess Policy] shall attach only after all Underlying Insurance has been exhausted by actual payment of claim or losses thereunder. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately state the provisions of the USSIC Excess Policy, which speaks for itself, but otherwise denies those allegations. follows: 11. The 2002 Twin City Excess Policy provides in part as A. This policy is subject to the same warranties, terms, conditions, definitions, exclusions and endorsements (except as regards the premium, the amount and limits of liability, and duty to defend and except as otherwise provided herein) as are contained in the policy of the Primary Insurer, together with all the warranties, terms, conditions, exclusions and limitations contained in or added by endorsement to any Underlying Excess Policy(ies). B. In no event shall this policy grant broader coverage than is provided by the most restrictive Primary or Underlying Excess Policy(ies). AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately state the provisions of the 2002 Twin City Excess Policy, which speaks for - 6 -

7 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 7 of 44 itself, but otherwise denies those allegations. 12. In addition to the 2002 AT&T Program, AT&T was insured under directors and officers liability insurance programs issued for the periods of July 1, 1997 to July 1, 2001 (the 1997 AT&T Program ), July 9, 2001 to July 9, 2002 (the 2001 AT&T Program ), and July 9, 2001 to July 9, 2007 (the 2001 AT&T Runoff Program ). USSIC does not participate in the 1997 AT&T Program, the 2001 AT&T Program, or 2001 AT&T Runoff Program. AT&T admits that in addition to the 2002 AT&T Program, AT&T was insured under directors and officers liability insurance programs for other periods of time, including what USSIC refers to as the 2001 AT&T Runoff Program in effect from July 9, 2001 to July 9, 2007, but denies that this paragraph accurately states the periods of time covered by what USSIC refers to as the 1997 AT&T Program or the 2001 AT&T Program. AT&T admits that USSIC does not participate in what USSIC refers to as the 1997 AT&T Program, the 2001 AT&T Program or the 2001 AT&T Runoff Program. Except as expressly admitted herein, the allegations of this paragraph are denied. The Pre-Policy Period Litigation 13. On or about March 28, 2000, AT&T, At Home Corporation ( At Home ), Comcast Corporation ( Comcast ), and Cox Communications ( Cox ) entered into a series of agreements pursuant to which AT&T acquired 25% of the outstanding shares of At Home s stock and approximately 74% of At Home s voting power (the March 2000 transactions ). At Home ultimately filed for bankruptcy protection on September 28, AT&T admits that on or about March 28, 2000, AT&T, At Home, Comcast and Cox, entered into a series of agreements, pursuant to which, among other things, AT&T acquired - 7 -

8 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 8 of 44 approximately 25 percent of the economic interest in At Home and approximately 74 percent of the voting interest in At Home and that these agreements, together with other agreements, sometimes are referred to as the March 2000 Transactions. AT&T admits that At Home filed for bankruptcy protection on September 28, Except as expressly admitted herein, the allegations of this paragraph are denied. 14. Prior to the inception of the 2002 AT&T Program, a number of lawsuits were filed regarding AT&T s involvement with At Home. These lawsuits include: (a) the action captioned Sheldon Pittleman v. At Home Corporation, et al., No. 1747NC (Del. Ch.) (the Pittleman Action ); (b) the lawsuits captioned Kevin Yourman v. At Home Corporation, et al., Case No (Sup. Ct., San Mateo, Cal.), Jerrold Schaffer v. At Home Corporation, et al., Case No (Sup. Ct., San Mateo, Cal.), and Linda Ward, et al. v. At Home Corporation, et al., Case No (Sup. Ct., San Mateo, Cal.), which were subsequently consolidated under the caption In re At Home Corp. Stockholders Litigation Master File No (Sup. Ct., San Mateo, Cal.) (the San Mateo Action ); and (c) the lawsuits captioned Frieda Eksler, et al. v. AT&T Corporation, et al., No. 02 CV 2078 (S.D.N.Y.), Channa Unger v. AT&T Corporation, et al., No. 02 CV 1976 (S.D.N.Y.), and Semen Leykin v. AT&T Corporation, et al., No. 02 CV 1765 (S.D.N.Y), which were subsequently consolidated under the referenced Leykin caption (the Leykin Action ). AT&T admits that subparts (a), (b) and (c) of this paragraph accurately identify the captions of certain lawsuits that were filed prior to July 31, 2002 and that certain of these lawsuits were consolidated as set forth in subparts (b)and (c) of this paragraph. Except as expressly admitted herein, AT&T - 8 -

9 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 9 of 44 denies the allegations in this paragraph. 15. On information and belief, the Pittleman Action, the San Mateo Action, and the Leykin Action were noticed under one or more insurance policies issued as part of the 1997 AT&T Program, the 2001 AT&T Program, and/or the 2001 AT&T Runoff Program. AT&T admits that one or more carriers that provided insurance policies issued as part of the 1997 AT&T Program, the 2001 AT&T Program, and/or the 2001 AT&T Runoff Program were notified of the Pittleman Action, the San Mateo Action, and the Leykin Action. Except as expressly admitted herein, the allegations of this paragraph are denied. The Williamson Action 16. On November 7, 2002, the Trustee for the At Home Bondholders Liquidating Trust, Richard Williamson, filed the original complaint in the above-referenced Williamson Action. On or about June 23, 2003, a first amended complaint was filed in the Williamson Action. AT&T admits the allegations in this paragraph. 17. As foreshadowed and predicted in the earlier Pittleman Action and San Mateo Action, the Williamson Action generally alleged that AT&T used the March 2000 transactions to gain control over At Home and then, over the next two years, improperly advanced its own interests at the expense of At Home. AT&T denies the allegations of this paragraph. 18. Among other things, the plaintiff in the Williamson Action alleged as follows: [O]ver a two year period, AT&T and the other defendants contravened every principle of corporate governance upon which our system depends. For two years, AT&T exercised a stranglehold on the Board of Directors of - 9 -

10 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 10 of 44 now bankrupt At Home Corporation. AT&T found itself in a situation rife with conflicts of interest. AT&T controlled At Home s Board. AT& was At Home s most important vendor and owned the `backbone for At Home s network. AT&T customers comprised approximately 25%-30% of At Home s subscriber base. AT&T resolved its conflicts of interest caused by multiple relationships with At Home (its controlling shareholder, principle vendor and major customer) by what was good for AT&T, not At Home. At every critical juncture in At Home s two year road to bankruptcy, AT&T and its director designees to the At Home Board chose what was in AT&T s best interests without regard to the fiduciary duties they owed to At Home as controlling shareholder and as directors. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately state the allegations made by the plaintiff in the Williamson Action, which allegations speak for themselves. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 19. Before the Williamson Action was filed, At Home s bondholders moved to stay the San Mateo Action on the grounds that the San Mateo plaintiffs claims were derivative claims belonging to the At Home bankruptcy estate. AT&T admits that before the Williamson Action was filed, the Official Committee of Unsecured Bondholders of At Home Corporation filed a motion to stay the San Mateo Action, but otherwise denies the allegations of this paragraph. 20. In a written decision dated September 10, 2002, the United States Bankruptcy Court for the Northern District of California granted the motion to stay on the grounds that the

11 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 11 of 44 claims in the San Mateo Action belong to [At Home] and cannot be asserted where [At Home] has asserted similar claims itself and objects to the shareholders asserting separate claims. The bankruptcy court held that the San Mateo Action sought damages from the same March 28, 2000 agreement between AT&T, Cox, and Comcast, and [At Home] that forms the basis for the contemplated Williamson Action. The bankruptcy court further held that the harm alleged by the plaintiffs in the San Mateo Action is closely intertwined with the harm alleged by the bondholders; and that the proposed Williamson Action would be against the same defendants for the same acts alleged in the San Mateo Action. AT&T admits that the United States Bankruptcy Court for the Northern District of California issued a September 10, 2002 memorandum granting the motion of the Official Committee of Unsecured Bondholders of At Home Corporation to stay the San Mateo Action, which memorandum speaks for itself, and admits the remaining allegations of this paragraph only insofar as and to the extent that they accurately state the content of that memorandum. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 21. The bankruptcy court s ruling was subsequently affirmed by both the United States District Court for the Northern District of California, in a decision dated September 29, 2003, and the United States Court of Appeals for the Ninth Circuit, in a decision dated November 23, AT&T admits the allegations of this paragraph. 22. Both in the bankruptcy court before the Williamson Action was filed, and later in the Ninth Circuit after the Williamson Action was filed, AT&T filed briefs, dated August 23, 2002 and March 29, 2004, respectively, in support of the motion to stay based on the substantial overlap between the two cases. Among other things, AT&T successfully argued that the San Mateo Action and the Williamson Action:

12 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 12 of 44 involve identical allegations of fact, an identical claim for breach of fiduciary duty, and identical prayers for relief. Were the two cases allowed to proceed simultaneously, the substantial overlap between them would create a serious risk of conflicting rulings of fact and law... And obviously, it would be a wasteful and inefficient use of scarce judicial and party resources to allow duplicative claims to go forward in two courts at once. AT&T denies that it filed a brief dated August 23, 2002 in either the bankruptcy court or the Ninth Circuit. AT&T admits that its outside counsel filed a brief dated March 29, 2004 in the United States Court of Appeals for the Ninth Circuit, which brief speaks for itself, and admits the allegations of this paragraph regarding that brief only insofar as and to the extent that they accurately characterize the contents of the brief, but otherwise denies such allegations. Except as expressly admitted herein, the allegations of this paragraph are denied. 23. On May 3, 2005, AT&T announced that it had settled the Williamson Action and a separate patent infringement brought by the bondholders liquidating trust against AT&T captioned Williamson v. AT&T Corp., No C (ND. Cal.). On information and belief, AT&T, under the terms of the settlement, paid $340,000,000 and provided a release of $60,000,000 with respect to claims that AT&T had asserted in the At Home bankruptcy. On information and belief, Comcast, in turn, paid AT&T $170,000,000 in connection with the settlement. AT&T admits the allegations in this paragraph. 24. On or about May 5, 2005, the At Home Bondholders Liquidating Trust filed a motion and accompanying papers seeking approval of the settlement. On or about June 27, 2005, the

13 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 13 of 44 bankruptcy court approved the settlement. AT&T admits the allegations in this paragraph. AT&T s Coverage Action Against Certain Other Insurers 25. On or about November 16, 2004, AT&T filed a lawsuit, captioned AT&T Corp. v. Clarendon Ins. Co., C.A. No. 04C (JRJ) (Del. Super.), seeking coverage for the Williamson Action and the Leykin Action (the Coverage Action ). USSIC was not a party to the Coverage Action. In the Coverage Action, AT&T subsequently amended its complaint to seek recovery of the amount it paid to settle the Williamson Action and the attorneys fees and costs it allegedly incurred in connection with the Leykin Action. AT&T sought recovery for these amounts under one or more of the 2001 AT&T Program, the 2001 AT&T Runoff Program, and from one insurer in the 2002 AT&T Program (National Union Fire Insurance Company of Pittsburgh, Pa.). AT&T also sought coverage under various insurance programs issued to At Home. AT&T admits that it filed the Coverage Action on or about November 16, 2004 and that USSIC was not a party to the Coverage Action. AT&T admits the remaining allegations of this paragraph only insofar as and to the extent that they accurately characterize the allegations in the initial and amended complaints in the Coverage Action, which allegations speak for themselves. Except as expressly admitted herein, the allegations of this paragraph are denied. 26. In the Coverage Action, the insurers moved for summary judgment. In connection with the summary judgment motions, AT&T argued that each misrepresentation or omission alleged in the Williamson Action and the Leykin Action constituted a separate claim. As the trial court observed, AT&T made this argument in an effort to spread coverage for the [Williamson and Leykin] Actions over multiple policy periods. AT&T argued that the Leykin Action alleged at least fifteen separate claims, while the Williamson Action alleged a numerous but unspecified number of claims

14 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 14 of 44 AT&T admits that the insurers moved for summary judgment in the Coverage Action. AT&T admits the remaining allegations in this paragraph only insofar as and to the extent that they accurately characterize the arguments made by AT&T in the Coverage Action and the trial court s statements in the Coverage Action, which arguments and statements speak for themselves. Except as expressly admitted herein, the allegations of this paragraph are denied. 27. In an opinion dated April 13, 2006, the court granted the insurers motions for summary judgment. See AT&T Corp. v. Clarendon Ins. Co., C.A. No. 04C (JRJ), 2006 Del. Super. LEXIS 543 (Del. Super. Apr. 13, 2006). In its opinion, the court rejected, as nonsensical, AT&T s argument that claims equated to wrongful acts. Instead, the court agreed with the insurers that the Williamson Action and Leykin Action each constituted single claims that were based upon and related to the wrongdoing at issue in the earlier-filed Pittleman Action and San Mateo Action. The court thus concluded that the Williamson Action and the Leykin Actions were properly deemed first-made during the policy period of the 1997 AT&T Program. AT&T admits that the trial court granted the insurers motions for summary judgment in an opinion dated April 13, 2006, but further states that the trial court s opinion was reversed by the Delaware Supreme Court. AT&T admits the remaining allegations in this paragraph only insofar as and to the extent that they accurately quote the trial court s subsequently reversed April 13, 2006 opinion, which opinion speaks for itself. Except as expressly admitted herein, the allegations of this paragraph are denied

15 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 15 of Based on the nexus between the Williamson Action and Leykin Action, on the one hand, and the Pittleman Action and the San Mateo Action, on the other, the court also held that coverage under the policies in the post programs was precluded under the policies prior notice, prior acts, and prior and pending exclusions. AT&T admits the allegations in this paragraph only insofar as and to the extent that they accurately characterize the trial court s subsequently reversed April 13, 2006 opinion, which opinion speaks for itself. Except as expressly admitted herein, the allegations of this paragraph are denied. 29. In a ruling dated February 5, 2007, the Delaware Supreme Court reversed in part the trial court s decision. See AT&T Corp. v. Faraday Capital Ltd., 918 A.2d 1104 (Del. 2007). In its ruling, the Delaware Supreme Court disagreed with the trial court s determination that the Williamson Action and the Leykin Actions each necessarily constituted a single claim. The Delaware Supreme Court did not modify any of the trial court s other findings, including its findings regarding the nexus between the wrongdoing alleged in the Williamson, Leykin, Pittleman, and San Mateo Actions. AT&T admits that the February 5, 2007 ruling by the Delaware Supreme Court reversed, in part, the trial court s decision. AT&T admits the remaining allegations in this paragraph only insofar as and to the extent that they accurately characterize the Delaware Supreme Court s February 5, 2007 ruling. In this regard, AT&T notes that the Delaware Supreme Court s February 5, 2007 ruling specifically states that the trial court s other determinations... were based on the incorrect premise that each lawsuit constituted one claim and thus cannot be read to leave standing the trial court s other

16 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 16 of 44 findings, as incorrectly alleged by USSIC in this paragraph. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 30. The Delaware Supreme Court remanded the Coverage Action back to the trial court. In a letter to the trial court dated March 9, 2007, AT&T argued that the Williamson Action constitutes four separate claims: (1) a zone of insolvency claim; (2) a misappropriation of technology and information claim; (3) a financing/financial condition claim; and (4) a March 2000 Transaction challenge claim. AT&T admits the allegations in the first sentence of this paragraph. AT&T admits that its outside counsel sent a letter to the trial court dated March 9, 2007, but admits the remaining allegations in this paragraph only insofar as and to the extent that they accurately characterize AT&T s March 9, 2007 correspondence to the trial court, which correspondence speaks for itself. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 31. In a December 4, 2008 Pretrial Stipulation and Order, AT&T described the so-called zone of insolvency claim as follows: The Zone of Insolvency Claim in Williamson sought recovery as a result of AT&T s alleged build or buy strategy (i.e., the strategy by AT&T to either build its own network or buy At Home s network on the cheap ) and alleged wrongful delay in At Home s bankruptcy filing in connection with this strategy. This Claim alleged that defendants AT&T, Armstrong, Noski, Petrillo, Cinali and Ianna breached their fiduciary duties after At Home entered the zone of insolvency in August 2001 by trying to acquire the assets of At Home s for less

17 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 17 of 44 than their fair value and by delaying At Home s bankruptcy filing in order to facilitate AT&T s building of an alternative network. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately quote portions of a joint draft Pretrial Stipulation and Order filed by the remaining parties to the Coverage Action on December 4, 2008, but otherwise denies the allegations in this paragraph. AT&T s Demand For Coverage For The Williamson Action 32. By letter dated December 5, 2002, AT&T, through its broker, provided notice of the Williamson Action, as a single claim, to the insurers on the 2002 AT&T Program, including USSIC. In subsequent correspondence, USSIC acknowledged receipt of, and reserved its rights with respect to, the Williamson Action and requested copies of the coverage positions of the underlying insurers on the 2002 AT&T Program. AT&T admits that its broker notified insurers on the 2002 AT&T Program of the Williamson Action by letter dated December 5, 2002, but otherwise denies the allegations of the first sentence of this paragraph. AT&T admits the allegations in the second sentence of this paragraph only insofar as and to the extent that they accurately characterize the unidentified correspondence, but otherwise denies those allegations. Except as expressly admitted herein, AT&T denies the allegations of this paragraph. 33. In a letter to AT&T s coverage counsel dated June 29, 2005, USSIC further addressed the operation of the USSIC Excess Policy in connection with the Williamson Action. The June 29, 2005 letter noted that USSIC had not been provided all of the

18 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 18 of 44 underlying insurers coverage letters with respect to the Williamson Action. Nevertheless, in the June 29, 2005 letter, USSIC advised that it appears, based on the information we have received, including but not limited to the primary insurer s coverage position dated April 25, 2003, that there is no coverage afforded under the USSIC [Excess] [P]olicy for this claim. AT&T admits the allegations in this paragraph only insofar as and to the extent that they accurately characterize the referenced correspondence, but otherwise denies those allegations. Except as expressly admitted herein, the allegations of this paragraph are denied. 34. On information and belief, AT&T has entered into settlements with one or more of the underlying insurers on the 2002 AT&T Program (each of whom, unlike USSIC, also participates in other insurance programs implicated or potentially implicated by the Williamson Action). On information and belief, these settlements have not exhausted the underlying policies on the 2002 AT&T Program. In response to requests from USSIC, AT&T has refused to advise USSIC what, if any, amounts the underlying insurers on the 2002 AT&T Program have paid under their policies in connection with the Williamson Action. AT&T admits that it has entered into settlements with one or more of the underlying insurers on the 2002 AT&T Program and that AT&T has declined to provide USSIC with confidential, protected information regarding those settlements. The allegations in this paragraph regarding whether other insurance programs are implicated or potentially implicated by the Williamson Action state legal conclusions as to which no response is required. Except as expressly admitted herein, AT&T denies the allegations in this paragraph and expressly states

19 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 19 of 44 that the underlying policies of the 2002 AT&T Program have been exhausted. 35. In a letter from AT&T s coverage counsel to USSIC, dated May, 1, 2009, AT&T argued that it is entitled to coverage under the 2002 AT&T Program for the so-called zone of insolvency claim asserted in the Williamson Action. Without identifying a specific amount, the May 1, 2009 letter asserted that AT&T s loss from the Zone of Insolvency Claim exceeds $100 million. The May 1, 2009 letter declined to identify what, if any, amounts the underlying insurers on the 2002 AT&T Program have paid towards the Williamson Action and effectively conceded that the underlying insurers have not paid the full limits of their policies ($50,000,000, excess of any applicable retentions) in covered losses. Nevertheless, the May 1, 2009 letter demanded payment by USSIC under the USSIC Excess Policy for the so-called zone of insolvency claim. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize a May 1, 2009 letter from AT&T s coverage counsel to USSIC, which speaks for itself, but otherwise denies the allegations in this paragraph. 36. USSIC addressed AT&T s demand for coverage for the socalled zone of insolvency claim in subsequent written communications, including a letter dated November 12, Among other things, the November 12, 2009 letter advised that the USSIC Excess Policy does not afford coverage for the Williamson Action, including the so-called zone of insolvency claim purportedly alleged therein. AT&T admits that AT&T s coverage counsel received a letter from USSIC s coverage counsel dated November 12, 2009, which letter speaks for itself, and admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the content of that letter. Except as

20 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 20 of 44 expressly admitted herein, the allegations of this paragraph are denied. COUNT I Declaratory Judgment Regarding Coverage Under the USSIC Excess Policy (Pre-policy period claim) 37. USSIC repeats and incorporates by reference the allegations in paragraphs 1 through 36 of this Complaint. As its answer to this paragraph, AT&T repeats and incorporates by reference its response to paragraphs 1 through 36 above as though fully set forth herein. 38. Subject to its terms and conditions, the USSIC Excess Policy only provides coverage for claims first-made during the amended policy period of July 31, 2002 to November 18, AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the terms and conditions of USSIC Excess Policy, which speaks for itself, but otherwise denies those allegations. 39. By incorporation of the terms of the underlying insurance, the USSIC Excess Policy provides that [c]laims reported to the Insurer alleging the same or related Wrongful Acts shall be considered reported to the Insurer at the time and during the policy period when the first such Claim was reported. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the coverage of the USSIC Excess Policy, which speaks for itself, but otherwise denies those allegations. 40. By incorporation of the terms of the underlying

21 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 21 of 44 insurance, the USSIC Excess Policy defines Claim as, among other things, a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non-monetary or injunctive relief which is commenced by: (i) service of a complaint or similar pleading; (ii) return of an indictment, information or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately quote a portion of definition of the term Claim, which definition speaks for itself, but otherwise denies those allegations. 41. The Williamson Action constitutes a single claim that alleges the same or related Wrongful Acts alleged in the Pittleman Action and the San Mateo Action. The Pittleman Action and the San Mateo Action were first-made and reported prior to the inception of the USSIC Excess Policy. The Williamson Action is thus properly deemed a claim first-made prior to the inception of the USSIC Excess Policy. The allegations in this paragraph state legal conclusions as to which no response is required. To the extent that any response is required, AT&T admits the allegation in the second sentence of this paragraph, but denies all remaining allegations of this paragraph. 42. The Williamson Action does not constitute four separate claims, including a separate zone of insolvency claim. Even if the Williamson Action asserts a separate zone or insolvency claim, this purported claim alleges the same of related Wrongful Acts alleged in the Pittleman Action and the San Mateo Action. Thus, to the extent there is a zone of insolvency claim, this purported claim is properly deemed a claim first-made prior to the inception of the USSIC Excess Policy. The allegations in this paragraph state legal conclusions as to which no response is required. To the extent

22 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 22 of 44 that any response is required, AT&T denies the allegations of this paragraph. 43. Accordingly, there is no coverage under the USSIC Excess Policy for the Williamson Action, including the so-called zone of insolvency claim purportedly alleged therein, and USSIC is entitled to a declaration to this effect. The allegations in this paragraph state legal conclusions as to which no response is required. To the extent that any response is required, AT&T denies the allegations of this paragraph. COUNT II Declaratory Judgment Regarding Coverage Under the USSIC Excess Policy (Prior Acts Exclusion) 44. USSIC repeats and incorporates by reference the allegations in paragraphs 1 through 43 of this Complaint. As its answer to this paragraph, AT&T repeats and incorporates by reference its response to paragraphs 1 through 43 above as though fully set forth herein. 45. The Twin City 2002 Excess Policy contains a prior acts exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the prior acts exclusion precludes coverage for any claim: where all or part of such claim is, directly or indirectly, based on, attributable to, arising out of, resulting from or in any manner relating to wrongful acts committed, attempted, or allegedly committed or attempted prior to 7/09/01. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize

23 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 23 of 44 the referenced insurance policies, which speak for themselves, but otherwise denies those allegations. 46. The National Union 2002 Primary Policy contains a prior acts exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the prior acts exclusion provides that: the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against a Insured alleging any Wrongful Act occurring prior to July 9, 2001 or after the end of the Policy Period. This policy only provides coverage for Wrongful Acts occurring on or after July 9, 2001 and prior to the end of the Policy Period and otherwise covered by this policy. Loss arising out of the same or related Wrongful Act shall be deemed to arise from the first such same or related Wrongful Act. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the referenced insurance policies, which speak for themselves, but otherwise denies those allegations. 47. The Williamson Action is directly or indirectly based on, attributable to, arises out of, results from or in any manner relates to wrongful acts committed, attempted, or allegedly committed or attempted prior to July 9, The allegations in this paragraph state legal conclusions to which no response is required. To the extent that any response is required, AT&T denies the allegations of this paragraph. 48. The Williamson Action does not constitute four separate claims, including a separate zone of insolvency claim. Even if the Williamson Action asserts a separate zone of insolvency claim, this purported claim is directly or indirectly

24 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 24 of 44 based on, attributable to, arises out of, results from or in any manner relates to wrongful acts committed, attempted, or allegedly committed or attempted prior to July 9, The allegations in this paragraph state legal conclusions to which no response is required. To the extent that any response is required, AT&T denies the allegations of this paragraph. 49. Accordingly, there is no coverage under the USSIC Excess Policy for that Williamson Action, including the socalled zone of insolvency claim purportedly alleged therein, and USSIC is entitled to a declaration to this effect. The allegations in this paragraph state legal conclusions to which no response is required. To the extent that any response is required, AT&T denies the allegations of this paragraph. COUNT III Declaratory Judgment Regarding Coverage Under the USSIC Excess Policy (Prior Notice Exclusion) 50. USSIC repeats and incorporates by reference the allegations in paragraphs 1 through 49 of this Complaint. As its answer to this paragraph, AT&T repeats and incorporates by reference its response to paragraphs 1 through 49 above as though fully set forth herein. 51. The Twin City 2002 Excess Policy contains a prior notice exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the prior notice exclusion precludes coverage for any claim: where all or part of such claim is, directly or indirectly, based on, attributable to,

25 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 25 of 44 arising out of, resulting from or in any ma[nn]er relating to wrongful acts or any facts, circumstances or situations of which notice of claim or occurrence which could give rise to a claim has been given prior to the effective date of this policy under any other policy or policies. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the Twin City 2002 Excess Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph. 52. The Greenwich 2002 Excess Policy contains a prior notice exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the prior notice exclusion precludes provides that: the Insurer shall not be liable to make any payment for loss or damages in connection with any claim based upon, arising oat, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, situation, transaction, event or wrongful act, which, before the Inception Date of this Policy, was the subject of any notice given under any other Management Liability Insurance Policy, Directors and Officers Liability Insurance Policy, Employment Practices Liability Policy or any similar insurance policy. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the Greenwich 2002 Excess Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph

26 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 26 of The National Union 2002 Primary Policy contains a prior notice exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the prior acts exclusion precludes coverage for any claim: alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the National Union 2002 Primary Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph. 54. Prior to the effective date of the USSIC Excess Policy, the Pittleman Action and the San Mateo Action were noticed-under or more of the policies in the 1997 AT&T Program, the 2001 AT&T Program, and/or the 2001 AT&T Runoff Program. AT&T admits that prior to July 31, 2002, one or more insurers that provided coverage under the 1997 AT&T Program were notified of the Pittleman Action. Except as expressly admitted herein, the allegations of this paragraph are denied. 55. The Williamson Action alleges and is directly or indirectly based on, attributable to, arises out of, in consequence of; results from or in any manner relates to or involves wrongful acts, facts, circumstances, situations, transactions or events that were the subject of the Pittleman Action and the San Mateo Action. The allegations in this paragraph state legal conclusions to which no response is required. To the extent

27 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 27 of 44 that a response is required, AT&T denies the allegations in this paragraph. 56. The Williamson Action does not constitute four separate claims, including a separate zone of insolvency claim. Even if the Williamson Action asserts a separate zone of insolvency claim, this purported claim alleges and is directly or indirectly based on, attributable to, arises out of, in consequence of, results from or in any manner relates to or involves wrongful acts, facts, circumstances, situations, transactions or events that were the subject of the Pittleman Action and the San Mateo Actions. The allegations in this paragraph state legal conclusions to which no response is required. To the extent that a response is required, AT&T denies the allegations in this paragraph. 57. Accordingly, there is no coverage for the Williamson Action, including the so-called zone of insolvency claim purportedly alleged therein, and USSIC is entitled to a declaration to this effect. The allegations in this paragraph state legal conclusions to which no response is required. To the extent that a response is required, AT&T denies the allegations in this paragraph. COUNT IV Declaratory Judgment Regarding Coverage Under the USSIC Excess Policy (Pending and Prior Litigation Exclusion) 58. USSIC repeats and incorporates by reference the allegations in paragraphs 1 through 57 of this Complaint. AT&T repeats and incorporates by reference its response to paragraphs 1 through 57 of this Complaint as if set

28 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 28 of 44 forth here in full. 59. The Twin City 2002 Excess Policy contains a pending and prior litigation exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the pending and prior litigation exclusion precludes coverage for any claim: 1. arising from any litigation, claims, demands, arbitration, legal or quasi-legal proceedings, decrees or judgments against any Insured occurring prior to, or pending of as of, 7/09/01, of which any Insured had received notice or otherwise had knowledge as of such date; 2. arising from any subsequent litigation, claims, demands, arbitration, legal or quasi-legal proceedings, decrees or judgments against any Insured arising from, or based on substantially the same matters as alleged in the pleadings of such prior or pending litigation, claims demands, arbitration, legal or quasi-legal proceedings, decree or judgments against any Insured; or 3. arising from any act of an Insured which gave rise to such prior or pending litigation, claims, demands, arbitration, legal or quasi-legal proceedings, decrees or judgments against any Insured. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the Twin City 2002 Excess Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph. 60. The Greenwich 2002 Excess Policy contains a pending and prior litigation exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and condition, the pending and prior litigation exclusion provides that:

29 Case 3:10-cv GEB -DEA Document 7 Filed 02/11/10 Page 29 of 44 no coverage will be available under this Policy for claims based upon, arising out, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, situation, transaction event or wrongful act, underlying or alleged in any prior and/or pending litigation or administrative or regulatory proceeding or arbitration which was brought prior to July 9, AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the Greenwich 2002 Excess Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph. 61. The Continental 2002 Excess Policy contains a pending and prior litigation exclusion that is incorporated into the USSIC Excess Policy. Subject to its terms and conditions, the pending and prior litigation exclusion provides that the Insurer shall not be liable to make payment for loss in connection with any claim based up indirectly resulting from, or in consequence of, or in any way involving: Any fact, circumstance, situation, transacts n or event underlying or alleged in any prior and/or pending litigation as of 7/09/2001, regardless of the legal theory upon which such litigation is predicated. AT&T admits the allegations of this paragraph only insofar as and to the extent that they accurately characterize the Continental 2002 Excess Policy and the USSIC Excess Policy, which policies speak for themselves, but otherwise denies the allegations in this paragraph. 62. The National Union 2002 Primary Policy contains a pending and prior litigation exclusion that is incorporated into