Of the Federal Circuit, sitting by designation. *

United States Court of Appeals

For the First Circuit

No. 09-2485

GENZYME CORPORATION,

Plaintiff-Appellant,

v.

FEDERAL INSURANCE COMPANY, 

Defendant-Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nancy Gertner, U.S. District Judge]

Before

Boudin, Dyk, and Thompson, Circuit Judges. *

Robert G. Jones and John D. Donovan, Jr., with whom Peter L.

Welsh, Katherine A.K. Mumma, Elizabeth E. Feeherry, and Ropes &

Gray LLP were on brief for appellant.

Daniel J. Standish, with whom Marc E. Rinder, Howard Anglin,

and Wiley Rein LLP were on brief for appellee.

October 13, 2010
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DYK, Circuit Judge. Genzyme Corporation (“Genzyme”)

appeals from a district court order dismissing Genzyme’s complaint

against Federal Insurance Company (“Federal”) for failure to state

a claim. Genzyme sought to recover its costs in settling a

shareholder class action under a corporate and director and officer

liability insurance policy (“the policy”) issued to Genzyme by

Federal. Federal denied coverage and Genzyme sued, seeking damages

of $10 million plus other relief. The district court held that

Genzyme’s loss was not insurable as a matter of Massachusetts

public policy. We disagree with this conclusion. In the

alternative, the district court held that Genzyme was precluded

from recovering under the terms of the policy’s so-called “Bump-Up”

clause for any amount paid to settle claims. We agree with the

district court that the policy does not cover the amount paid to

settle claims against the corporation. However, we hold that the

policy does cover any settlement amounts paid pursuant to an

indemnification obligation with respect to the directors and

officers. Because a portion of the settlement amount may have been

paid to settle claims against the directors and officers, we remand

to the district court to consider the question of allocation.

I.

A.

Genzyme is a biotechnology corporation organized under

the laws of the Commonwealth of Massachusetts. From 1994 to 2003,
The share exchange provision provided as follows: 1

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Genzyme’s capital structure included “tracking stock” designed to

track the performance of particular business divisions rather than

the company as a whole. From December 2000 through June 2003,

three series of Genzyme tracking stock were outstanding, one each

for the General Division (which traded under the ticker symbol

GENZ), the Biosurgery Division (which traded as GZBX), and the

Molecular Oncology Division (which traded as GZMO). Each of these

tracking stocks was a series of Genzyme’s common stock. Genzyme

allocated the performance of programs, assets, and liabilities to

each division. However Genzyme owned the divisional assets and was

responsible for all liabilities. Therefore, though the tracking

stocks reflected the financial performance of the separate

divisions, the divisions themselves were not separate entities.

Each division was owned directly by Genzyme and holders of the

tracking stock were holders of a single class of Genzyme’s stock

and possessed voting rights in Genzyme as a whole. Each of these

tracking stocks was registered under the Securities Exchange Act of

1934 and traded under its own symbol on the NASDAQ Exchange.

Genzyme’s Articles of Organization (“Articles”) contained

an optional share exchange provision which permitted Genzyme to

eliminate its tracking stock structure by requiring Biosurgery

Division and Molecular Oncology Division shareholders to exchange

their shares either for General Division shares or for cash.1
The Board of Directors may at any time . . . in one

transaction or a series of related transactions, by

[Genzyme] and/or its subsidiaries of all or substantially

all the properties and assets allocated to Genzyme

Biosurgery Division to any other Division of Genzyme (A

“GBS Reallocation”), declare that each of the outstanding

shares of GBS stock shall be exchanged, on an Exchange

Date, as determined by the Board of Directors, for (a) a

number of fully paid and nonassessable shares of [Genzyme

General Division] stock . . . equal to (1) 130% of the

Fair Market Value of one share of the GBS stock (the “GBS

Optional Exchange Amount”) as of the date of the first

public announcement by [Genzyme] (the “GBS Optional

Exchange Announcement Date’) of such exchange divided by

(2) the Fair Market Value of one share of [Genzyme

General Division] stock as of such GBS Optional Exchange

Announcement Date or (b) cash equal to the GBS Optional

Exchange Amount, or (c) any combination of [Genzyme

General Division] Stock and cash equal to the GBS

Optional Exchange Amount as determined by the Board of

Directors. 

J.A. 96. 

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The Articles specified that each division shareholder would receive

shares of General Division stock equal to 130% of the “fair market

value” of the tracking stock in any share exchange. The Articles

defined “fair market value” as the average closing price of GZBX or

GZMO stock during a twenty-day period commencing thirty days prior

to the announcement of a share exchange.

On May 8, 2003, Genzyme announced that it had decided to

invoke the exchange provisions in the Articles and thereby

eliminate the tracking stocks. We refer to this as the “share

exchange.” In particular, Genzyme announced that it would exchange

each Biosurgery Division and Molecular Oncology Division share for

a certain number of General Division shares, leaving the General
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Division shares as the only outstanding common stock of the

corporation. The share exchange was carried out on June 30, 2003.

Each Biosurgery Division shareholder received 0.04914 shares of

GENZ stock per share of GZBX stock. Genzyme itself received

nothing in the exchange, other than cancellation of the tracking

stock.

The share exchange was unpopular with many Biosurgery

Division Shareholders and soon after it was announced, a number of

shareholder lawsuits were filed against Genzyme, its board of

directors, and its officers. One of these cases was filed in the

United States District Court for the Southern District of New York

against Genzyme, its directors, and two of its officers. That

court certified a class consisting of those persons who held shares

of GZBX stock when, after the market closed on May 8, 2003, Genzyme

announced the share exchange. On August 6, 2007, Genzyme agreed to

settle all of the class members’ claims against the company and

against its directors and officers by making a one-time payment of

$64 million. The entirety of the settlement payment was paid by

Genzyme. Genzyme now seeks to recover from Federal for the

settlement payment in the amount of $10 million, the maximum

recovery allowed under the policy. Although at least some of

Genzyme’s theories might also allow it to recover litigation costs

in the shareholder suit, Genzyme does not seek to recover those
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costs, presumably because the settlement costs ($64 million) exceed

the $10 million policy cap.

B.

An understanding of the claims made by the plaintiffs in

the class action is integral to an understanding of the dispute

between Genzyme and Federal. The operative complaint at the time

of settlement, the Fourth Amended Class Action Complaint, alleged

that the creation of Genzyme’s Biosurgery Division tracking stock

was a product of its merger with Biomatrix, Inc. (“Biomatrix”), an

independent biomaterials company. This merger combined the assets

of Biomatrix with those of Genzyme’s Surgical Product Division and

Tissue Repair Division to create the Biosurgery Division. 

The class action plaintiffs alleged that Genzyme promised

at the time of the merger that it would operate Biosurgery as an

independent business reflected by tracking stock, but failed to do

so. In addition, the class action plaintiffs alleged that

Genzyme’s directors and officers managed the Biosurgery Division’s

corporate earnings and withheld positive information about the

Biosurgery Division in an effort to artificially depress the market

value of the GZBX stock so that Genzyme could fold the Biosurgery

Division into the General Division at an exchange rate that would

be favorable to General Division shareholders. Since the Articles

provided a fixed ratio of exchange which depended on the market

value of the Biosurgery Division shares, Genzyme could execute the
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share exchange with fewer General Division Shares by artificially

depressing the market value of the Biosurgery Division shares.

General Division shareholders would benefit from an exchange

executed by issuing the minimum number of new General Division

shares possible.

The class action plaintiffs alleged that Genzyme and its

officers and directors violated the securities laws by causing

Genzyme to engage in insider trading and by failing to disclose

material information to the public. They also alleged that the

directors and officers breached their fiduciary duties of loyalty,

candor, good faith, and due care to Genzyme shareholders, including

the Biosurgery Division shareholders. The class action plaintiffs

further alleged that Genzyme breached the implied covenant of good

faith with respect to the Articles of Organization and that Genzyme

breached the merger agreement it had executed with Biomatrix.

Finally, the class action plaintiffs alleged that Genzyme engaged

in unfair and deceptive trade practices under state law. The class

action plaintiffs alleged that the directors and officers would be

motivated to carry out such a scheme by virtue of the fact that

they themselves owned large numbers of General Division shares.

The class action in the underlying litigation involved

two sub-classes. The members of one sub-class sold their shares in

the open market after the share exchange was announced but before

June 30, 2003, when the share exchange occurred, and thus did not
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participate directly in the share exchange. The members of the

other sub-class transferred their shares pursuant to the share

exchange.

C.

On September 22, 2002, Federal issued the director and

officer and corporate liability insurance policy at issue to

Genzyme. The policy covers claims made during the period of

September 22, 2002, to September 22, 2003, the period during which

the class action plaintiffs’ complaints were filed. It limits

Federal’s liability to $10 million and is subject to a $15 million

deductible under Insuring Clause 2. Insuring Clause 2 covers

losses for which Genzyme grants indemnification to its directors

and officers. Insuring Clause 3 covers losses suffered by Genzyme

on account of securities claims. Insuring Clause 2 provides:

[Federal] shall pay on behalf of [Genzyme] all Loss for

which [Genzyme] grants Indemnification to each Insured

Person [i.e., Genzyme’s officers and directors], as

permitted or required by law, which the Insured Person

has become legally obligated to pay on account of any

Claim first made against him, individually or otherwise,

during the Policy Period . . . for a Wrongful Act

committed, attempted, or allegedly committed or attempted

by such Insured Person before or during the Policy

Period.

J.A. 179. Insuring Clause 3 provides:

[Federal] shall pay on behalf of [Genzyme] all Loss for

which it becomes legally obligated to pay on account of

any Securities Claim first made against it during the

Policy Period . . . for a Wrongful Act.
2 Federal explains that the term “Bump-Up” is used in the

insurance industry to describe litigation seeking to increase or

“bump-up” the consideration paid for a security.

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J.A. 69. The policy defines “Loss” as the “total amount which

[Genzyme or its officers and directors] become[] legally obligated

to pay on account of each Claim and for all Claims in each Policy

Period . . . made against them for Wrongful Acts for which coverage

applies, including, but not limited to damages, judgments,

settlements, costs and Defense Costs.” J.A. 51 (emphasis added).

The policy also provides that “Loss” does not include “matters

uninsurable under the law pursuant to which [the policy] is

construed.” Id. 

The policy also contains a “Bump-Up” provision which 2

provides that:

[Federal] shall not be liable under Insuring Clause 3 for

that part of Loss, other than Defense Costs, which is

based upon, arising from, or in consequence of the actual

or proposed payment by any Insured Organization of

allegedly inadequate or excessive consideration in

connection with its purchase of securities issued by

[Genzyme].

J.A. 71 (emphases added). By its terms, the Bump-Up exclusion only

applies to claims made against Genzyme that implicate Insuring

Clause 3. The policy does not define the term “purchase of

securities.”

The policy also contains an “Allocation” provision which

provides as follows:

If a Securities Claim covered, in whole or in part, under

Insuring Clauses 2 or 3 results in any [director or
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officer] under Insuring Clause 2 or [Genzyme] under

Insuring Clause 3 incurring both Loss covered hereunder

and loss not covered hereunder, because such Securities

Claim includes both covered and uncovered matters, [the

parties] shall allocate such amount to Loss as follows:

1. 100% of such amount constituting Defense Costs

shall be allocated to covered Loss; and

(ii) 100% of such amount other than Defense Costs shall

be allocated to covered Loss.

(iii)Notwithstanding [(i) and (ii)], [the parties] shall

allocate that part of Loss subject to [certain

exclusions, including the Bump-Up clause] based

upon the relative legal exposure of the [directors

and officers and Genzyme].

J.A. 71.

D.

Genzyme sought indemnification from Federal under the

policy. Federal denied coverage, stating that the settlement

payment is not an insurable loss under the policy. Genzyme filed

suit against Federal in the Massachusetts state courts, and the

case was removed to the United States District Court for the

District of Massachusetts. Genzyme alleged (1) that Federal

breached its contract with Genzyme by denying coverage; (2) that

Federal breached the implied covenant of good faith and fair

dealing; and (3) that Federal engaged in unfair and deceptive acts

and practices, in violation of Mass. Gen. Laws chs. 93A and 176D.

Federal moved to dismiss Genzyme’s complaint under

Federal Rule of Civil Procedure 12(b)(6) on the grounds that it

failed to state a claim upon which relief can be granted. On

September 28, 2009, the district court dismissed the suit. Genzyme
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Corp. v. Federal Ins. Co., 657 F. Supp. 2d 282 (D. Mass. 2009).

The district court found that the settlement payment was not an

insurable loss for the purposes of Insuring Clause 3 as a matter of

public policy. In reaching this conclusion, the district court

opined that Genzyme, in effect, “stole” from the Biosurgery

Division shareholders and conferred an improper benefit on the

General Division shareholders. Id. at 290. 

The district court reasoned that “Genzyme should not be

able to divide the benefits of equity ownership among its

shareholders one way, redistribute those benefits, and then demand

indemnification from its insurer for the redivision.” Id. at 291.

The district court expressed its concern that a company could take

advantage of a legal rule permitting indemnification in such

circumstances, with the result being that “the shareholders whose

shares were ‘cancelled’ would be compensated through the judgment

or settlement, and the corporation’s other shareholders would

obtain the benefits flowing from the share cancellation while

shifting a portion of its [sic] costs to the corporation’s

insurer.” Id. at 291-92. The district court therefore concluded

that the settlement payment was not an insurable loss as a matter

of Massachusetts law, holding that a payment “to resolve a claim

that [a corporation] benefitted one group of shareholders at the

expense of another group of shareholders” is not legally insurable

as against public policy. Id. at 291.
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In the alternative, the district court held that the

settlement payment represented a loss in connection with Genzyme’s

“purchase” or “proposed” purchase of its own securities, thereby

triggering the Bump-Up exclusion and excluding the payment from

coverage under Insuring Clause 3. The district court also held

that under the Bump-Up clause, Genzyme was not entitled to

reimbursement for its indemnification of its officers and directors

under Insuring Clause 2 even if the Bump-Up clause did not apply on

its face to Insuring Clause 2. Noting that “it will often be the

case that when a shareholder can bring a claim against the

corporation, she can also bring one against its directors and

officers,” the district court opined that permitting Genzyme to

recover “would encourage fraud by insured corporations.” Id. at

294. The district court therefore concluded that “it makes little

sense to allow a corporation to sidestep coverage limitations in

its insurance policy through the simple expedient of claiming that

a settlement payment was made to indemnify its directors and

officers.” Id. Finally, the district court held that Genzyme did

not state a claim of unfair and deceptive acts and practices under

Mass. Gen. Laws ch. 93a.

Genzyme timely appealed, and we have jurisdiction

pursuant to 28 U.S.C. § 1291.
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II.

This court reviews a district court’s decision to dismiss

a complaint for failure to state a claim de novo. Vernet v.

Serrano-Torres, 566 F.3d 254, 258 (1st Cir. 2009). “[W]e, like the

district court, must assume the truth of all well-plead facts and

give the plaintiff[s] the benefit of all reasonable inferences

therefrom.” Ruiz v. Bally Total Fitness Holding Corp., 496 F.3d 1,

5 (1st Cir. 2007). In this respect, to survive a motion to dismiss,

a complaint must establish “a plausible entitlement to relief.”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 559 (2007). Under

Massachusetts law, “[c]onstruction of insurance contracts and

application of their terms [to those facts alleged] are matters of

law” subject to de novo review. Preferred Mut. Ins. Co. v.

Travelers Cos., 127 F.3d 136, 137 (1st Cir. 1997).

III.

The policy’s definition of “Loss” excludes “matters

uninsurable under the law pursuant to which [the policy] is

construed.” J.A. 51. The district court held that the settlement

payment is not an insurable loss for any of the insuring clauses,

including Insuring Clause 3, as a matter of Massachusetts public

policy because the settled claims charged that Genzyme benefitted

one group of shareholders at the expense of another. The district

court provided no case or statutory support for this holding. 
3 The Massachusetts Supreme Judicial Court has articulated

one other justification for denying coverage on public policy

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Massachusetts law governs the scope of the policy. The

public policy rationale articulated by the district court finds no

support in Massachusetts statutory or case law. Massachusetts law

recognizes only a limited public policy exception. Massachusetts

General Laws ch. 175, sec. 47 provides a non-exclusive list of

risks for which insurance against loss may be issued and purchased.

It provides that “no company may insure any person against legal

liability for causing injury, other than bodily injury, by his

deliberate or intentional crime or wrongdoing.” Id. sub. sixth(b).

In Andover Newton Theological School, Inc. v. Continental

Casualty Co., 409 Mass. 350 (1991), the Massachusetts Supreme

Judicial Court held that insurance coverage is impermissible

against public policy under that provision “if an intentionally

committed, wrongful act was also done deliberately or

intentionally, in the sense that the actor knew that the act was

wrongful.” Id. at 352. This court has discussed this holding,

remarking that “[i]n other words, Massachusetts law only proscribes

coverage of acts committed with the specific intent to do something

the law forbids.” Andover Newton Theological Sch., Inc. v. Cont’l

Cas. Co., 930 F.2d 89, 92 n.3 (1st Cir. 1991) (emphasis altered).

There is no contention that this exception is applicable in this

case even though the class action plaintiffs did allege fraud by

Genzyme and certain of its officers and directors.3
grounds—when the existence of loss is already known to the insured

at the time that coverage is purchased. See SCA Servs., Inc. v.

Transp. Ins. Co., 419 Mass. 528 (1995). This exception does not

enunciate a new rule but merely reflects the truism that insurance

exists to insure against unknown risks, and not against known

certainties. There is no contention that this exception applies

here. 

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The Supreme Court has made it clear that under federal

law, in order for a contract to be invalidated on public policy

grounds, “[s]uch a public policy . . . must be well defined and

dominant, and is to be ascertained ‘by reference to the laws and

legal precedents and not from general considerations of supposed

public interests.’” W.R. Grace & Co. v. Rubber Workers, 461 U.S.

757, 766 (1983) (quoting Muschany v. United States, 324 U.S. 49, 66

(1945)). Under Massachusetts law, courts similarly are not charged

with creating amorphous public policy limitations on insurance

policies.

The Massachusetts Supreme Judicial Court has stated that

“‘[p]ublic policy’ . . . refers to a court's conviction, grounded

in legislation and precedent, that denying enforcement of a

contractual term is necessary to protect some aspect of the public

welfare.” Beacon Hill Civic Ass'n v. Ristorante Toscano, Inc., 422

Mass. 318, 321 (1996) (emphasis added). We see no basis in

Massachusetts legislation or precedent for concluding that the

settlement payment is uninsurable as a matter of public policy. At

the same time, there are significant reasons why such an exception

should not be created as a matter of public policy. Such an
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exception would have the effect of making it impossible to secure

coverage for damages awards in routine securities litigation that

charges the corporation with unfair or unlawful treatment of a

class of securities holders. Such coverage is clearly contemplated

by the policy here. By its terms, the Policy provided coverage for

losses that Genzyme becomes “legally obligated to pay on account of

any Securities Claim . . . .” J.A. 69. A “Securities Claim”

includes any Claim “brought by or on behalf of any securities

holder” of Genzyme. J.A. 70. If the parties wish to exclude such

coverage, it is common to include limiting provisions as was, in

fact, done here in the Bump-Up clause discussed below. There is no

clear public policy that would prevent the parties from including

securities litigation coverage in policies, or any basis to assume

that policies are designed to exclude such coverage, particularly

where, as here, securities litigation is specifically mentioned in

the policy and one class of claims arising from such litigation is

specifically excluded by the Bump-Up clause. 

In the alternative, Federal argues that the settlement

payment represents restitution by Genzyme of ill-gotten gains or

benefits to which Genzyme was not entitled and is therefore

uninsurable. While there is no Massachusetts case recognizing this

principle, in the district court Federal cited Level 3

Communications, Inc. v. Federal Insurance Company, 272 F.3d 908

(7th Cir. 2001) and its progeny to support this contention. In
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Level 3, the plaintiffs alleged that Level 3 Corporation paid too

little to acquire plaintiffs’ interests in a business by making

fraudulent representations and retained for its own benefit the

amounts it ought to have paid. Level 3 settled the claim, and

sought coverage under its insurance policy with Federal. The

Seventh Circuit held that because the payment was “restitutionary

in nature,” the settlement payment was not a “loss” and therefore

not insurable because the definition of loss within the meaning of

an insurance contract does not “include the restoration of an illgotten gain.” Id. at 910. When a corporation receives a benefit

to which it is not entitled and is then forced to disgorge that

benefit, restitution is available to remedy the unjust enrichment.

Level 3 embodies the principle that a restitutionary payment is not

insurable. Federal argued before the district court that Level 3

should govern this case. The district court rejected this argument

because in its view, Genzyme itself received no “material benefit”

in the share exchange “that could be disgorged through a

restitutionary remedy.” Genzyme, 657 F. Supp. 2d at 289.

We need not address the question of whether Massachusetts

recognizes the exception set forth in Level 3 as we agree with the

district court that this case does not fit within the framework of

Level 3. This case does not present an unjust enrichment

situation. Here, Genzyme obtained no identifiable asset in the

share exchange and therefore the settlement payment cannot
One might argue that part of any settlement that was 4

restitution for the directors’ and officers’ ill-gotten gain might

be excluded under a Level-3 interpretation of the word “loss.”

However, Federal does not contend that the word “loss” should be

interpreted to exclude these gains. 

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represent the restoration to the plaintiffs of some amount Genzyme

had improperly taken and withheld. Genzyme simply reorganized its

capital structure by cancelling one series of stock and issuing

additional shares of another series of stock, and acquired a right

to cancel its tracking stocks. A corporation is neither benefitted

nor harmed by issuing additional shares of stock; the issuance of

additional shares has no effect on a corporation’s assets or

liabilities. The right to cancel shares is not an identifiable

asset. Therefore, the exception articulated in Level 3 would not

apply even if recognized in Massachusetts.4

Federal urges alternatively that a loss for insurance

purposes does not occur if it derives from the fulfillment of an

existing obligation. In other words, Federal argues that

fulfilling a preexisting obligation through a settlement or

judgment does not transform that payment into a covered “loss.”

See Pac. Ins. Co., Ltd. v. Eaton Vance Mgmt., 369 F.3d 584, 590-91

(1st Cir. 2004). In Pacific Insurance, the policy holder had a

contractual obligation to establish and fund certain employee

accounts pursuant to a profit-sharing plan. The policy holder

failed to do so and thereafter was contacted by an employee who

alleged that his account had not been properly funded. Upon the
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advice of counsel, who informed the policy holder that the employee

would likely be successful if he chose to litigate the issue, the

policy holder retroactively established and funded the accounts to

the level they would have reached had the policy holder timely

contributed. The insurer thereafter sought a declaratory judgment

that the money contributed was not recoverable under the insurance

policy. This court agreed, holding that the policy holder

seeks reimbursement for amounts it paid--principal and

interest--in satisfaction of its Plan-created obligation

to establish and fund those accounts to the level they

would have attained had [the policy holder] initially

complied with the Plan. So understood, the cause of this

obligation cannot be the breach of the obligation;

instead, in our view, this obligation derived from the

[Plan itself] . . . .

Id. at 590 (footnote omitted). Because the policy “does not cover

debts that are ‘incurred’ through a contractual obligation,” id. at

591, and because “[i]t makes no sense to permit a dereliction in

duty to transform an uninsured liability into an insured event,”

id. at 593, this court held that the payment was not a loss within

the meaning of policy in suit.

This case does not fall within the rule articulated by

this court in Pacific Insurance. Unlike here, the dispute in 

Pacific Insurance involved a payment made to fulfill an explicit,

preexisting contractual obligation to another party. Indeed in

Pacific Insurance, this court stated that “the relevant liability

for which [the policy holder] seeks recovery from its insurer is

not one for breach of fiduciary duty relative to the belatedly
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funded employee accounts.” Id. at 590. Instead, this court noted

that “the underlying obligation for which reimbursement is sought

existed regardless of whether Eaton Vance first complied with its

fiduciary duties or breached them.” Id. at 590-91. The same

cannot be said of this case. Genzyme had no concrete and

identifiable preexisting contractual obligation to pay the amount

of the settlement. Rather, the underlying complaint made clear

that the alleged cause of the injury was in fact the breach of

Genzyme’s applicable fiduciary duties and/or contractual

obligations. In sum, this court’s holding in Pacific Insurance

does not support a conclusion of uninsurability.

IV.

This leads us to the only provision in the policy that

could provide a contractual basis for denying payment under the

policy—the Bump-Up clause. It provides:

[Federal] shall not be liable under Insuring Clause 3 for

that part of Loss, other than Defense Costs . . . which

is based upon, arising from, or in consequence of the

actual or proposed payment by any Insured Organization of

allegedly inadequate or excessive consideration in

connection with its purchase of securities issued by

[Genzyme].

J.A. 71 (emphases added). This clause on its face bars recovery

for losses under Insuring Clause 3, other than defense costs.
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We conclude, as did the district court, that the clause

is applicable to payments made to settle claims made by both subclasses of shareholders. Here Genzyme itself acquired the tracking

stock in exchange for General Division shares. The consideration

was allegedly “inadequate or excessive” leading to a payment (i.e.,

a Loss) by Genzyme. The sole question is whether a “purchase” was

involved. Federal argues that Genzyme “purchased” the stock from

those shareholders who held the stock at the date of the

cancellation and participated in the share exchange by acquiring

each outstanding GZBX share in exchange for a fraction of a GENZ

share.

In general, Massachusetts law presumes that words in the

policy are used “in their usual and ordinary sense.” Hakim v.

Mass. Insurers’ Insolvency Fund, 675 N.E.2d 1161, 1164 (Mass.

1997). Although ambiguities in insurance policies generally should

be resolved against the insurer in favor of the insured, id. at

1165, this presumption does not apply where, as here, "the policy

language results from the bargaining between sophisticated

commercial parties of similar bargaining power.” F.D.I.C. v. Ins.

Co. of North Am., 105 F.3d 778, 786-87 (1st Cir. 1997) (applying

Massachusetts law) (citation omitted).
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While technically the Biosurgery Division shares were

cancelled rather than surrendered, such a transaction is commonly

referred to as a purchase, including in the original shareholder

class action suit. Webster’s Third New International Dictionary

defines a purchase as “something obtained for a price in money or

its equivalent.” Webster’s Third New International Dictionary 1845

(unabr. 2002); see also Oxford English Dictionary 860 (2d ed. 1989)

(defining “purchase” as “[t]o acquire by the payment of money or

its equivalent; buying”; this definition is followed by a note

stating that this is “[n]ow the chief sense” in which the word is

used). Here, Genzyme acquired the rights to cancel the tracking

stocks. Further, Genzyme’s own Articles use the verb “pay” to

describe the transaction by which the shares were exchanged, and

the notice sent to the class of underlying plaintiffs notifying

them of the settlement described the settlement as “resolv[ing] a

lawsuit over whether Genzyme Corporation and some of its current

and former officers and directors caused investors to be paid too

little for the GZBX shares in connection with an exchange of those

shares for Genzyme General shares.” J.A. 494 (emphasis added).

Indeed, in Genzyme’s opposition of Federal’s motion to dismiss, it

noted that “[t]ransactions in which corporations cancel one series
-23-

or class or shares and replace those shares with newly-issued

shares are not uncommonly referred to in layman’s terms as ‘buy

backs’ or ‘repurchases.’” J.A. 579 n.4.

Nor is such an interpretation of the clause inconsistent

with the purpose of the Bump-Up clause. The Bump-Up clause was

designed to exclude claims for payment in certain situations, such

as in leveraged buyouts, where the company is charged with favoring

one class of shareholders at the expense of another. For example,

in a leveraged buyout, the corporation might underpay the existing

shareholders to benefit the remaining shareholders. Here too,

Genzyme is charged with favoring holders of General Division shares

at the expense of holders of Biosurgery Division shares.

Genzyme argues that even if the Bump-Up clause were

applicable to shareholders who participated in the exchange, it is

inapplicable to that portion of the settlement payment made to

resolve claims made by the sub-class of shareholders who sold their

shares on the open market before the share exchange took place.

Genzyme contends that its settlement payment to these class members

does not fall within the scope of the Bump-Up provision because it

never in fact purchased securities from them.
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The Bump-Up provision applies to loss “arising from . .

. the actual or proposed payment . . . of allegedly inadequate or

excessive consideration in connection with [the] purchase of

securities.” J.A. 71 (emphasis added). Genzyme made payments to

shareholders who sold in anticipation of the share exchange. These

shareholders claimed that they were damaged by Genzyme's mere

announcement of the proposed exchange. Their theory was that when

Genzyme announced the share exchange, it effectively put a cap on

the value of the Biosurgery Division shares. For all intents and

purposes, a Biosurgery Division share was worth 0.04914 shares of

GENZ stock from the moment the Share exchange was announced on May

8, 2003, even though the exchange was not scheduled to take place

until almost two months later. No rational investor would purchase

a Biosurgery Division share on May 9, 2003, for more than 0.04914

the value of a GENZ share if he knew that the Biosurgery Division

share would simply be converted into 0.04914 GENZ shares on June

30, 2003. The settlement payments to those shareholders thus

represented losses “arising from . . . a proposed payment . . . of

allegedly inadequate or excessive consideration . . . .” J.A. 71.

Since the Bump-Up provision applies to both actual and

proposed payments of inadequate consideration for a corporation's
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own securities, Genzyme may not seek indemnification for that part

of the settlement payment that went to the class members who sold

into the open market.

V.

Genzyme also contends that the district court erred in

concluding that the Bump-Up clause applies to Insuring Clause 2

(directors and officers) as well as to Clause 3 (Genzyme). We

agree. On the face of the policy, the Bump-Up clause only applies

to Insuring Clause 3. Thus the Bump-Up clause cannot bar Genzyme

from seeking recovery under Insuring Clause 2 for any amount it

paid to indemnify its officers and directors. Indeed, the

allocation clause makes clear that the application of the Bump-Up

Clause solely to Insuring Clause 3 was no accident. The allocation

provision states that

[i]f a Securities Claim covered, in whole or in part,

under Insuring Clauses 2 or 3 results in any [director or

officer] under Insuring Clause 2 or [Genzyme] under

Insuring Clause 3 incurring both Loss covered hereunder

and loss not covered hereunder, because such Securities

Claim includes both covered and uncovered matters, [the

parties] shall allocate such amount to Loss as follows:

. . . [the parties] shall allocate that part of Loss

subject to [certain exclusions, including the Bump-Up

clause] based upon the relative legal exposure of the

[directors and officers and Genzyme].
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J.A. 71. The allocation provision specifically contemplates a

situation in which the Bump-Up clause would bar coverage under

Insuring Clause 3, but Insuring Clause 2 would still operate to

provide coverage. Allocation would then be required.

Contrary to the explicit language in the policy, the

district court concluded that the Bump-Up clause should indeed

apply to Insuring Clause 2, reasoning that

it makes little sense to allow a corporation to sidestep

coverage limitations in its insurance policy through the

simple expedient of claiming that a settlement payment

was made to indemnify its directors and officers. Since

a corporation can only act through its corporate agents,

it will often be the case that when a shareholder can

bring a claim against the corporation, she can also bring

one against its directors and officers. . . . [T]he

approach supported by Genzyme would encourage fraud by

insured corporations . . . .

Genzyme, 657 F. Supp. 2d at 294. In one respect, the district

court is correct. In situations where a shareholder can bring a

claim against a corporation, a claim may also exist against its

directors and officers. In such situations, it will often be the

case that a portion of a settlement payment is made to resolve

claims against the corporation whereas another portion will be made

to settle claims against directors and officers. However, giving

effect to the plain language of the policy does nothing “to allow

a corporation to sidestep coverage limitations in its insurance
-27-

policy.” Id. Rather, applying the Bump-Up clause to Insuring

Clause 2 denies the corporation the express benefit of the

insurance policy for which it paid. There is no basis in public

policy for applying the Bump-Up clause to Insuring Clause 2. 

Since the Bump-Up clause applies to Insuring Clause 3,

but not to Insuring Clause 2, and the policy provides for

allocation, we must remand to the district court to consider the

allocation question. If part of the Genzyme payment represented

indemnification provided to officers and directors, then such

payment would appear to fall under Insuring Clause 2 and allocation

of the total settlement payment is required under the policy.

The problems involved in allocation may be difficult.

Other issues aside, the complaint alleged that Genzyme’s directors

and officers depressed the value of Biosurgery stock and Genzyme

repurchased the stock for a lowered price; the same claim may

therefore be stated against both the directors and officers and

Genzyme – but one is covered under the insurance contract and the

other is not. This may be a case where settlement, rather than

lengthy and costly litigation, might be worth consideration by the

parties.
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VI.

For the foregoing reasons, we reverse the district

court’s grant of Federal’s motion to dismiss in part. We hold that

there is no public policy that prevents Genzyme from recovering

under the policy but that the Bump-Up clause bars recovery of

settlement amounts paid to resolve claims against Genzyme itself.

On remand the district court must determine whether any amounts

paid in settlement were attributable to the indemnification of the

named directors and officers and, if so, determine how much of the

settlement costs should be allocated to those claims. We

accordingly remand to the district court for further proceedings

consistent with this opinion. No costs are awarded.

REVERSED-IN-PART AND REMANDED.