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Vol. 11 - Issue 1

January 3, 2022

 

Choice Of Law Whopper For D&O Coverage Disputes


RSUI Indemnity Company v. Murdock, 248 A.3d 887 (Del. 2021)

 

On its face, the Delaware Supreme Court’s decision, in RSUI Indemnity Company v. Murdock, seems an odd choice for inclusion as one of the year’s ten most significant involving coverage.  At issue was the First State’s test for determining what state’s law applies to adjudicating coverage under a director’s and officer’s liability insurance policy.  With choice of law being such a well-developed issue nationally, Murdock seems the classic situation of a case, while very important for its own jurisdiction, that is not going to influence decisions across the country.  This is a significant reason why seemingly important decisions are not included on this annual insurance coverage hit parade.

Despite this, Murdock had no problem landing a spot.  While the decision is unlikely to affect how other states address choice of law for D&O disputes, it can still be expected to have a national footprint, namely, affecting where some of these coverage suits are filed.      

At issue in Murdock was coverage for claims that two of Dole Food’s officers manipulated the price of Dole’s stock, making it artificially low, to enable the company to be taken private for a reduced amount.

Dole’s shareholders filed suit.  Following a nine-day trial, the Delaware Chancery Court found that the officers engaged in fraud and certain intentionally misleading conduct and were liable for nearly $150 million in damages.  The judgment was paid in full.  Dole then settled a related case for $74 million.          

As you can imagine, with these kinds of numbers, there were numerous insurers involved and claims asserted.  A coverage action was filed by certain insurers, followed by insurers making payments or reaching settlements.  To keep it simple here, what matters is that one insurer, RSUI, did not settle.  The court entered judgment against RSUI for its policy limits of $10 million plus $2.3 million in prejudgment interest.

Two of RSUI’s principal defenses were that coverage was precluded under California law [Insurance Code section 533’s preclusion of coverage for willful acts] as well as the policy’s Fraud/Profit exclusion.

As RSUI saw it, California law controlled, as many of the contacts to the coverage dispute were tied to California.  These included such important factors as the policy being negotiated and issued in California, where Dole was headquartered, as well as the policy containing California amendatory endorsements.  The insureds’ countered that Delaware law applied as Dole was incorporated in Delaware.

The supreme court undertook an analysis of choice of law under the Restatement (Second) Conflict of Laws’ “most significant relationship test.”  While there are numerous factors that go into the Restatement’s most significant relationship test – it can be a bear to analyze -- when all is said and done, it usually points to the state where the policy was issued as the one whose law controls. 

Based on this, it should have been an easy decision for the court to conclude that California law applied.  California’s several connections to the policy dominated over the single Delaware contact -- Dole’s state of incorporation.

But the court concluded that Delaware law applied: “Nor do we find the other previously discussed California contacts to be as legally significant or as laden with policy considerations as Dole’s status as a Delaware corporation and the individual insureds’ status as directors and officers, all operating under the authority and guidance of Delaware law. To be clear, we do not ignore the California contacts and acknowledge that they might be dispositive were we addressing an insurance policy covering a different subject matter and insureds with a more tenuous connection to Delaware than a Delaware corporation and its directors and officers have. Yet when we balance the California contacts against Delaware’s interest in protecting the ability of its considerable corporate citizenry to secure D&O insurance and thereby attract talented directors and officers, and for the other reasons mentioned above, we find that Delaware has the most significant relationship to the Policy and the parties.”

Having concluded that Delaware law applied, RSUI lost the ability to argue that California Insurance Code section 533 precluded coverage.

But what about the insurer’s fallback argument: Delaware public policy precludes coverage for intentional and fraudulent wrongdoing.  For various reasons, not discussed here, the court held that public policy was not a bar to coverage: “The question here then is: does our State have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract? We hold that it does not. To the contrary, when the Delaware General Assembly enacted Section 145 authorizing corporations to afford their directors and officers broad indemnification and advancement rights and to purchase D&O insurance ‘against any liability’ asserted against their directors and officers ‘whether or not the corporation would have the power to indemnify such person against such liability under this section,’ it expressed the opposite of the policy RSUI asks us to adopt.”

The court also held that the policy’s Profit/Fraud exclusion did not apply, as the requirement of fraudulent acts being established by a final and non-appealable adjudication, adverse to the insured, had not been satisfied [there was a technical analysis to arrive at this].   

The take-away from Murdock is easy to see.  A Delaware-incorporated insured – which is a popular place of incorporation for the types of companies involved in significant D&O matters -- seeking coverage under a D&O policy, can file a coverage action in Delaware and secure application of Delaware law.  Translation -- get the benefit of the state’s principle that fraudulent conduct is insurable, even if the insured has no other connection to Delaware.  Welcome to the race to the courthouse, with insurers seeking to file coverage actions in a state that would not apply Delaware law – which is presumably most states, if the insured’s only connection to Delaware is that the insured is incorporated there.                      



 
 
 
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