The Delaware Superior Court, purporting to apply Delaware and California law, has held that there was no “final adjudication” for purposes of triggering a conduct exclusion where the parties to the underlying action settled after the court issued an interlocutory memorandum opinion containing findings of fraud.  Arch Ins. Co. v. Murdock, 2016 WL 7414218 (Del. Super. Ct. Dec. 21, 2016).

An officer and minority owner of a publicly-traded company sought to acquire the remaining outstanding shares of the corporation and take it private.  Shareholders of the corporation brought suit against the corporation challenging the fairness of the transaction.  In a memorandum opinion, the Delaware Chancery Court found breaches of the duty of loyalty and assessed liability against the officer and the company.  In the opinion, the Vice Chancellor repeatedly cited to “fraud” and “fraudulent activity” by the defendants.  At that time, the court did not issue the final judgment.  Shortly after the decision, the shareholders and defendants settled for 100% of the liability assessed by the Vice Chancellor plus interest, so no appeal ensued.  The court issued an order and final judgment approving the settlement.

The defendants sought coverage for the settlement from their D&O carriers.  The defendants’ D&O insurers denied coverage, asserting that the conduct exclusion in the policy applied, which barred coverage for claims “based upon, arising out of or attributable to . . . any deliberately criminal or fraudulent act . . . if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.”

In the ensuing coverage litigation, the trial court granted the insureds’ motion to dismiss in part, holding that a “final adjudication” had not been rendered in the underlying case that established a finding of a deliberately fraudulent act.  According to the court, the memorandum opinion, without an entry of judgment, was not a final and non-appealable adjudication.  Rather, according to the court, the only final and non-appealable adjudication was the order and final judgment approving the settlement.  According to the court, “the Settlement and the ensuing Order and Final Judgment . . . [were] carefully crafted to mitigate the findings in the Memorandum Opinion,” and there was no docket entry entered in connection with the memorandum opinion.