Applying Delaware law, a Delaware state trial court has held that insurers did not act in bad faith by denying coverage for underlying settlements when they had reasonable grounds for their position and promptly sought a declaratory judgment as to their indemnification responsibilities.  Arch Ins. Co. v.  Murdock., 2019 WL 1932536 (Del. Super. Ct. May 1, 2019).

The insured company and its officer were sued by shareholders in separate lawsuits.  After the Delaware Chancery Court issued an opinion finding that the insureds had engaged in “fraud” and “fraudulent activity,” the insureds sought coverage under their D&O policies for potential settlements of the litigation.  The insurers reserved rights on various potential exclusions and requested additional information.  The insureds refused to provide certain of the information on the grounds that such information was privileged.  The insureds ultimately agreed to settle the underlying litigation, which the insurers refused to fund.  The insurers then filed suit against the insureds to determine their indemnification obligations, and the insureds asserted a counterclaim for bad faith.

The court granted the insurers’ motion for summary judgment as to the bad faith counterclaim.  The insureds argued that the insurers acted in bad faith by relying on a fraud exclusion and breach of cooperation and consent to settle provisions.  The court held that the insurers had given “well-reasoned arguments” for raising those defenses and, while the merits of the defenses would be adjudicated in the present coverage litigation, as a matter of law, the insurers did not raise those arguments in bad faith.  The insureds also claimed bad faith because the insurers applied California law to interpret the policies.  While the court held that Delaware law applied to interpret the policies, it rejected the insureds’ “bad faith choice of law” argument, holding that choice of law “is a very sophisticated analysis.”  The court found that the insurers had a reasonable basis to believe that California law would apply because the insured entity was headquartered in California, the policies were negotiated by California brokers, and the policies included California amendatory endorsements.