Delaware Supreme Court Applies Delaware Law in D&O Coverage Dispute Involving California Company Incorporated in Delaware
In a much-watched case, the Delaware Supreme Court has held that Delaware law governs a dispute regarding insurance coverage for a federal securities class action under D&O policies issued in California to a California company, where the company was incorporated in Delaware. RSUI Indemnity Company v. Murdock, 2021 WL 803867 (Del. March 4, 2021). The Court also held that a breach of the duty of loyalty based on fraudulent conduct is insurable under Delaware law and the policies’ profit/fraud exclusion did not apply.
David Murdock, Dole Food Company’s CEO, took Dole private in 2013. After the transaction closed, Dole stockholders filed lawsuits in Delaware Chancery Court alleging a breach of fiduciary duty against Murdock and the company’s COO, Michael Carter, based on alleged manipulation of the company’s stock to an artificially low price. The suit was consolidated with another suit brought by stockholders seeking appraisal of their shares. The Court of Chancery issued a memorandum opinion finding that Murdock and Carter had breached their fiduciary duties and engaged in fraud. Meanwhile, a federal securities class action was initiated in the United States District Court for the District of Delaware based on the same transaction. That case settled for $74 million, plus interest. Dole sought coverage from its D&O insurance program, which, with limited exception, denied coverage.
Several of Dole’s insurers filed an action seeking a declaration that they had no obligation to fund the settlement under California law based on the application of California Insurance Code Section 533, which bars coverage for willful acts. The insurers asserted that California had the most significant relationship to the dispute, noting that the negotiation and procurement of the policies occurred at Dole’s headquarters in California through a California-based insurance broker, and the policies were ultimately issued to the California broker and then delivered to Dole’s headquarters. Additionally, the primary policy had California amendatory endorsements and the officers whose conduct was in question lived and worked in California. Dole, on the other hand, argued that Delaware law applied because Delaware law allows corporations to purchase insurance to protect its directors and officers against any liabilities, whether or not the corporation has the power to indemnify the director or officer for such liability. Dole also asserted that applying Delaware law would foster certainty, predictability, and uniformity of result in similar cases. The Superior Court applied Delaware law and an appeal followed.
The Delaware Supreme Court affirmed, concluding that, when the insured risk is the directors’ and officers’ fidelity to the corporation, including stockholders and investors, the state of incorporation has the most significant interest and, therefore, Delaware law should apply because Dole is incorporated in Delaware. The Court observed that D&O insurance minimizes the risk of serving as a director and allows Delaware corporations to attract talented people to serve in those roles. The Court rejected the significance of the California contacts because, although the officers physically resided and worked in California, they would be covered by the Policy only to the extent they were acting in their capacity as officers of a Delaware corporation.
Because California law did not apply to bar coverage for the federal securities class action settlement outright, the Delaware Supreme Court turned to the parties’ remaining disputes pertaining to coverage:
First, the Court held that breach of the duty of loyalty claims based on fraud are not uninsurable as a matter of Delaware public policy. The Court placed heavy emphasis on the freedom of sophisticated parties to contract. However, the Court cautioned that, by allowing insurance for this kind of conduct, it was not condoning this conduct.
Second, the court held that the policies’ profit/fraud exclusion did not bar coverage for the settlement of the federal securities class action. The exclusion required the relevant conduct be “established by a final and non-appealable adjudication adverse to such Insured in the underlying action.” Although the Delaware Chancery Court found that the officers acted fraudulently, Dole was seeking coverage for settlement of the federal securities class action, where no such finding was ever made.
Third, the court denied the insurers’ request for allocation for acts taken outside of the individuals’ capacities as insureds, concluding that there was nothing in the record suggesting that less coverage would be available to the insureds based on conduct outside of their insured capacity.
Finally, although the Court found that the insurers had a duty to indemnify Dole, it declined to find that the insurers acted in bad faith in denying coverage because there was a bona fide dispute as to coverage.