Hunton Insurance Recovery Blog

On March 3, 2021, the Delaware Supreme Court issued a landmark decision holding that Delaware law should be applied in disputes over directors and officers liability (“D&O”) insurance policies sold to companies incorporated in Delaware. RSUI Indem. Co. v. Murdock, et al. No. 154, 2020, C.A. No. N16C-01-104 CCLD (Del. Mar. 3, 2021). The court addressed this and other key issues in the long-running dispute over D&O insurance purchased by Dole Food Company, specifically addressing issues raised by Dole’s eighth-layer excess insurer, RSUI, which provided $10 million coverage excess of $75 million.

The court decided multiple important issues, finding that liability for alleged fraud is insurable under Delaware public policy, RSUI’s Profit/Fraud Exclusion did not bar coverage because there had been no “final adjudication” of fraud, and the “larger sums rule” governed allocation issues. However, among these important rulings, the most significant may be the Supreme Court’s ruling that Delaware governs the interpretation of D&O insurance issued to a company incorporated in Delaware.  The court specifically rejected the insurer’s arguments that California law (which might preclude coverage) should apply under a policy that was purchased and issued in California to a Delaware corporation headquartered in California.

Background

In November 2013, Dole went private through a merger in which its CEO, David Murdock, acquired all of the company’s outstanding shares that he did not already own (approximately 60% of the company). After the merger closed, stockholders sued in Delaware state court alleging breach of fiduciary duty by certain of Dole’s directors and officers on the ground that, among other things, they had artificially deflated the stock price prior to the merger. The trial resulted in a decision against Dole’s directors and officers for more than $148 million in damages. However, the case settled before any judgment was entered. Another class of stockholders subsequently filed a related case in Delaware federal court, which resulted in a $74 million settlement.

RSUI sued in Delaware state court, seeking a ruling that it had no obligation to fund the settlements. Dole asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud in the inducement. The coverage action resulted in a policy-limits judgment against RSUI in the amount of $10 million, plus more than $2.3 million in prejudgment interest. RSUI appealed.

The Decision

The Murdock court recognized that, under Delaware’s most “significant relationship” test, there is “a presumption for insurance contracts that, as a general matter, the law of the state which the parties understood was to be the principal location of the insured risk should be applied because that state will have the most significant relationship.” The court also noted, however, that a different result may obtain where the facts of the case do not fit such presumptions—such as where, as in many complex insurance-coverage disputes, the policy insures risks not confined to one jurisdiction.  In that context, the court will look at “broader subject-matter-specific factors.”

Under this standard, the court considered the following factors, among others, set forth in the Restatement (Second) on Conflict of Laws: (i) the place of contracting; (ii) the place of negotiation of the contract; (iii) the place of performance; (iv) the location of the subject matter of the contract; and (v) the domicile, residence, nationality, place of incorporation and place of business of the parties.

Applying these factors, the court determined that Delaware law applies “‘[w]hen the insured risk is the directors’ and officers’ ‘honesty and fidelity’ to the corporation’—and we would add to its stockholders and investors—‘and the choice of law is between headquarters or the state of incorporation, the state of incorporation has the most significant interest.’”

The court said its conclusion is consistent with the principle that courts must examine the insurance contract as a whole to determine its subject matter. For example, the Dole D&O policy was intended to cover a Delaware corporation, and Delaware law provides “broad indemnification and advancement rights to their directors and officers to purchase D&O policies to protect them even where indemnification is unavailable.” The availability of this insurance protection enables Delaware corporations “to attract talented people to fill those roles.” The court stated that the choice-of-law factors suggest that “the state of incorporation is the center of gravity of the typical D&O policy.”

Finally, the court determined that Dole’s California contacts did not outweigh Delaware’s interest in “protecting the ability of its considerable corporate citizenry to secure D&O insurance and thereby attract talented directors and officers.”

Key Takeaways

The Murdock decision confirms the superior court’s conclusion that under the “most significant relationship” test in the context of insurance-coverage disputes, Delaware courts may consider broader factors where the insurance policy insures risks that are not confined to one jurisdiction. The Delaware Supreme Court, one of the premier arbiters of corporate law disputes in the country, has confirmed that companies incorporated in Delaware and their insured directors and officers deserve benefits of Delaware law.  As Murdock illustrates, the court specifically endorsed taking a consistent approach to interpretation of D&O insurance issued to Delaware corporations, an approach that protects Delaware corporations and helps them attract talented directors and officers, all of whom can understand how their D&O insurance may apply by looking at how Delaware courts have addressed these issues.

Given Delaware’s leading role on issues of corporate law and governance, this decision may also influence other courts addressing this crucial issue of choice of law in the context of D&O insurance policies. In addition, most states have the same policy as Delaware of enabling broad indemnification and advancement rights to attract and retain directors and officers.

Policyholders also may note that this theme of promoting policies that assist companies with attracting talented directors and officers is consistent with the recent opinions of Delaware trial courts favoring policyholders under D&O policies on issues concerning the advancement of defense costs and the jurisdiction of Delaware courts over certain coverage issues. A discussion of those case decisions can be accessed here.