Pasich LLP Prevails in Landmark D&O Coverage Decision for Dole Food Company
As reported by Law360, Lexology, Delaware Business Court Insider, Business Insurance and more, the Delaware Supreme Court affirmed a precedent-setting ruling from the trial court in favor of Dole Food Company and David H. Murdock, upholding a series of pro-insured decisions on issues of first impression relating to Directors & Officers Liability claims in RSUI Indemnity Co. v. Murdock, No. 154, 2020 (Del. March 3, 2021). The value of directors' and officers' liability insurance should never be underestimated — no matter the circumstances. In RSUI, the Court addressed several issues of first impression and confirmed that Delaware corporations and their directors and officers are entitled to broad protection under D&O insurance policies.
The Delaware Supreme Court addressed the following questions:
- Does Delaware law govern the interpretation of an D&O insurance policy negotiated and issued in California to a Delaware corporation headquartered in California?
- Is fraud uninsurable as a matter of public policy?
- Does an exclusion barring coverage for fraud defeat coverage?
- When a settlement involves both insured and uninsured claims and parties, what rule governs how much of the settlement an insurer must pay?
The Court answered each of these questions in favor of coverage and in favor of the Insureds.
Link to opinion: https://bit.ly/30aU4de
What It Means
Many corporations’ D&O insurance programs provide tens or hundreds of millions of dollars in potential coverage. In rejecting key arguments that insurers often make in trying to limit what they pay, the Delaware Supreme Court's decision sends a strong message that insurers no longer can hide behind these arguments. The Delaware Supreme Court has confirmed the value of D&O insurance. Its decision should better guarantee that insurance payments will be more readily available. This decision will help not only directors and officers, but also those allegedly injured by their actions. Too, the opinion also gives Delaware corporations more certainty about what their directors and officers insurance covers.
In 2013, Dole Food Company's chair and general counsel/CEO were sued in a class action in Delaware by Dole shareholders for breach of fiduciary duty in relating to a "going private" transaction. In 2015, after a nine-day trial involving 43 witnesses and more than 1,800 trial exhibits, the Court of Chancery issued a 106-page Memorandum Opinion. The court held that these officers had breached their fiduciary duties. The court also made several references to fraud during its opinion. The court found the two officers jointly and severally liable for $148 million.
The parties then entered settlement negotiations. Two days after those negotiations were concluded, another class action was filed in Delaware—this time against Dole itself and the two officers for securities laws violations. Settlement negotiations succeeded in the first action, which resolved with a judgment approving the settlement and Dole's former chair agreeing to pay $115 million. However, before that settlement was concluded, six of Dole's D&O Insurers sued Dole, its two officers, and the company that acquired Dole's shares in Delaware Superior Court, seeking a declaration that they had no duty under their policies to reimburse the insureds for any settlement.
A year later, a settlement was negotiated in the second class action. The court entered judgment approving that settlement. Dole paid $74 million, and the insurers again refused to pay. Dole and the officers then counterclaimed against the insurers in the insurance coverage lawsuit.
During the coverage action, five of the six insurers that had not previously exhausted their limits settled with Mr. Murdock and Dole. RSUI, the sixth insurer, withdrew its last coverage defenses on the brink of trial, stipulating to the entry of judgment against it for the full amount of its policy limit, plus interest. RSUI then appealed the Superior Court's earlier rulings against it.
The Delaware Supreme Court's Decision
RSUI lost all the issues that it appealed.
The Governing Law
Even though the Insurers sued in Delaware, RSUI argued vehemently that California law governed, first asking the trial court to rule in their favor, then seeking an interlocutory appeal in the Delaware Supreme Court, then asking the trial court to reconsider, and then asking the Delaware Supreme Court to reverse on appeal. All its efforts were to no avail.
RSUI argued that California law should apply because the policy was negotiated and issued in California, Dole's principal place of business was in California, Dole's management and board were in California, at least some officers resided in California, and the allegedly fraudulent acts took place in California.
The Delaware Supreme Court disagreed, characterizing RSUI's criticism of the Superior Court's reasoning as "misguided." It said:
[I]n the vast majority of cases, Delaware law governs the duties of the directors and officers of Delaware corporation to the corporation, its stockholders, and its investors. As such, corporations must assess their need for D&O coverage with reference to Delaware law.
These factors suggest that the state of incorporation is the center of gravity of the typical D&O policy, including the Policy under consideration here.
Slip op. at 24.
The Court emphasized that Dole's
directors and officers, to the extent they are acting 'in their capacity as such' and are therefore covered by the Policy, act on behalf of Dole as a corporate entity, whose legal residence is in Delaware. Seen from this vantage point, the Insureds' legal ties to Delaware are more significant—and therefore should be afforded greater weight—than their physical location in California.
Id. at 24-25 (footnote omitted).
Insurance for Fraud
RSUI argued that because the Memorandum Opinion had findings of fraud, it had no duty to indemnify. According to RSUI, fraud is not insurable as a matter of Delaware public policy. The Delaware Supreme Court disagreed.
The Court started by "reaffirming [its] respect for the right of sophisticated parties to enter into insurance contracts as they deem fit 'in the absence of clear indicia that . . . [a countervailing public] policy exists.'" Id. at 27. It noted that the insuring agreement, like the agreements in most D&O policies, obligated RSUI to pay for "Loss" arising from claims for a "Wrongful Act," broadly defined to include "actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty." Id. Court then held that Delaware does not "have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties' freedom of contract " Id. at 29.
The Court also focused on injured parties' right to redress. It explained:
[I]n the high-stakes arena of stockholder litigation, a blanket prohibition, on public-policy grounds, against insuring for losses arising from a director's or officer's misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery. This conflicts with the public policy that favors the compensation of innocent victims.
Id. at 31.
The Fraud Exclusion
RSUI also argued that even though coverage for fraud was precluded as a matter of public policy, the policies had an exclusion that did so. That exclusion (common in D&O policies) applies to loss as to claims based on, arising out of or attributable to
any deliberate . . . fraudulent act, error or omission by the Insured . . . if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.
Id. at 33 (footnote omitted)
RSUI argued that because the Court of Chancery had held a nine-day trial in the first class action and issued a Memorandum Opinion after that trial, the exclusion applied. The Insureds argued that the decision never became final because they settled (without the Insurers' consent) and the ultimate judgment stemmed from the settlement, not the Memorandum Opinion. The Insureds also argued that even if there were a "final and non-appealable adjudication" in the first class action, there was no such adjudication in the second class action, which was settled before any adjudication. The Superior Court agreed.
The Delaware Supreme Court stated that it did not need to address the first issue because RSUI's policy would be exhausted by the settlement of the second class action lawsuit if the exclusion did not apply to that lawsuit. It rejected RSUI's argument that "some findings in the Memorandum Opinion might have been implicated in the resolution" of the second class action. The Court found that "irrelevant to a determination of whether there was an adjudication" in the second class action. Id. at 37. It held that to hold otherwise
would ignore the plain meaning of the Profit/Fraud Exclusions' stipulation that only "fraudulent act[s] . . . established by a final and non-appealable adjudication adverse to [the] Insured in the underlying action" would be subject to the exclusion.
The Court noted that even if the exclusion could be interpreted as RSUI urged, it
would not render the Insureds' interpretation unreasonable. Instead, it would merely be to recognize an ambiguity. And under our insurance law jurisprudence, we would construe that ambiguity in favor of the Insureds. Either way, as applied to Dole's loss in the [second class action lawsuit], the Profit/Fraud Exclusion fails.
Id. (footnote omitted).
Allocation Between Covered and Uncovered Matters
Finally, the Delaware Supreme Court turned to RSUI's argument that RSUI need not pay the full loss unless the Insureds proved what portion of the loss should be allocated to covered matters and parties rather than uncovered matters and parties. RSUI relied on a common allocation provision in the policies that called for the parties to "use their best efforts to determine a fair and proper allocation of covered Loss," and argued it was obligated to pay only as to sums "allocated to matters and Insureds which are afforded coverage," considering "the relative legal and financial exposures of the Insureds." Id. at 39.
In response, the Insureds argued that the governing rule is the so-called "larger settlement" rule and that, under this rule, the full loss was insured unless the Insurers could prove that some uncovered liability increased the amount of the settlements.
The Delaware Supreme Court agreed with the Superior Court's reasoning, quoting the Superior Court's decision:
"The Policies cover all Loss that the Insured(s) become legally obligated to pay. Such language implies . . . a complete indemnity for Loss regardless of who else might be at fault for similar actions. The Policies do not limit coverage because of the activities of others that might overlap the claims against the Insureds. Any type of pro rata or relative exposure analysis seems contrary to the language of the Policies."
Id. at 41 (footnote omitted).
The Court then concluded:
[T]he "larger settlement rule" captures the extent to which RSUI's indemnity obligations might be reduced by an allocation of a portion of the [first class action] settlement to non-covered losses or uninsured parties. Under the rule, as articulated by the Ninth Circuit Court of Appeals in Nordstrom, Inc. v. Chubb & Son, Inc., "responsibility for any portion of a settlement should be allocated away from the insured party only if the acts of the uninsured party are determined to have increased the settlement."
Id. (footnote omitted).
What It Means
Many corporation's D&O insurance programs provide tens of millions, or hundreds of millions of dollars, in potential coverage. In rejecting key arguments that insurers often make in trying to limit what they pay, the Delaware Supreme Court's decision sends a strong message that insurers no longer can hide behind these arguments. The Delaware Supreme Court has confirmed the value of D&O insurance. Its decision should better guarantee that insurance payments will be more readily available. This decision will help not only directors and officers, but also those allegedly injured by their actions.