Guest Post: Some Good News for the Cybersecurity Class Action Bar

John Reed Stark

As discussed in the following guest post from John Reed Stark, a recent development in the class action litigation arising out of the massive Marriott International data breach could have significant ramifications for other claimants asserting class action claims — including securities class action claims — based on data breaches or other cybersecurity incidents. Stark is President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement. A version of this article originally appeared on Securities Docket. I would like to thank John for allowing me to publish his guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article. Continue Reading

Percentage of 2018 Deals Drawing Merger Objection Suits Held Steady

One of the most significant corporate litigation phenomena over recent years has been the rise of merger objection litigation, as result of which nearly every public company merger objection transaction has drawn at least one lawsuit. According to the latest study of merger litigation from Cornerstone Research, this phenomenon continued in 2018, with the same percentage of merger transactions as in 2017 attracting at least one lawsuit – in 2018, as in 2017, 82% of public company merger transaction valued over $100 million drew at least one lawsuit. The Cornerstone Research report, entitled “Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2018 M&A Litigation,” can be found here. Cornerstone Research’s September 17, 2019 press release about the report can be found here. Continue Reading

Cal. Sup. Ct.: Notice-Prejudice Rule Represents a Fundamental Public Policy

Under the so-called “notice-prejudice Rule” applicable in some jurisdictions, insurers can deny coverage for claims based on the policyholder’s late provision of notice of claim only in the event that the late notice materially prejudiced the insurer. In a recent decision, the California Supreme Court, ruling on questions certified to the Court from the Ninth Circuit, held that the notice-prejudice rule represents a “fundamental public policy” under California law potentially sufficient to override the choice of law provision in the parties’ insurance contract. The Court also held that the notice-prejudice rule also applies to the consent to incur expense provisions in first-party insurance policies. As discussed below, there are a number of interesting aspects to the court’s ruling. The California Supreme Court’s August 29, 2019 decision in Pitzer College v. Indian Harbor Insurance Company can be found here.

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11th Circ.: Florida Public Policy Precludes Coverage for Voluntary Settlement of Criminal Charges

D&O insurance typically defines the term “Claim” to include criminal charges after indictment. However, the coverage available under the policy for criminal proceedings is excluded in the event of a final adjudication determining that precluded misconduct actually took place. But what happens to the coverage if there is no final adjudication but rather the criminal charges are resolved through a negotiation that results in a monetary payment by the criminal defendants? In a recent decision, the Eleventh Circuit determined that the applicable D&O insurance policy’s coverage did not extend to amounts paid in negotiated resolution of criminal charges, despite the absence of a final adjudication – not by operation of the exclusion, but because of the nature of the payments.  Continue Reading

Mumbai Professional Liability Insurance Symposium

The D&O Diary’s overseas assignment continued this week with a stop in Mumbai, India’s financial capital. I was in Mumbai to participate in the annual Bima Gyaan Symposium, an educational and networking event for the professional liability insurance industry in India. As reflected in the pictures below, the event was once again well-attended and was a great success. Continue Reading

Guest Post: No Choice of Law in Delaware Coverage Disputes?

In the following guest post, Jeremy Salzman and Kylie Tomas of Sompo International and Ommid Farashahi and Jonathan Cipriani of BatesCarey LLP discuss a recent series of Delaware court decisions in which the courts applied Delaware law in addressing insurance coverage disputes. In their article, the authors question Delaware law appropriately should have been the law applied in those cases. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.




It is no secret that Delaware courts exert significant influence on the American corporate law landscape.  With more large companies incorporated in Delaware than any other state, Delaware boasts a bench that is extremely well-versed in corporate law issues.


A disturbing trend has developed recently, however, with Delaware courts expanding their influence even further, into the area of insurance law.  In a spate of recent decisions, Delaware courts have applied Delaware law to insurance coverage disputes, essentially by default in the absence of a choice of law provision, where the policyholder is incorporated in Delaware.  Delaware courts have given little to no regard to, for example, the state where the policy was issued, the state where the policyholder is headquartered, or state amendatory endorsements, attached to the policy, reflecting the intent of the parties to be subject to the law of certain state (other than Delaware).


This unfortunate trend has significant consequences for insurance carriers issuing policies to Delaware-incorporated insureds.  These include the increase in the number of coverage actions filed by policyholders against insurers in Delaware, as well as the application of Delaware insurance law, which is often less favorable to insurers than the law of other jurisdictions.


This article discusses how this trend has developed, why this matters to insurers, and what steps insurers can take in response.


The Mills Case

                Back in 2010, a Delaware trial court applied Delaware law to an insurance coverage dispute, despite the fact that the insured was headquartered in Virginia and the policy was issued in Virginia.  Mills Ltd. P’ship v. Liberty Mut. Ins. Co., 2010 WL 8250837 (Del. Super. Ct. Nov. 5, 2010).  Mills involved a coverage dispute, under a D&O policy, regarding exhaustion of underlying insurance.  The insured was incorporated in Delaware, but headquartered in Virginia, where the policy was issued.  The Mills court opined that, in cases where “the insured risk” is the business conduct of directors and officers located in states across the country or even throughout the world, Delaware will look to factors including the place of contracting, the place of negotiation of the contract, the place of performance, the location of the subject matter of the contract, and the domicile, residence, nationality, place of incorporation, and place of business of the parties.  Id. at *5.


While purporting to look at all of these factors, the court stated that, where the underlying litigation involves the directors’ and officers’ “honesty and fidelity to the corporation,” the state of incorporation has a more significant relationship to the policy than the place where the insured has its physical headquarters.  In the court’s words: “[The insured’s] directors and officers caused a Delaware corporation to defraud its investors, which made the corporation liable and triggered the corporation’s D&O policy.  In a case like this, what difference does [the] headquarters’ location make to the company or the people involved?” Id. at *6.  Accordingly, the court applied Delaware law, holding that Delaware employs the “functional exhaustion” rule, which was fatal to the insurer’s exhaustion-based coverage defense.


The Recent Trend

For almost a decade, the Mills decision was considered by many to be an aberration, with no other court following its choice of law analysis – until recently.  In March of 2018, another Delaware trial court applied Mills, holding that Delaware law applied, even though the insured was headquartered in California, the policy was issued there, and the policy included California state amendatory endorsements.  Arch Ins. Co. v. Murdock, 2018 WL 1129110 (Del. Super. Ct. Mar. 1, 2018).  Nevertheless, relying upon Mills, the court applied Delaware law, reasoning that the conduct of the insured’s directors and officers was centrally implicated; that the insured risk involved their “honesty and fidelity” to the corporation; that the individual defendants held management positions pursuant to Delaware law; that the situs of the company’s shares was Delaware; and that prior court rulings had involved Delaware law.  The court held that Delaware law, unlike California, did not preclude an insurance indemnity payment for an insured’s fraud, and required the insurers to demonstrate prejudice from the insureds’ violation of the consent provision.


Thereafter, in IDT Corp. v. U.S. Specialty Ins. Co., 2019 WL 413692 (Del. Super. Ct. Jan. 31, 2019), the insured was a Delaware corporation with its principal place of business in New Jersey.  The court concluded that Delaware law applied because the insured was incorporated in Delaware, the policies covered D&O liabilities involving the insureds’ “honesty and fidelity” to the corporation, and the merits of the underlying litigation were governed by Delaware law.


In Verizon Commc’ns, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2019 WL 2517418 (Del. Super. Ct. Apr. 26, 2019), the same judge who decided the Murdock case held that Delaware law applied to a D&O policy and, thus (for that reason among others), the coverage action should proceed in Delaware, not New York, even though the insurers filed a dueling action in New York.


More recently, in Pfizer, Inc. v Arch Ins. Co., 2019 WL 3306043 (Del. Super. Ct. July 23, 2019), even though the insured’s principal place of business was in New York, the policy was issued in New York, the policy contained New York amendatory endorsements, and the underlying lawsuit was filed and pending in New York, the Delaware court applied Delaware law, relying on Mills and Murdock.


If this trend continues, the insurance industry can expect Delaware trial courts to apply Delaware law to insurance coverage disputes, essentially by default in the absence of a choice of law provision, where the policyholder is incorporated in Delaware, regardless of where the policy was issued or where the policyholder is headquartered.


Why This Matters to Insurers

While anecdotal, we have seen a significant increase in the number of coverage actions filed by policyholders in Delaware in an effort to avoid litigating in a jurisdiction more likely to apply the law of state where the policy was issued.  Not only has the number of such actions increased, but the timing of the filing of these actions has changed as well.  In order to “plant the flag” in Delaware, policyholders have been filing coverage litigation more quickly than before, resulting in less pre-litigation dialogue or negotiation between the parties.


This trend is also important to insurers because Delaware insurance law can be particularly unfriendly to insurers.  For example, in the Pfizer case discussed above, the Delaware court was asked to decide a “related claims” issue.  Finding that Delaware law, not New York law, applied, the court imposed Delaware’s very narrow “relatedness” test and held that two claims were not related because they were not “fundamentally identical.”  See Pfizer, 2019 WL 3306043, at *10.  Importantly, if the dispute had been decided under New York law, the insurers could have relied on New York’s broader “sufficient factual nexus” test.


Another example is that, unlike courts in other jurisdictions, Delaware courts will not sustain a coverage defense based on an insurer’s lack of consent to settle an underlying case, unless the insurer can show prejudice.  See Murdock, 2018 WL 1129110, at *13.


Delaware is also less favorable to insurers with respect to coverage for disgorgement.  Compare Gallup, Inc. v. Greenwich Ins. Co., 2015 WL 1201518, (Del. Super. Ct. Feb. 25, 2015) (where a claim for disgorgement is settled without a final adjudication, there is coverage for the settlement, even if disgorgement is uninsurable), with Phila. Indem. Ins. Co. v. Sabal Ins. Grp., Inc., — F. App’x —, 2019 WL 4014100 (11th Cir. Aug. 26, 2019) (rejecting case law holding similarly to Gallup and finding no coverage for settlement of disgorgement claim based on traditional “no Loss” analysis).


How Insurers Can Respond


How can insurers respond to this trend?  As to policies already in the marketplace, of course, the industry can continue to seek a good ruling from a different Delaware trial court judge on this issue, presumably based upon a particularly good set of facts.  In addition, insurers can seek appellate relief from the Delaware Supreme Court (there is no immediate appellate court in Delaware).  However, a challenge to a court’s early decision on choice of law may not be possible until the underlying case is tried or otherwise disposed of by motion, and cases rarely go that far down stream.  In addition, it is critical that, if the industry does seek relief from the Delaware Supreme Court, it must evaluate carefully the best “test case” to send up, as a “close call” case could yield a decision from Delaware’s highest court unfriendly to the industry.  In the meantime, absent a decision from the Delaware Supreme court, while a “race to the courthouse” is never the preferred option, insurers should consider filing first in the “right” jurisdiction when faced with a coverage dispute, anticipating that the policyholder will likely file in Delaware.


As to policies yet to be issued, there is one clear option – to include a choice of law provision in the policy identifying the law of a state other than Delaware.  Insurers may choose to apply the law of the state where the insured is headquartered.  Many insurers and insureds probably assume that is the law that will govern the policy anyway, so this may simply reinforce pre-existing expectations of the parties.  Of course, it will behoove insurers to be aware of any unique risks or concerns presented by a given jurisdiction and to consider the choice of law provision in light of all relevant factors.  Another option is to include a New York choice of law provision, which has been traditionally included by certain markets, and therefore should not be particularly controversial with policyholders or their brokers.  Even this option, however, may be subject to challenge, as illustrated by a recent decision by the California Supreme Court.  In Pitzer College v. Indian Harbor Insurance Company, 2019 WL 4065521 (Cal. Aug. 29, 2019), the Court held that, even though a policy contained a New York choice of law provision, the court applied California law to certain notice issues, because the issues concerned a “fundamental public policy” of California.  Yet another potential option could involve policy language outlining binding arbitration in connection with disputes arising from the application of a policy’s choice of law provision.


While it is unfortunate that insurers must now expect Delaware courts to apply Delaware law where the policyholder is incorporated in Delaware, absent a choice of law provision or other policy built-in procedure, this appears to be the “new normal,” at least for now.  But, as discussed above, there are steps that insurers can take, both with respect to those policies already in the marketplace and future policies. 


This article is intended for informational purposes, only. It does not constitute legal advice. Nor is it a substitute for legal advice.

Jerusalem and Tel Aviv

Dome of the Rock, Jerusalem

The D&O Diary is on assignment overseas this week with a lengthy itinerary including multiple stops. The first stop on my schedule was in Israel, where I had business meetings in Tel Aviv. My timetable while I was in Israel also allowed an opportunity for a first-time ever visit to Jerusalem. As reflected in the pictures below, the Jerusalem stopover was a truly extraordinary experience. Continue Reading

Delaware Federal Court Rejects Merger Objection Plaintiffs’ Mootness Fee Request

As discussed in prior posts, after the Delaware courts evinced their distaste for the type of disclosure-only settlements that had until then typically resolved merger objection lawsuits, the plaintiffs’ lawyers changed their game. They began filing their merger objection lawsuits in federal court rather than in state court, and then rather than settling the cases, agreed to dismiss their cases in exchange for supplemental proxy disclosures, after which the plaintiffs would seek to recover a so-called “mootness fee.” At least one federal judge recently questioned this “racket,” but the question remained whether more courts would take steps to scrutinize this process and discourage what has become nothing more than the plaintiffs’ lawyers’ extraction of a “go away” payment.


In a positive sign suggesting that court may indeed become more involved in policing this process, a District of Delaware judge recently rejected merger objection lawsuit plaintiffs’ mootness fee petition on the ground that the plaintiffs failed to carry their burden of showing that the supplemental disclosures produced a substantial benefit for the acquired company’s shareholders. Continue Reading

Guest Post: Delaware Court Ruling Creates New Wrinkle for Defendants Evaluating Appraisal Claims

Dan Wolf

As I discussed in a recent post, in July 2019, a Delaware Superior Court judge held that an appraisal action is a Securities Claim within the meaning of the applicable D&O insurance policy. While this part of the court’s ruling was noteworthy, there was another part of the court’s ruling that was also important. In addition to the Securities Claim issue, the court also determined that policy provided coverage for pre-judgment interest on the fair value payment in the appraisal action, even though the policy did not provide coverage for the payment itself.


In the following guest post, Dan Wolf, an associate at the Gilbert law firm, takes a look at the pre-judgment interest aspect of the recent Delaware opinion. Among other things, Dan suggests that this aspect of the court’s decision changes defendants’ analysis of whether or not to prepay appraisal claimants. A version of this article first appeared on his firm’s blog, here. I would like to thank Dan for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Dan’s article. Continue Reading