delawareIn an August 27, 2015 post-trial opinion (discussed here), Delaware Vice-Chancellor Travis Laster found that Dole Foods CEO David Murdock, and the company’s General Counsel and Chief Operating Officer, C. Michael Carter, had committed “fraud” in connection with a November 2013 “going private” transaction. However, according to a December 21, 2016 Delaware Superior Court decision in the subsequent insurance coverage litigation, because Laster’s findings of fraud were not part of the subsequent post-settlement final judgment in the case, the fraud exclusion in Dole’s D&O insurance program did not preclude coverage for the settlement. Anyone interested in understanding how the fraud exclusion in a D&O policy operates will want to read this opinion. A copy of the Delaware Superior Court opinion can be found here.



In November 2013, Murdock, acting through DFC, a holding company, took Dole private through a transaction in which he acquired the Dole shares he did not already own. Dole shareholders filed multiple lawsuits against Dole, Murdock, and Carter, alleging that they had manipulated Dole’s share price so Murdock could acquire the shares at a lower cost.


In a post-trial opinion (the “Memorandum Opinion”) in the shareholder litigation, Laster found that Murdock and Carter had engaged in “fraud” that prevented Dole’s shareholders from receiving a fairer price in the transaction.


Among other things, Laster found that Carter, whom Laster described as Murdock’s “right-hand man,” took a series of steps that were calculated to drive Dole’s share price down. Before Murdock made his proposal to take the company private, Carter made “false disclosures” about savings Dole could achieve through certain 2012 transactions. Laster also found that Carter “intentionally tried to mislead” the board committee “for Murdock’s benefit.” Laster concluded that the shareholders had been damaged and entered a $148.1 million damages award against Dole, Murdock and Carter.


In December 2015, and in lieu of an appeal, the parties in the Dole shareholder litigation settled the dispute for 100% of the damages award plus interest. Murdock agreed to pay the settlement amount on the defendants’ behalf. In a February 10, 2016 Order and Final Judgment, Laster approved the settlement.


Dole maintained a $100 million program of D&O insurance consisting of a layer of primary insurance and eight layers of excess insurance. The primary layer and several of the lower level excess layers were exhausted by defense expense. In January 2016, after the parties had agreed to settle the underlying lawsuit but before Laster had approved the settlement, a number of the excess insurers filed a declaratory judgment action, seeking a judicial declaration that there was no coverage under their policies for any portion of the settlement amount.


Among other things, the insurers argued that Murdock and Carter’s fraud in connection with the going private transaction relieved the insurers of any obligation to defend or indemnify. The insurers also argued that the defendants in the underlying lawsuit did not obtain their consent prior to entering the settlement, as required under the policy. The insurers also argued that they had a right of subrogation against the individual defendants.


Policy Section IV.A.6 of the primary policy, as amended, provided as follows:

The Insurer shall not be liable for Loss on account of any Claim: . . . based upon, arising out of or attributable to:

  1. Any profit, remuneration or financial advantage to which the Insured was not legally entitled; or
  2. Any willful violation of any statute or regulation or any deliberately criminal or 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.


The declaratory judgment action defendants filed a motion to dismiss the declaratory judgment action against them.


The December 21 Opinion

In his December 21 opinion, Judge Eric M. Davis granted the declaratory judgment action defendants’ dismissal motion regarding the fraud exclusion and regarding the subrogation issue.


In concluding that the fraud exclusion did not preclude coverage, Judge Davis noted that while Laster’s Memorandum Opinion “did make findings that some of the defendants… committed fraudulent acts,” the Memorandum Opinion “was not a final and non-appealable adjudication.” The only “final and non-appealable adjudication in the Chancery Court action was the Order and Final Judgment” that was entered pursuant to the parties’ settlement. The Settlement and the Order and Final Judgment, Judge Davis noted, “do not make findings regarding the fraudulent acts by an insured.”


Judge Davis also noted that several aspects of the Memorandum Opinion which he found supported his conclusion that the Memorandum Opinion did not represent a “final and non-appealable adjudication.”


First, the Memorandum Opinion requested that the parties “advise the court as to any issues that remain to be addressed.” This, Judge Davis said, showed that “issues remained outstanding in the litigation and that the Memorandum Opinion was, at best, interlocutory.” He also noted that if the Memorandum Opinion were final, “there would be a docket entry showing the entry of an order with that opinion,” but there was no entry. Also if the Memorandum Opinion had been final, the Order and Final Judgment would have to have vacated the Memorandum Opinion, which it does not.


Accordingly, because the Memorandum Opinion does not constitute a final and non-appealable order and because the Final Order and Judgment that was entered in the case “do not make findings regarding fraudulent acts by an Insured,” Judge Davis found that “the plain, unambiguous language of Exclusion IV.A.6 means the exclusion does not apply.”


Judge Davis also granted the defendants’ motion with respect to the subrogation issue, finding that under the law of both California and Delaware, an insurer may not subrogate against its own insured. Judge Davis also noted that the insurance program’s subrogation provision expressly provided that the insurer shall not subrogate against an individual insured unless Exclusion IV.A.6 applies. Because Judge Davis concluded that Exclusion IV.A.6 does not apply, the insurer’s subrogation rights under the policy were inapplicable.



Everyone involved with D&O insurance has at one time or another been asked whether or not the fraud exclusion is triggered if an insured person has been merely accused of fraudulent misconduct. The answer is that, at least under the typical wording found in most contemporary D&O insurance policies, mere allegations of fraud alone are insufficient to trigger the exclusion. And that is as it should be. Many claims triggering a D&O insurance policy contain allegations of fraud. If mere allegations alone were sufficient to trigger the exclusion, the policy would afford precious little coverage in many circumstances.


In order to ensure that mere allegations alone do not trigger the exclusion, the typical D&O insurance policy these days will require a judicial determination that fraud has actually taken place in order for the exclusion to be triggered. What specifically is required in order to meet these exclusionary requirements is very much dependent on the actual policy wording. For example, in an earlier case, discussed here, one New York court held, based on the wording at issue, that a final lower court “judgment” alone was sufficient to trigger the exclusion, even though the judgment was appealable.


The specific wording of the fraud exclusion at issue here was much more protective for the insureds. In order for the fraud exclusion in Dole’s insurance program to be triggered, the precluded conduct must have been “established by a final and non-appealable adjudication.” Under this wording, the occurrence of the precluded conduct is not “established” sufficiently to trigger the exclusion if the adjudication is either not “final” or if it is “appealable.”


Even though Laster’s Memorandum Opinion contained determinations of fraud, the supposed fraud was not “established” for purposes of the exclusion because the Memorandum Opinion was not, according to Judge Davis, “final.” A final order was subsequently entered in the case after the parties reached a settlement, but the Final Order and Judgment did not “establish” that the precluded conduct had taken place.


Many observers aware of Laster’s findings in the Memorandum Opinion may find this outcome somewhat surprising; the surprise may be due to the fact that the exclusion has been found not to apply and the policy coverage has been found to be available for insured persons who were not merely accused of fraud, but who had actually been found to have committed fraud, at least in the Memorandum Opinion.


For those who find this troubling, there are a number of things to keep in mind. The first is that the reason for the fraud exclusion’s detailed trigger requirements is to ensure that mere allegations or unestablished assertions are not sufficient to preclude coverage, and also to ensure that even a conviction of fraud is not sufficient to preclude insurance coverage for an appeal. The balance struck in this policy wording, which is found in many D&O policies, is basically that there is no finding of fraud sufficient to trigger the exclusion until the factual determinations are final and all appeals have been exhausted. Any determination of fraud short of these requirements – such as, for example, a finding in an order that is, as Judge Davis said, merely “interlocutory” — is not sufficient to preclude coverage.


Second, it is a going to be an unusual circumstance where someone found to have committed fraud is going to be able to negotiate a post-determination settlement. A settlement certainly would not be available in the event of a criminal conviction for fraud. It is also going to be a rare occasion in the civil context where a defendant would be willing to accept a post-determination settlement of a fraud allegation or that a plaintiff would be willing to agree to the settlement. Very few defendants will be able to agree, as the defendants in the underlying case did here, to a settlement that consists of the full amount of the damages award in the underlying case.


I recognize that one aspect of this situation is that the defendants from the underlying action seem to have maneuvered the case in order to preserve coverage and avoid the implications of Laster’s findings that they committed fraud. Judge Davis specifically “acknowledges” that the post-settlement Order and Final Judgment “are carefully crafted to mitigate the findings in the Memorandum Opinion.” He noted that “the Defendants could have done that to maintain insurance coverage or for a number of other reasons.” Judge Davis, at least, is unconcerned that the defendants may have engineered the settlement in order to try to preserve coverage and to avoid the potential effect of the fraud exclusion. For him the only relevant inquiry is whether or not there coverage preclusive conduct has been “established” by a “final and non-appealable adjudication.”


I understand it might be troubling that the defendants engineered a settlement in order to avoid the coverage preclusive effects of the fraud exclusion, but the fact is that this happens all the time; the difference is that the settlement usually takes place before a court has made determinations that the litigation targets committed fraud.


Waiting until after trial to enter a settlement as a way to try to preserve coverage is going to be a very chancy proposition for most litigation defendants. Obviously it will drive up the price of poker; here, the amount of the settlement, set at the amount of the judgment plus interest, is far in excess of the amount of insurance available. Most litigants mindful of these kinds of risks will opt to settle before trial. There was also the risk that the maneuver might not work, and that the defendants might get stuck with the settlement amount, without the benefit of insurance. Not many litigants are going to run that risk.


Here’s another thing to think about for those who are troubled by this opinion. That is, there is nothing new about this. Defendants frequently settle cases in order to avoid the possible insurance-undermining effects of a fraud determination. Judge Davis’s cited and relies upon numerous prior decisions. To be sure, as Judge Davis noted, the prior cases all involved settlements that had been reached during trial, rather than after trial, as was the case here. But in both the prior cases and in this case, the settlements were reached before the matter was finalized for appeal. Judge Davis found that the rationale from those prior cases applied equally here. The Memorandum Opinion, Judge Davis said, “was a step towards a final adjudication” but it was “not final and it was not appealable.” He added that “the reality is that before any judgment was entered by Vice Chancellor Laster, the Defendants settled the case and had it dismissed through the Order and Final Judgment.”


It should be noted that the Judge Davis’s decision is only  a trial court ruling. The excess insurers may choose — once the insurance coverage case rulings are final, of course — to appeal the rulings. There could be more to be seen in this case before it is all said and done. Given the amount of money at stake, I would say the chances of appeal are high.


I recognize that there may be many readers that have a different reaction to this decision. I encourage readers who view this case differently than I do to add their observations about the decision to this post using the blog’s comment feature.