The insurance coverage litigation arising from the settlement of the shareholder claims filed in connection with the Dole Food Company’s November 2013 “going private” transaction continues to grind on. In the latest development in the coverage dispute, a Delaware Superior Court judge has entered a number of interesting rulings, deciding among other things that an underlying determination that an insured committed fraud does not make the claim uninsurable as a matter of Delaware law. Delaware Superior Court Judge Eric Davis’s March 1, 2018 opinion in the Dole Foods coverage litigation can be found here.
In November 2013, Dole Foods CEO David Murdock, acting through 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 the company’s General Counsel and Chief Operating Officer, C. Michael Carter, alleging that they had manipulated Dole’s share price so Murdock could acquire the shares at a lower cost.
In an August 27, 2015 post-trial opinion (discussed here), Delaware Vice-Chancellor Travis Laster found that Murdock and Carter had committed “fraud” in connection with the transaction. 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.
As discussed here, in a December 21, 2016 decision, Superior Court Judge Davis ruled that because Laster’s findings of fraud were not part of the post-settlement final judgment in the case, the fraud exclusion in Dole’s D&O insurance program did not preclude coverage for the settlement. The parties continued to litigate the coverage dispute based on the insurers contention that they the applicable state law does not permit indemnification of the Dole officers; that the insureds had failed to obtain written consent prior to entering the settlements; and that the insureds had failed to cooperate with the insurers. The insurers moved for summary judgment on these issues.
The March 1, 2018 Decision
In a March 1, 2018 decision, Judge Davis denied the insurers’ summary judgment motions, ruling, among other things, that Delaware law rather than California law applied to the policy’s interpretation, and that the underlying court’s determination that the individuals had committed fraud did not preclude coverage for the claim as a Delaware public policy. Judge Davis also concluded that because of disputed factual issues, summary judgment on the failure to obtain consent and failure to cooperate issues is premature.
The insurers had attempted to argue that California law applied in order to be able to rely on Cal. Ins. Code Section 533, which provides that “an insurer is not liable for a loss caused by the willful act of the insured’s agents or others.” Section 533 is, as California’s courts have said, an “implied exclusionary clause” that is “read into all insurance policies,” regardless of the actual language.
Delaware does not have a statute similar to California’s Section 533. Instead, Delaware’s code provides that “a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporate against any liability … whether or not the corporate would have the power to indemnify such person against such liability under this section.” The difference between the two jurisdictions’ laws on this issue therefore is potentially significant.
After a detailed review of choice of law principles, Judge Davis concluded that Delaware law applied to this coverage dispute. Among other things, Judge Davis determined that the place of incorporation is the more significant contact, and that Dole is a Delaware corporation. Carter and Murdock are officers of a Delaware corporation. The shareholders filed their breach of duty lawsuit in Delaware’s Chancery Court. The Chancery court applied Delaware law in determining that Carter and Murdock had breached their duties. Under these facts, Judge Davis said, “Delaware and California has the more significant interest and Delaware law will apply.”
Judge Davis then determined that, “although it may strain public policy to allow a director to collect insurance on a fraud, it does not appear to be explicitly prohibited by Delaware statutory law.” Delaware public policy “does not clearly prohibit Insurers from indemnifying the Insureds’ fraud,” and accordingly, Judge Davis said he would not grant the motion “on a claim that indemnification would violate Delaware public policy.”
Although Judge Davis did not decide the settlement consent and cooperation issues, he did review important insurance policy construction principles. Among other things, he said, with respect to the “reasonable expectations doctrine,” that “case law exists that permits judicial application of the reasonable expectations doctrine to fulfill an insured’s expectations even where those expectations contravene the unambiguous, plain meaning of exclusionary clauses.”
Choice of law issues are usually not the part of judicial decisions that command attention. However, it seems likely that Judge Davis’s ruling on the choice of law issues may have determined the outcome of the public policy indemnification issue. The insurers’ argument that indemnifying the individuals for their fraud would violate public policy was clearly much stronger under California law (thus explaining the critical importance of the choice of law issue).
Judge Davis’s conclusion that Delaware law applies is interesting, particularly the significance he placed on the fact that the place of incorporation. Obviously many corporations, particularly publicly traded companies, are incorporated in Delaware. Judge Davis’s analysis could be helpful for companies seeking to argue that Delaware law should govern the interpretation of their insurance policies.
For insurers that are disappointed by the choice of law analysis here, or that otherwise would like to be able to argue that California law should govern the interpretation of their policies in order to be able to try to rely on California’s willful acts coverage prohibition, have an available option. They could require the inclusion of a California choice of law provision. While this option is available, I am guessing we won’t see a lot of insurers rushing to add California choice of law provisions. The Willful Acts statute may be perceived as beneficial for insurers, but insurers may have a different view of the rest of applicable provisions under California law (as well as the increased likelihood that they might wind up litigating coverage disputes in California’s courts).
Judge Davis’s analysis that Delaware public policy does not prohibit insurers from indemnifying fraud is interesting. If nothing else, it suggests that insurers seeking to deny coverage for fraudulent misconduct will be limited in doing so to the specific provisions and requirements of their policies’ fraud exclusions, and will not be able to rely on more general notions of public policy. Indeed, Judge Davis’s analysis of the public policy issues suggests that Delaware public policy does not involve significant constraints on insurability.
Finally, Judge Davis’s analysis of the reasonable expectations doctrine is interesting and his statement about the impact of those expectations even in face of unambiguous exclusionary language could be helpful in other coverage disputes, at least where Delaware law applies.
Special thanks to Peter Gillon of the Pillsbury law firm for sending along the decision as well as his thoughts about the case to me. I hasten to add the views expressed in this blog post are exclusively my own.