The long-running insurance coverage litigation arising from the settlements of the shareholder claims filed in connection with the Dole Food Company’s November 2013 “going private” transaction continues to work its way through the Delaware court. In the latest development in the coverage dispute, a Delaware Superior Court judge has entered two separate interesting orders, the first granting the insurer’s motion for summary judgment on the defendants’ bad faith counterclaim, and the second denying the insurers’ summary judgment motions, among other things, on the consent to settlement and cooperation clause issues. Delaware Superior Court Judge Eric Davis’s May 1, 2018 opinion on the bad faith counterclaim can be found here. Judge Davis’s May 7, 2018 opinion on the consent to settlement and cooperation clause issues can be found here.
The Underlying Chancery Court Lawsuit
The November 1, 2013 transaction in which David Murdock, Dole Food Company’s Chairman and CEO, acquired the Dole shares was the subject of a breach of fiduciary duty lawsuit filed in Delaware Chancery Court. In 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, had employed “fraud” to drive down the Dole’s share price to lower the amount Murdock paid in the deal. Laster entered a damages award against Murdock and Carter, jointly and severally, of $148.1 million, as discussed here. On December 7, 2015, Murdock and Dole reached an agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the judgment amount to be paid to the plaintiffs in a separate appraisal action, as discussed here. As part of the settlement, the defendants gave up their right to appeal the Chancery Court rulings and judgment.
The Underlying Securities Class Action Lawsuit
On December 5, 2015, while the approval of the settlement of the Chancery Court action was pending, plaintiff shareholders filed a securities class action lawsuit against Dole and Murdock in the U.S. District Court for the District of Delaware, as discussed here. The plaintiffs in the securities lawsuit alleged that Dole and Murdoch misled investors in connection with the Dole take-private transaction, in violation of the federal securities laws. The parties to the securities class action lawsuit entered mediation. As reflected in the parties’ March 2017 stipulation of settlement, the securities lawsuit ultimately settled for $74 million. The total amount of the two settlements is $222.1 million.
The Insurance Coverage Litigation
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 Chancery Court lawsuit and after the securities lawsuit had been filed, the remaining excess insurers filed an action in Delaware Superior Court seeking a declaratory judgement that there was no coverage under their policies for any portion of the Chancery Court settlement and that there was no coverage for the separate securities class action lawsuits.
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 Chancery Court action, the fraud exclusion in Dole’s D&O insurance program did not preclude coverage for the settlement.
As discussed here, in a March 1, 2018 decision, Judge Davis denied the insurers’ summary judgment motions in which the insurers sought to argue that under California law, which the insurers contended applied to the policies, coverage for the under the policy for the settlements is precluded as a matter of public policy. Judge Davis ruled, among other things, that Delaware law rather than California law applied to the policy’s interpretation, and that the Chancery Court’s determination that the individuals had committed fraud did not preclude coverage for the claim as a Delaware public policy.
In two May 2019 rulings, discussed below, Judge Davis ruled on two further motions for summary judgment, the first in which the insurers moved for summary judgment on Dole and the other defendants’ counterclaim that the defendants had denied coverage in bad faith; and the second, in which the various parties’ moved for summary judgment on the issues of whether Dole had breached the policies’ cooperation clause and whether Dole had breached the policies consent to settle provisions. In the second ruling, Judge Davis also addressed the defendants’ summary judgment on the insurers’ argument that the settlements did not represent “Loss” under the policies, but rather represented merely an increase in the consideration to be paid in the take private transaction.
The May 1, 2019 Order
In his May 1, 2019 order, Judge Davis granted the insurers’ motion for summary judgment on the bad faith counterclaim against the insurers. Dole and the other defendants had claimed in Count 3 of their Counterclaim that the insurers had breached their implied covenant of good faith and fair dealing in denying coverage for the underlying settlement amounts.
The defendants had argued that the insurers had acted in bad faith because the insurers applied California law in denying coverage for the settlements. Judge Davis said that while applying California law was “incorrect”, it “was reasonable.” After all, he noted, the insurers issued the insurance policies to Dole’s California headquarter; the policies were negotiated by California brokers; and included California amendatory endorsements. Judge Davis added that determination of the law applicable to an insurance policy is “a very sophisticated analysis” and that prior to his ruling in this case there was only one other published court opinion on the choice of law issue.
Judge Davis also rejected the defendants’ argument that the insurers acted in bad faith in relying on the statements in the Chancery Court opinion as a basis on which to contend that the policy’s fraud exclusion was triggered. He noted that, “while it ended up being wrong,” the insurers’ determination that the Chancery Court opinion constituted a “final and non-appealable adjudication” adverse to the defendants was rational when made. He added that the parties were putting too much emphasis on the Fraud Exclusion in connection with the bad faith claim, since the insurers had asserted “other viable reasons for denying coverage” – including the defendants’ alleged breaches of the policies’ consent to settlement provision and the policies’ cooperation clause.
The May 7 Order
In the May 7 order, Judge Davis first granted summary judgment in favor of the defendants with respect the insurers’ contention that the settlement amounts did not represent a “loss” under the policies but merely an increase in the consideration for the take-private transaction. In rejecting the insurers’ argument, he noted that the policies’ definition of loss specifically stated that the term “loss” includes “settlement amounts.” He also noted that the provision in the definition of “loss” specifying that loss does not include amounts of increased transactional consideration relates only to amounts paid by “the policyholder.”
Judge Davis said that the settlements are “settlement amounts” within the definition, and that the definition’s exception for increased transaction amounts did not apply to the Chancery Court settlement because the entire amount of the Chancery Court settlement was paid by Murdock, not the policyholder (Dole). The securities class action settlement is, Judge Davis said, covered “loss,” even though paid in part by Dole, because Dole did not acquire shares in connection with the merger. Judge Davis also rejected the insurers’ argument that the settlement amounts were not loss because the defendants were merely paying for what they already owed; he noted that the Chancery court found breaches of fiduciary duty, not merely a breach of contract. Thus, the defendants were not merely paying amounts they previously owed but rather were paying to settle an alleged “wrongful act” within the meaning of the policy.
In the May 7 order, Judge Davis denied the insurers’ summary judgment on the issues of whether the defendants had breached the consent to settlement clause and the cooperation clause.
In rejecting the insurers’ motion with respect to the consent to settlement provisions, he noted that “consent-to settle provisions do not provide an insurer with an absolute right to veto a reasonable settlement.” Rather, the “main purpose” of the consent provision is “to protect the insurer from prejudice or a collusive settlement.” An insurer is not, Judge Davis said, free from liability in the absence of a showing that the breach caused the insurer to suffer injuries. These kinds of issues generally “are not properly resolved on summary judgment.” The insurers have demonstrated that thye did not provide prior written consent to the settlements, so the burden is on the defendants to show that the insurers have not suffered prejudice. On the grounds of that disputed issues of material fact remain, Judge Davis denied the summary judgment motion on the consent to settlement issue.
In rejecting the insurers’ summary judgment motion with respect to the cooperation clause, Judge Davis noted that cooperation clauses are “meant to prevent collusion between the insured party and the injured party.” Judge Davis said that there are disputed issues of material fact with regard to whether there was a “substantial breach of the cooperation provision.” Judge Davis noted that there were factual issues of whether the defendants had withheld information that the insurers requested; whether the request were reasonable; whether the insurers’ coverage denial gave the defendants the right to enter a reasonable settlement; and whether the settlements were fair unreasonable under the circumstances and not fraudulent or coercive.
Ordinarily, a court’s decision to deny summary judgment on consent to settlement or cooperation clause issues would not be particularly interesting. After all, a decision that summary judgment is not appropriate because there are material factual disputes in some ways merely kicks the dispute down the road for determination another day.
However, in this instance, what Judge Davis said along the way in denying the insurers’ summary judgment motion is interesting, particularly what he said with respect to the purposes of the policy provisions.
With respect to the consent to settlement provision, he said that purpose of the consent to settlement provision is to protect insurers from prejudice or a collusive settlement, and that an insurer is not free from liability absent a “showing that the breach caused the insurer to suffer prejudice” – the consent-to-settlement provision, Judge Davis said does not “provide the insurer an absolute right to veto a reasonable settlement.”
Judge Davis’s statements about the consent to settlement provision’s purposes, and in particular his statement that the insurer cannot rely on the consent to settlement provision to deny coverage for a settlement in the absence of a showing of prejudice, are potentially significant and could prove helpful to policyholders in other situations. Settlement often unfolds rapidly and after the fact insurers often try to argue that they have no obligation to pay for a deal to which they did not agree in advance. These can become very messy disputes (as this case in fact shows). Judge Davis’s statements that the consent to settlement provision does not provide the insurer with an absolute veto right and that the insurer cannot assert breach of the provision as a defense to coverage in the absence of prejudice could be helpful to policyholders seeking coverage for a settlement that was put together quickly and without all procedural niceties observed. There will often be, as was the case here, disputed issues of material fact, which at least can provide policyholders some protection from a summary judgment motion on the consent to settlement issue.
By the same token, Judge Davis’s statement about the cooperation clause could also prove helpful to policyholders. His statement of the purpose of the provision, to prevent collusion and to allow the insurer to conduct a reasonable investigation, at least suggests the possibility that a supposed breach of cooperation on which an insurer seeks to rely is not sufficient to trigger the provision because the supposed breach was not collusive and did not impede the insurer’s investigation. In any event, Judge Davis’s conclusion that there are material issues of fact on question whether the supposed breaches were substantial could also provide policyholders some protection against summary judgment.
Judge Davis’s conclusion that the consent to settlement issue and the cooperation clause issue are fact-dependent does have important practical implications. In a May 13, 2019 post on the Hunton Insurance Recovery Blog about Judge Davis’s latest coverage decisions (here), the authors note that because consent to settlement and cooperation clause issues can be fact-intensive, “it is imperative that insureds document their communications with insurers, including but not limited to notification of claims, requests for attendance at mediation, demands to settle, and ongoing cooperation efforts. Because these issues will often result in a fact-finding inquiry, it is important to have interactions with insurers well-documented.”
Judge Davis’s decision that the settlements represent “loss” within the meaning of the policies’ definition is also significant. Insurers frequently try to argue that the amounts for which policyholders are seeking insurance do not represent loss. Judge Davis’s willingness to look at all the circumstances of the settlements (including in particular that the amounts were paid in whole or in part by Murdoch, not by Dole) is significant, as is his analysis of the insurers’ contention that the settlements merely represent amounts that the defendants already owed. His recognition that the settlements represent payments in resolution of claims for alleged wrongful acts, and not in resolution of claims for breach of contract, could be helpful in other situations in which insurers assert the “no loss” argument.
Judge Davis’s grant of summary judgment on the bad faith issues is interesting, but hardly surprising. The defendants may well have prevailed on the choice of law and fraud exclusion issues, but there was nothing about the grounds on which the insurers pursued those issues to suggest that the insurers were not making their arguments in good faith. From my old days fighting the coverage wars for the insurers, I get a little bit impatient with bad faith arguments; the bad faith card gets played way too frequently, and that certainly seems to be the case here.
The bottom line for these parties is that there are many more issues to resolve and this case has a lot further to go. The case will continue to unfold and the parties work through these issues. For many reasons surrounding the circumstances of these cases (including among other things, the factual characterizations in the Chancery Court opinion), it arguably is no surprise that the insurers are fighting this coverage dispute so vigorously. It remains to be seen how it will all play out.
The Wiley Rein law firm’s May 6, 2019 post on its Executive Summary Blog about Judge Davis’s summary judgment ruling on the bad faith counterclaim can be found here.