In a development that undoubtedly will be discussed among D&O insurance professionals for months to come, the Delaware Supreme Court issued an opinion last week in the long-running Dole Foods insurance coverage battle. Many D&O insurance industry observers will not be surprised to learn that the Delaware Court’s opinion is favorable to policyholders. As discussed below, the opinion (and the many rulings in the court below in this dispute) may encourage insurers to consider possible policy wording revisions. A copy of the Delaware Supreme Court’s March 3, 2021 opinion 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 Dole shares he did not already own was the subject of a breach of fiduciary duty lawsuit filed in Delaware Chancery Court. In a 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster expressly found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, respectively, had “engaged in fraud” to drive down the Dole’s share price to lower the amount Murdock and Carter 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 a settlement agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the amount of damages to be paid to the plaintiffs in a separate appraisal action, as discussed here.
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. As might be expected, the securities class action complaint quotes extensively from Laster’s opinion from the Delaware Chancery Court lawsuit, including Laster’s findings that Murdock and Carter had “engaged in fraud.” 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. They also later argued that there was no coverage for the separate securities class action lawsuit and settlement.
As discussed here, in a December 21, 2016 decision, Delaware Superior Court Judge Davis ruled in the coverage action 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 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 matter of Delaware public policy.
In two May 2019 rulings, discussed here, Judge Davis ruled on two further motions for summary judgment, the first granting the insurer’s motion for summary judgment on the Dole defendants’ bad faith counterclaim, and the second denying the insurers’ summary judgment motions, among other things, on consent to settlement and cooperation clause issues. In his May 2019 rulings, Judge Davis expressly left open issues relating to subrogation, allocation, and exhaustion.
Finally, in a January 2020 ruling (here), discussed here, Judge Davis ruled, notwithstanding the “relative legal and financial exposures” language in the primary policy’s allocation provision, that the “larger settlement rule” governed the determination of allocation issues. In the subsequent Delaware Supreme Court opinion discussed below, the Court said that in the January 2020 opinion, Judge Davis “ruled that the Insurers could not allocate the Insureds’ losses.
On March 26, 2020, the Superior Court entered final judgment on behalf of the Insureds. All of the insurers but one either paid their policy limits or settled with Dole. The eighth level excess insurer filed an appeal. As the Delaware Supreme Court noted at the outset of its subsequent opinion on the insurer’s appeal, the eighth level excess insurer (hereafter referred to as the insurer) “is the only insurer involved in this appeal.”
On appeal, the insurer claimed that the Superior Court had erred in four ways. First, it contended that Judge Davis incorrectly concluded that Delaware law rather than California law governed the policy. Second, the insurer argued that even if the Supreme Court concludes that Delaware law applies, Delaware law should dictate that fraudulent conduct is uninsurable as a matter of public policy. Third, the insurer argued that the Superior Court erred in concluding that the policy’s fraud exclusion did not preclude coverage. Fourth, the insurer argued that the Superior Court incorrectly applied the “larger settlement rule” contrary to the “relative legal and financial exposures” language in the policy’s allocation provision. The Insureds cross-appealed, arguing that the Superior Court incorrectly dismissed their bad faith counterclaim.
The March 3, 2021 Opinion
In a March 3, 2021 opinion written by Justice Gary Traynor for a unanimous court, the Delaware Supreme Court affirmed the Superior Court’s rulings.
Choice of Law
The first issue the Court addressed was the choice of law issue – that is, the question of whether Delaware law or California law governed the insurance coverage issues. The Court agreed with the insurer that the “most significant relationship test” should determine which jurisdiction’s law should apply. The insurer argued that California law should govern, noting, among other things, that Dole’s headquarters and the insured principals were all located in California; that the policy was delivered to Dole’s headquarters; and the policy included California amendatory endorsements. The insurer argued further that the single fact that Dole was incorporated in Delaware should not override all of the other factors.
The Supreme Court began its analysis by looking at the Delaware statutory provisions applicable to indemnification and advancement. The Court noted that the provisions permit Delaware corporations to provide broad indemnification and advancement rights and, the Court noted, “to purchase D&O insurance to protect them even where indemnification is unavailable.” These provisions, the Court said, evidence a recognition that “minimizing the downside risks of serving as a director or officer through D&O insurance will enhance the ability of Delaware corporations to attract talented people.”
The Court further noted that “because Delaware law governs the scope and entitlement to indemnification and advancement, applying Delaware law to the D&O policies that actually cover those costs advances the relevant policies of the forum.” It is also the case, the Court noted, that “in the vast majority of cases, Delaware law governs the duties of the directors and officers.” These factors, the Court said, suggest that “the state of incorporation is the center of gravity of the typical D&O policy, including the Policy under consideration here.”
While there are, the Court noted, California contacts involved here, the insurer’s “emphasis on physical location underrates the significance of Dole’s status as a Delaware corporation.” The corporation’s directors and officers “act on behalf of Dole, whose legal residence is in Delaware.” The insureds’ “legal ties” to Delaware “are more significant – and therefore should be afforded greater weight — than their physical location in California.”
The California contacts, the Court said, “might be dispositive were we addressing an insurance policy covering a different subject matter and insureds with a more tenuous connection to Delaware.” The Court went on to say “When we balance the California contacts against Delaware’s interests in protecting the ability of its considerable corporate citizenry to secure D&O insurance and thereby attract talented directors and officers … we find that Delaware has the most significant relationship to the Policy and its parties.” Accordingly, the Court affirmed the Superior Court’s choice of law ruling.
The Public Policy Issue
The Court then turned to the insurer’s argument that Delaware public policy should bar the insureds’ insurability. The Court posed the question to itself “does our State have a public policy against the insurability of losses occasioned by fraud as to vitiate parties’ freedom of contract?” The Court answered, “We hold that it does not.”
The Court started its analysis by reviewing the policy’s fraud exclusion and its requirement for a “final and non-appealable adjudication” in order for the exclusion to be triggered, which the Court said “implies that fraud that does not fall within the exclusion because it has not been finally adjudicated will otherwise be covered.”
The Court further noted that the state’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” regardless of whether the corporation has the power to indemnify against such liability. The public policy embodied in this provision “weighs in favor of the insurability of losses incurred as a result of a breach of the duty of loyalty, including one marred by fraud.” A blanked prohibition on insurability, the Court said, “would leave many injured parties without a means of recovery,” which would conflict with “the public policy that favors the compensation of innocent victims.”
Delaware’s courts, the Court said, should defer to “the parties’ contractual choices and to the legislature’s prerogative in matters of public policy.” Courts show this deference “not because we condone fraud in Delaware”; rather, the Court said, “concluding that certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different that placing a stamp of approval on that conduct.” In the absence of “clear guidance” from the legislature, the Court said it “must” reject the insurer’s invitation to void its contractual obligations on public-policy ground.
The Fraud Exclusion
The Court then turned to the insurer’s argument that the policy’s fraud exclusion precluded coverage. The fraud exclusion provided that the insurer shall not be liable for Loss on account of any Claim based on, arising from, or attributable to “any willful violation of any statute or regulation or any deliberately criminal or fraudulent act, error or omissions by the Insured, if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.”
The Superior Court’s opinion on this issue had focused on the applicability of the exclusion to the settlement of the Chancery Court lawsuit (the one in which the Vice Chancellor found that the individuals had acted with “fraud”) On appeal, the Supreme Court focused instead on the settlement of the Securities Class Action lawsuit, which had not yet taken place at the time the Superior Court ruled on fraud exclusion issues. The Supreme Court reasoned that if the Securities lawsuit settlement was covered, it doesn’t matter whether the Chancery Court action is covered, since the Securities Lawsuit settlement would more than exhaust the insurer’s policy.
The Court concluded that the fraud exclusion did not operate to preclude coverage for the settlement of the Securities Lawsuit. The exclusion, the Court noted, is not triggered unless the precluded conduct is adjudicated “in the underlying action.” However, the fraud finding on which the insurer relied was not in the Securities Lawsuit; it was in the Chancery Court lawsuit. The fact that the findings in the Chancery Court lawsuit “might have been implicated” in the resolution of the Securities Lawsuit had it not been settled “is irrelevant to a determination of whether there has been an adjudication” in the Securities Lawsuit.
The Allocation Issue
The Court also rejected the insurer’s argument that the Superior Court had improperly applied the “Larger Settlement Rule” to the allocation issue, given the “Relative Exposures” language in the policy’s allocation provision. The Court affirmed that the Superior Court had properly applied the Larger Settlement Rule. The Court went on to observe that the insurer had “pleaded no facts” to suggest that the settlement of the Securities Lawsuit “represented an admixture of covered and non-covered losses. Nor, the Court said, did the Insurer provided “an explanation of how the application of their ‘relative exposures’ allocation theory would lead to a reduction in the coverage available to the Insureds.”
Finally, the Court affirmed the district court’s dismissal of the insureds’ bad faith claim against the insurer, citing the Superior Court’s observation that the insurers had advanced “a number of well-reasoned arguments for denying coverage.”
Although I have given myself a few days to live with this opinion and to let it marinate a little bit before trying to write about it, I still almost don’t know where to begin in discussing it. I suppose the best place to start is right at the beginning, at the point the insurers filed their declaratory judgment action in Delaware Superior Court. Here’s one thing I know for sure – no D&O insurer will ever do that again. Indeed, as I discuss further below, I suspect the insurers likely are now considering how to take steps to avoid litigating coverage issues in Delaware’s courts.
It is not a new observation that Delaware’s courts have a reputation as being policyholder friendly. Indeed, I have made that observation myself in a number of posts; in a prior post, written recently but before I knew about this most recent decision, I wrote “it is generally true that on balance policyholders will want to have their D&O insurance coverage disputes resolved in Delaware courts. Insurers? Not so much.”
Although there are many different aspects of the Delaware Supreme Court’s opinion here — as well as of the various decisions of the Superior Court below — that I might cite as suggesting the Delaware courts’ policyholder inclination, the most significant example is the Court’s choice of law analysis. This is not the first time that I have found fault with a Delaware court’s conclusion that Delaware law governs an insurance coverage dispute just because the company involved is incorporated in Delaware.
The Court here gave little weight to the contract-related principles typically found to govern the “most significant relationship test” – such as where the contract was formed or where it was delivered – and instead gives outcome determinative weight to the mere fact that the company involved was incorporated in Delaware. And why do Delaware courts give determinative weight to this factor? I will give the Delaware Supreme Court credit here; they didn’t beat around the bush. The Court was explicit that Delaware incorporation should be given preclusive weight because Delaware has an “interest in protecting” its considerable “corporate citizenry.” In other words, having your insurance coverage disputes determined under Delaware law is part of the package a corporation gets by incorporating in the state, a consideration that has substantial value given the state’s courts’ commitment to seeing that D&O claims are covered.
In the wake of the various rulings in this case, both at the Supreme Court level and in the court below, D&O insurers have a host of policy wording issues to consider. Among other things, the insurers may look at the wording in the fraud exclusion and consider changing the phrase “the underlying action” to “an underlying action.” The insurers will also want to take a look at the wording of the standard allocation provision; the fact that both the Superior Court and the Supreme Court concluded that the “Larger Settlement Rule” rather than the “Relative Exposures” rule applies to the allocation issue, even though the allocation provision expressly included the “Relative Exposures” language, is something the insurers undoubtedly will also want to reconsider. (On the allocation issue, I refer readers to my more detailed analysis in connection with the Superior Court’s ruling on the issue).
But with respect to the issue that is probably going to capture the most attention, the insurers undoubtedly will be taking up the question of whether they need to add a forum selection provision to their policies. Although there are a number of ways the insurers might try to address forum selection, one possibility is for insurers to add a provision specifying that all issues relating to the policy will be adjudicated in the courts of the state identified in the address appearing in Item 1 of the Declarations Page. The policy could even designate the applicable law in the same way (that is, disputes are to be governed by the laws of the state identified in the address appearing in item 1 of the Declarations Page). This approach would allow the insured to have disputes heard in the courts and according to the law of its home state.
There are many other intricate insurance coverage issues presented here that are also worth discussing, but rather than turning to these other issues, there is one overarching point here that needs to be made. That is: These insureds have managed to get what amounts to full insurance coverage for conduct that a Delaware court expressly found to constitute “fraud.” Regardless of what you think about the Delaware courts’ resolution of the various coverage issues, this fact should not be overlooked. Delaware of course gets to say what its public policy is, and if its courts say there is no public policy in the state against insuring fraud, then that is the way it is. Just the same, I would have expected any discussion of these issues – even in Delaware – to include maybe a little bit of analysis of what might be wrong with allowing insurance for fraud and how providing the insurance might not only protect wrongdoers but also eliminate deterrence that might otherwise exist against fraud.
At least until now, one part of the ongoing discussion among D&O insurance professionals about Delaware’s perceived policyholder-friendly approach is a suggestion that while Delaware’s Superior Court may be a rough place for insurers, the state’s Supreme Court has proven to provide a tempering influence. Here, the professionals are usually referring to the Delaware Supreme Court’s recent decisions in the Verizon case (here) and the Solera case (here), in both of which the Supreme Court overturned policyholder-favorable Superior Court decisions. However, with the Supreme Court’s decision in the Dole Foods case, I think this view of the state’s Supreme Court will fall out of fashion.
There is one other aspect of this case worth considering. Of the various insurers that were initially involved in this coverage litigation, only one insurer continued to press on all the way through and on to the Supreme Court. The fact that the other insurers paid their limits or otherwise settled with the insureds was not only a point of emphasis in the Supreme Court’s opinion, but it was a fact the Supreme Court mentioned multiple times. The lone insurer that continued to fight had made itself conspicuous in a way that caught the Supreme Court’s attention. I suspect this conspicuousness was not helpful to the insurer in the end.
Special thanks to the several readers who sent me a copy of the Delaware Supreme Court’s opinion.