A perception has emerged in certain circles that Delaware Superior Court is a favorable forum for D&O insurance policyholder and unfavorable for D&O insurers. However, in a recent decision in a D&O insurance coverage dispute by the federal court in Delaware (as opposed to the state court in Delaware) not only determined that Delaware law applied but also determined that there was no coverage under the applicable policy for the underlying claim. As discussed below, the court’s ruling in the case may suggest that Delaware’s federal court may represent an alternative to Delaware’s state courts for D&O insurers. A copy of the District of Delaware’s May 23, 2022 decision in the Cocrystal case can be found here.



Cocrystal Pharma, Inc. was formed in April 2014 through a reverse merger that took place between Biozone Pharmaceuticals and Cocrystal Discovery. The surviving company, Cocrystal, is based in Washington state but is incorporated in Delaware.


On October 2, 2015, the SEC served a subpoena on Cocrystal in connection with an SEC investigation. The SEC subsequently served additional subpoenas on two former Biozone executives, Elliott Maza and Brian Keller. On September 7, 2018, the SEC filed an enforcement action in the Southern District of New York against multiple individuals, including Maza, Keller, and a third Biozone-affiliated person, Phillip Frost. Among other things, the SEC alleged that the three former Biozone individuals had engaged in a pump-and-dump scheme to inflate the value of Biozone’s shares. After the SEC filed its enforcement action, several Cocrystal shareholders filed derivative suits relating to the same alleged events as the SEC complaint.


Cocrystal maintained a D&O insurance policy for the policy period January 2, 2015 to May 6, 2018. Cocrystal submitted each of the above matters – the subpoenas; the SEC enforcement action; and the derivative suits – to its insurer as claims under the policy. Although the insurer initially took the position that there was no coverage for the subpoenas, it subsequently changed its position and advanced defense costs Cocrystal incurred in responding to the SEC’s investigation. After the derivative suits were filed, the insurer again reversed its coverage position, contending that there was no coverage under the policy for these matters, as all of the misconduct alleged took place prior to the merger transaction, and therefore could not have been undertaken by the individuals in their capacities as directors or officers of Cocrystal (as company only came into existence at the time of the merger).


The insurer then filed an action in the District of Delaware seeking a judicial declaration that there was no coverage under the policy either for the derivative actions or for the SEC investigation. The insurer also sought recoupment of the nearly $1 million in costs the insurer had advanced to Cocrystal. Cocrystal filed a counterclaim against the insurer, alleging, among other things, breach of contract and bad faith, as well as violation of alleged statutory duties under Washington law. The parties filed cross motions for summary judgment.


The policy defines the term Wrongful Act to mean “any actual or alleged error, misstatement, misleading statements, act, omission, neglect, or breach of duty, actually or allegedly committed or attempted by the Insured Persons in their capacities as such.”


The May 23, 2022 Opinion

In a detailed May 23, 2022 opinion, Judge Joshua Wolson granted the insurer’s motion for summary judgment on all of its declaratory judgment claims, and also granted summary judgment in the insurer’s favor on all of Cocrystal’s counterclaims, except one of Cocrystal’s claims under Washington state statutory law.


Before reaching the merits of the parties’ position, Judge Wolson first determined which jurisdiction’s law applied to the parties’ respective breach of contract and bad faith claims. Cocrystal urged that Washington state law should govern, while the insurer, interestingly, argued that Delaware law should apply. In order to determine which state’s law applied, Judge Wolson applied Delaware choice of law principles (Delaware law being the law of the forum’s host state). Applying Delaware choice of law principles, Judge Wolson determined that Delaware law should govern the determination of the breach of contract and bad faith issues. In concluding that Delaware law applied, Judge Wolson primarily relied on Delaware choice of law principles providing that Delaware law applied to disputes over D&O insurance coverage where the insured company is a Delaware corporation.


After having determined that Delaware law governed the breach of contract and bad faith issues, Judge Wolson then proceeded to address the parties’ respective summary judgment motions on those issues.


Judge Wolson first determined that, because the subject of the SEC investigation – the Biozone pump-and-dump scheme – occurred before the merger transaction, the alleged pre-merger pump-and-dump scheme did not involve actions undertaken by them in the capacities as directors and officers of Cocrystal (as Cocrystal did not even yet exist at the time). Because they “were not acting for Cocrystal when they engaged in the Pump-and-Dump Scheme, that conduct is not a Wrongful Act that triggers coverage under the Policy.”


Moreover, Judge Wolson held, the “plain language of the Policy” provides that Cocrystal must repay the Defense Costs that Liberty advanced to Cocrystal. Cocrystal had tried to argue that the insurer had waived the right to seek recoupment. However, Judge Wolson held, “the doctrine of waiver does not operate to expand or create coverage” that the Policy does not provide.


Judge Wolson also determined that there is no coverage for the derivative suits. In reaching this conclusion, he noted that the policy expired on May 6, 2018 but the first of the derivative suits was not filed until September 2018 or later. While the policy contained a standard relation back provision, Judge Wolson held that “the relation back provision applies only when a claim arises from a Wrongful Act or Interrelated Wrongful Act.” Because the pump-and-dump scheme is neither a Wrongful Act nor an Interrelated Wrongful Act, “there is nothing to which the Derivative Actions could relate back.” Because the derivative actions were not made during the applicable policy period, Cocrystal is not entitled to coverage for the Derivative Actions.


Judge Wolson did deny the insurer’s motion for summary judgment on one of Cocrystal’s statutory claims, under the Washington Insurance Fair Conduct Act. Because the WIFCA does not require for there to be insurance coverage in order for a claimant to assert a claim, the court’s determination that there was no coverage under the policy did not negate the WIFCA claim.



This decision is an interesting one on many levels. For starters, it represents an example of how important capacity issues can be in the determination of D&O insurance coverage. Individual company executives only have coverage under their company’s D&O insurance policy for action undertaken in their capacities as directors or officers of the insured company; they do not have coverage for actions undertaken in other capacities – such as, here for example, where the alleged wrongful acts were all undertaken in the individuals’ capacities of a predecessor company.


While the capacity issue is important, the Court’s analysis of the choice of law issues arguably is more interesting. For starters, this was the unusual situation where the insurer was arguing that Delaware law applied and the policyholder was arguing that another jurisdiction’s law applied. In most instances these days, insurers are likelier to try to avoid the application of Delaware law, based on the not-unjustified perception among insurers that Delaware law is favorable to policyholders and unfavorable to insurers.


However, not only did Judge Wolson determine that Delaware law applied, he then proceeded to determine that under Delaware law there was no coverage for the underlying claims. And not only that, he also determined, applying Delaware law, that the policyholder had to repay amounts that the insurer had previously advanced. Given the capacity issues involved, the outcome here arguably should be unsurprising. However, the fact that the court reached the conclusion that there is not coverage here by applying Delaware law arguably is more surprising – or maybe if not surprising at least notable and worthy of comment.


One particular aspect of this situation is also worth considering here. This coverage dispute went forward in the United States District Court for the District of Delaware rather than in the Delaware Superior Court. A possible suggestion here is perhaps that the federal court in Delaware, as opposed to Delaware’s state courts, may not be subject to the same policyholder favoritism as many insurers perceive to be the case.


D&O insurers’ concerns about Delaware as a forum for insurance coverage disputes has reached the point that it is now a topic of current discussion that insurers should incorporate a choice of forum (or at least a choice of law) provision in their insurance policies. However, it may be that insurers concerned about facing Delaware’s courts as a forum for the determination of insurance coverage disputes possible may have a better alternative, in the federal court in Delaware.


Special thanks to a loyal reader for sending along the recent decision and also for providing commentary about the choice of law and forum issues.