In a recent decision in an insurance coverage dispute, the Delaware Superior Court granted the insurers’ motions to dismiss, holding that coverage under two towers of insurance was precluded, respectively, by the No Action clause and the Past Acts Exclusion. Insurance coverage practitioners and observers will find this decision interesting in and of itself, for what it says about the relevant policy provisions, and as a general matter, as an example of a Delaware court coverage decision. As discussed below, the decision arguably is an expectations-defying example of an insurer-friendly Delaware court coverage decision. A copy of the court’s May 9, 2024 decision opinion can be found here.

Background

Origis USA LLC is a defendant in an underlying federal court liability suit relating to a corporate transaction. In response to the lawsuit, Origis sought insurance coverage under two towers of D&O insurance: the 2021-2022 tower; and the 2023-2024 tower. Each of the towers consists of one layer of primary insurance and multiple layers of follow-form excess insurance. The insurers denied coverage under their respective policies, and Origis filed an insurance coverage lawsuit in Delaware Superior Court against the insurers.

The defendant insurers filed motions to dismiss Origis’s coverage lawsuit. The insurers in the 2021-2022 tower based their dismissal motions on the primary policy’s “No Action” clause, which provides that no actions may be filed against the insurer until the insured’s payment obligation are finally determined. The insurers in the 2023-2024 tower contend that coverage is precluded under the past acts exclusion because the claims asserted in the underlying lawsuit are based upon wrongful acts alleged to have occurred before the November 18, 2021 prior acts date.

The Relevant Policy Language

The No Action Clause in the primary policy in the 2021-2022 tower provides: “With respect to any Liability Coverage Part, no action shall be taken against the Insurer unless, as a condition precedent thereto, there has been full compliance with all the terms of this Policy, and until the Insured’s obligation to pay has been finally determined by an adjudication against the Insured, or by written agreement of the Insured, claimant and the Insurer.”

Each of the policies in the 2023-2024 tower contains a prior acts exclusion; there are, the court in the coverage action later noted, “slight differences in the way each Insurer chose to word this exclusion, but the substance of the exclusions have [sic] uniform application in this instance.” The court quoted the following language from one of the excess policies as representative: “The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured that alleges arises, out of, is based upon or attributable to, directly or indirectly, in whole or in part, any actual or alleged Wrongful Acts which first occurred prior to November 18, 2021.”

The May 9, 2024, Opinion

In a succinct May 9, 2024, Opinion, Delaware Superior Court Judge Sheldon K. Rennie granted the defendant insurers’ motions to dismiss.

Judge Rennie first considered the argument of the insurers in the 2021-2022 tower that the primary policy’s no action clause precludes the plaintiffs’ ability to bring the coverage lawsuit before the conclusion of the underlying action.

The coverage lawsuit plaintiffs, according to Judge Rennie, “do not disagree that the No Action clauses plain language calls for that result.” Rather, Judge Rennie said, “Plaintiffs cite wide-ranging precedent to demonstrate a supposed national disfavor for enforcing No Action clauses against an aggrieved insured.”

Even were the court to accept that premise, Judge Rennie said, “Delaware courts are exceptionally inclined to hold sophisticated parties to their bargains.” For that reason, “the Court will not disregard the No Action clause.” Delaware courts’ “reluctance to relieve a party of its voluntary arrangements is especially strong when a sophisticated party, like the ones here, asks for such relief.”

Judge Rennie said further that with respect to the plaintiffs’ argument about the “draconian nature” of the No Action Clause is “unpersuasive,” adding the observations that “Plaintiffs freely assented to this provision” and that “The Court is fully confident that the representatives of this billion-dollar company were well-equipped to understand the policy language and negotiate changes.” Plaintiffs “cannot use this litigation to reopen negotiations.”

Judge Rennie rejected plaintiffs’ public policy arguments against enforcing the No Action clause, noting the stronger public policy in favor of freedom of contract. Moreover, the No Action clause “does not permanently deprive Plaintiffs of any right”; rather, the plaintiffs’ right to seek a remedy is “simply deferred.”

The plaintiffs sought to rely on a 1969 Delaware Superior Court opinion, Wright Construction Co. v. St. Lawrence Flurospar, which held that a policy’s no action clause did not bar a defendant insured from impleading his insurer as a third-party defendant, even though no judgment had yet been entered against the insured. Judge Rennie opened his consideration of the Wright Construction case by noting first that he did “not find Wright to be very persuasive,” adding that no Delaware court had ever cited to it. He observed further that the Wright court neglected to cite the language of the No Action clause at issue, adding that the court’s “cursory analysis” was likely due to fact that there was no coverage available under the policy in any event, so the insurer’s dismissal motion was granted anyway. Finally, Judge Rennie cited a more recent case involving nearly identical policy language in which the court enforced a similar “No Action” clause. Judge Rennie also rejected the plaintiffs’ attempt to rely on extracontractual sources to oppose the clause’s enforcement.

With respect to the 2023-2024 tower’s insurers’ argument that the prior acts exclusion precluded coverage, the plaintiffs had tried to argue that there were paragraphs in the underlying complaint that alleged wrongful acts that post-dated the prior acts date.

As Judge Rennie noted, “out of 252 paragraphs, the plaintiffs found three to rely on.” The plaintiffs argued that these three paragraphs represented a Claim that stands apart from the other 249 paragraphs in the underlying complaint. Judge Rennie rejected this argument, noting that the paragraphs, which allege a failure to provide information, may involve an alleged Wrongful Act, there was no Claim was based on that act, nor did the underlying litigation seek any relief based on that alleged breach. The allegations in the three paragraphs are “little more than an aside in a lengthy complaint that brings plenty of proper Claims – but only Claims for pre-November 2021 Wrongful Acts.”

The allegations in the three paragraphs on which the plaintiff sought to rely, according to Judge Rennie, clearly “arose from” the allegations presented in the balance of the complaint. The relatedness of the allegations is apparent “where, as here, the first allegation is an excluded wrongful act and the second allegation is the cover-up of that wrongful act.” Indeed, Judge Rennie added, “it is difficult to conceive a much better fit of the term ‘arising out of” that than the way the cover-up is predicated on an initial wrong.” Thus, even if the three paragraphs on which the plaintiff sought to rely were to constitute a claim, “they arose out of an earlier alleged misconduct and so are excluded” by the prior acts exclusions.

Discussion

I suspect that as they made their way through this opinion, many insurer-side coverage counsel found themselves repeatedly turning back to the caption on the opinion’s first page to make sure that a Delaware court really did issue this opinion.

To explain myself to readers who may not understand my meaning, I need to add that within certain insurer-side circles, Delaware’s courts, and in particular the Delaware Superior Court, have what insurer-side advocates consider to be a well-earned reputation for predisposition in insurance coverage lawsuits in favor of policyholders and against insurers. Whether or not the Delaware courts are as predisposed as the insurer-side representatives perceive is debatable. But regardless of the accuracy of the perception, there is no doubt that Judge Rennie’s opinion in this case is contrary to the insurers’-side representatives’ general perception of Delaware’s courts.

The one thing I know for sure is that there are statements in this opinion that undoubtedly will make their way into insurers’ legal briefs in future Delaware coverage disputes. In particular, Judge Rennie’s statements about enforcing policies as written and not allowing sophisticated policyholders to use coverage litigation to try to re-write the policy language as negotiated will become, I predict, standard features of insurers’ briefs.

The policyholder-side counsel in this case marshalled arguments they undoubtedly considered to be good and sufficient. To their credit, policyholder side counsel managed to find an old case in which a Delaware court had in fact refused to enforce the No Action clause in a liability policy. Just the same, I am not surprised by the outcome here of the plaintiffs’ attempts to avoid the no action clause’s preclusive effect. The No Action clause is a standard policy provision. It is generally understood that it means what it says; indeed, I suspect that is the reason that, at least in my experience, the provision’s preclusive effect is not often litigated.

Judge Rennie’s analysis of the past acts issue is also interesting and instructive. Insurer side representatives will take heart from the fact that Judge Rennie found that merely because there were some ancillary allegations that post-dates the prior acts date, that was not sufficient to overcome the prior acts exclusion’s coverage preclusive effect. In that regard, it is significant that Judge Rennie found that it is not enough to overcome the exclusion’s preclusive effect to show that some of the wrongful acts alleged post-date the past acts date; in order to overcome the exclusion, the policyholder must show that the allegations subsequent to the past acts date were the basis of a claim for which the underlying claimant was seeking relief, and the separate claim, if there were one, was not based upon or arising out of wrongful acts preceding the wrongful acts date.

It probably should be noted that, at least with respect the 2021-2022 tower, this dismissal is not a permanent outcome. As Judge Rennie noted in his opinion, he granted the dismissal motion now because the conditions in the No Action clause have not yet been met. He also made it clear that there would be no further barriers to the plaintiffs’ coverage lawsuit against the insurers in the 2021-2022 after the conditions in the No Action clause have been met. So if the underlying claim reaches the point where the liability of the defendants in the underlying action has been determined or settled, the plaintiffs in this coverage action could seek to reinstate their lawsuit against the insurers. So the plaintiffs may yet get to pursue their claims against the insurers in the 2021-2022 tower.

Special thanks to a loyal reader for providing me with a copy of the opinion.