This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Supreme Court recently made landmark rulings on choice-of-law and fraud-exclusion issues in affirming a decision that required the last of nine D&O insurers to pay its share of settlements with investors who claimed Dole Foods Co. Inc.’s CEO cheated them in a 2013 going-private buyout in RUSI Indemnity Co. Inc .v. Murdock, et al., No. 154, 2020, opinion (Del. March 3, 2021).
The high court’s March 3 en banc opinion rejected all four key arguments RUSI Indemnity Co. made in its appeal of the Superior Court’s dismissal of the insurer’s claim that it did not owe coverage for $200 million in settlements of investor breach of fiduciary duty, securities fraud and appraisal actions.
The opinion, and several other recent Delaware director and officer insurance decisions that some insurers view as policyholder-friendly, will be closely examined by business insurers and their defense firms nationwide, possibly resulting in the inclusion of forum selection clauses and other changes in policy wording and litigation strategy.
Since two thirds of the nation’s Fortune 500 companies are chartered in Delaware, the high court’s unanimous opinion is significant in that it endorsed rulings that:
• Delaware law applied despite Dole’s incorporation being its only connection to the First State, while the policy was negotiated and issued in California, where the fruit giant was based and the officers and directors lived.
• Under Delaware law, a policy provision that excludes coverage for fraudulent action by an insured does not defeat coverage
• What RUSI calls the “Fraud/Profit Exclusion”— did not defeat coverage for the settlement of the stockholder actions
• The “larger settlement rule,” was not improperly applied contrary to the policy’s provision governing the allocation of losses to the extent they were covered.
Justice Gary Traynor, writing for the full court, said Delaware insurance statutes specifically allow corporations “to purchase D&O insurance for liabilities arising from bad-faith conduct,” but “concluding certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different than placing a stamp of approval on that conduct.”
The underlying litigation
The underlying litigation stemmed from Murdock and President, COO and General Counsel C. Michael Carter’s alleged deception and fraud that enabled them to acquire the 60 percent of Dole stock they didn’t already own at an artificially low price in a going-private transaction. In a consolidated action in the Chancery Court, a group of investors alleged fraud and breach of duty and that was combined with an appraisal action. In a memorandum opinion after trial, Vice Chancellor Travis B. Laster ruled that Murdock and Carter had engaged in fraud and bad faith in orchestrating the unfair, self-interested transaction for an undeserved extra profit of nearly 17 percent and found the two jointly and severally liable for $148,190,590.18—or $2.74 per share—in damages. In re Dole Food Co., Inc. Stockholder Litigation, 2015 WL 5052214, at *26 (Del. Ch. Aug. 27, 2015).
The other underlying action
Meanwhile, before the Chancery Court action was settled, another group of Dole stockholders who had sold their stock between January and October 2013, and were therefore not parties to the Stockholder Action, filed a securities class action in the U.S. District Court for the District of Delaware alleging fraud and violations of the Securities Act. They cited references in the Chancery opinion regarding Murdock and Carter having “engaged in fraud”. San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-1140-SLR (D. Del. 2015). The high court said without consent or confirmation of coverage from the insurers, Dole negotiated a settlement of the San Antonio action, under which the plaintiffs released the claims against the insureds and Dole agreed to pay or cause to be paid $74,000,000 plus interest.
The coverage actions
Eventually, after filing an unsuccessful declaratory judgment action in Superior Court, Dole’s excess insurers other than RUSI, paid the limits of their $10 million policies or settled with the insureds but RSUI pressed on with the suit and the Superior Court ordered RSUI to pay $10 million plus more than $2 million in prejudgment interest after rejecting four key arguments, and RSUI appealed.
Choice of law
The justices agreed that Delaware’s legislature intended that companies incorporated in Delaware should be governed by that state’s corporate law even if their charter was their only connection to the First State. “The state of incorporation is the center of gravity of the typical D&O policy, including the policy under consideration here,” Justice Traynor wrote. The insureds’ legal ties to Delaware “are more significant – and therefore should be afforded greater weight — than their physical location in California.”
Public policy re: Insurability
The high court asked itself the question ““does our State have a public policy against the insurability of losses occasioned by fraud as to vitiate parties’ freedom of contract?” and answered in the negative, noting that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” whether or not the corporation has the power to indemnify against such liability.
The policy’s fraud exclusion
Although the Chancery Court found that the Dole officers “engaged in fraud” there was no final adjudication of that finding, especially in the District Court action. However, the fraud finding on which the insurer relied was not in the Securities Lawsuit; it was in the Chancery Court lawsuit, Justice Traynor held. 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. A blanket prohibition, on public-policy grounds, against insuring for losses arising from a director’s or officer’s misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery. A prohibition on insurability, also “would leave many injured parties without a means of recovery,” which would conflict with “the public policy that favors the compensation of innocent victims,” the high court said.
The Allocation Issue
The Supreme Court said RUSI had pleaded no facts to suggest that the settlement of the Securities Lawsuit “represented an admixture of covered and non-covered losses.” Nor, it said, did the Insurer provide “an explanation of how the application of their ‘relative exposures’ allocation theory would lead to a reduction in the coverage available to the Insureds.”
“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,” said Kevin M. LaCroix, an insurance law specialist who hosts the D&O Diary blog where he posted a comprehensive analysis and commentary on the RUSI opinion. https://www.dandodiary.com/2021/03/articles/d-o-insurance/del-sup-ct-rules-for-insureds-in-long-running-dole-foods-do-insurance-coverage-dispute/
He said in the crucial area of choice-of-law, the Supreme 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 fact that the company involved was incorporated in Delaware.
The insurers undoubtedly will be taking up the question of whether they need to add a forum selection provision to their policies, LaCroix said. Hopefully, the question of when and how a forum selection clause may be legally enforced will not become yet another facet of D&O litigation.