Delaware Supreme Court Holds That Fraud is Insurable

Snell & Wilmer

Snell & Wilmer

In a decision that is likely to reshape directors and officers (“D&O”) policies across the nation, the Delaware Supreme Court has held that fraudulent conduct by corporate officers and directors is insurable under Delaware law. RSUI Indemnity Company v. Murdock, 2021 WL 803867 (Del. March 4, 2021). The court also held that Delaware law governs a coverage dispute under a directors and officers liability insurance policy (“D&O Policy”) issued to a Delaware company, even though the policy was negotiated and issued in California, the company is headquartered in California, and its officers and directors live and work in California

The Dispute Giving Rise To RSUI Indemnity Company v. Murdock

The insurance coverage at issue involved claims for breach of fiduciary duty and federal securities law violations under a $10 million excess D&O Policy issued to Dole Food Company, Inc. (“Dole”).

In 2013, David Murdock, Dole’s CEO, took the company private through a merger transaction that resulted in Murdock acquiring all of Dole’s stock. Stockholders filed several lawsuits for breach of fiduciary duty against Murdock and the company’s COO, Michael Carter, based on their alleged intentional and fraudulent acts to drive down the company’s stock price. The actions were consolidated, and the Court of Chancery issued a decision finding that Murdock and Carter had breached their fiduciary duties and engaged in fraud. The case was settled. But, in the meantime, a federal securities class action was filed relying on the fraud findings made by the Court of Chancery. That suit was also settled.

Dole then sought coverage under its D&O Policy for its defense and settlement costs in connection with the federal securities class action. Dole’s insurance claim was denied.

RSUI Indemnity Company and Dole’s other D&O insurers (collectively, “RSUI”) then filed suit in the Superior Court of the State of Delaware seeking a declaratory judgment that no coverage was available for defense costs and settlement in the class action based primarily on two arguments: (1) California law applied barring coverage, and (2) even if Delaware law applied, public policy barred coverage of claims attributable to the fraud of a director or officer of a Delaware corporation.

The Superior Court rejected these arguments and the Delaware Supreme Court affirmed.

California Law Applied To The Coverage Dispute

There was no choice of law provision in the D&O Policy. But, RSUI argued that California law should apply because that state had the most significant relationship with the case since Dole was headquartered in California, the D&O Policy was negotiated, issued and delivered in California, and Dole’s directors and officers lived and worked in California.

The Superior Court rejected RSUI’s argument and applied Delaware law, although it did acknowledge Dole’s contacts with California. The Delaware Supreme Court affirmed, concluding that Delaware had the most significant relationship with the case because Delaware corporations have a strong interest in obtaining D&O insurance and attracting directors and officers.

Fraud is Insurable Under Delaware Law

One of the most significant parts of the decision is that Delaware public policy does not prohibit Delaware corporations from securing insurance for directors and officers to cover claims for a breach of fiduciary duty based on fraud. This, of course, differs from the public policy of many states, including California where willful acts such as fraud are uninsurable, and will likely have an immediate effect on Delaware corporations involved in litigation.

In its decision, the Delaware Supreme Court emphasized the freedom of sophisticated parties to contract as they deem fit. And, in analyzing the language of the D&O Policy at issue, it concluded that the allegations of fraud in the underlying litigation “fit comfortably” within the scope of covered losses.

The Supreme Court also explained that the D&O Policy’s “fraud/profit exclusion” required the determination of fraud to be “established by a final and non-appealable adjudication.” And, although the Delaware Chancery Court found that the officers acted fraudulently, Dole was seeking coverage for settlement of the federal securities class action, where no such finding was ever made. Accordingly, neither Delaware public policy nor the language of the D&O Policy bared Dole’s insurance claim arising from its officers’ breach of fiduciary duty based on fraud.

Key Takeaways

  • Absent a choice of law provision, it is likely that D&O Policies for Delaware corporations will be governed by Delaware law, irrespective of where the corporation is headquartered, the policy was negotiated and issued, and the directors and officers live and work.
  • Fraud is insurable under the typical D&O policy for a Delaware corporation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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