RSUI Indemnity Co. v. Murdock

IN THE SUPREME COURT OF THE STATE OF DELAWARE
RSUI INDEMNITY COMPANY, §
§ No. 154, 2020
Plaintiff Below, §
Appellant/Cross-Appellee, § Court Below: Superior Court
§ of the State of Delaware
v. §
§ C.A. No. N16C-01-104 CCLD
DAVID H. MURDOCK and DOLE §
FOOD COMPANY, INC., §
§
Defendants Below, Appellees/ §
Cross-Appellants. §
Submitted: December 16, 2020
Decided: March 3, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and
MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Upon appeal from the Superior Court. AFFIRMED.
Robert J. Katzenstein, Esquire, Kathleen M. Miller, Esquire, SMITH,
KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Robert P. Conlon,
Esquire (argued), Kevin A. Lahm, Esquire, Cassandra L. Jones, Esquire, WALKER
WILCOX MATOUSEK LLP, Chicago, Illinois, for Appellant RSUI Indemnity
Company.
Elena C. Norman, Esquire, Mary F. Dugan, Esquire, YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; Kirk A. Pasich, Esquire
(argued), Pamela Woods, Esquire, Christopher T. Pasich, Esquire, PASICH LLP,
Los Angeles, California, for Appellees David H. Murdock and Dole Food Company,
Inc.
TRAYNOR, Justice:
An excess insurer under a directors’ and officers’ liability insurance policy
sought a declaration from the Superior Court that coverage under the policy was not
available to fund the settlement of two lawsuits—a breach of fiduciary duty action
in the Court of Chancery and a federal securities action in the United States District
Court for the District of Delaware. In a series of decisions, the Superior Court
rejected the insurer’s claims and entered judgment in favor of the insureds.
In this appeal, the insurer contends that the Superior Court committed several
errors along the way. The purported errors we take up in this opinion include:
whether the insurance policy, which insures a Delaware corporation and its directors
and officers but which was negotiated and issued in California, should be interpreted
under Delaware law; whether the policy, to the extent that it appears to cover losses
occasioned by one of the insureds’ fraud, is unenforceable as contrary to the public
policy of Delaware; whether a policy provision that excludes coverage for fraudulent
actions defeats coverage; and whether the Superior Court properly applied the
policy’s allocation provision.
For the reasons that follow, we hold that the Superior Court resolved each of
these issues correctly; therefore, we AFFIRM.
2
I.
A.
Dole Food Company, Inc. (“Dole”) holds a $15,000,000 directors, officers,
and corporate liability insurance policy (generically, a “D&O policy”) issued by
AXIS Insurance Company (“AXIS”). RSUI Indemnity Company (“RSUI”), among
other insurers (together with AXIS and RSUI, the “Insurers”1), provides excess
D&O policy coverage to Dole in policies that follow form to Dole’s policy with
AXIS (the “Policy”2). RSUI is Dole’s eighth layer of D&O coverage, providing
$10,000,000, payable upon the exhaustion of the $75,000,000 coverage from the
underlying policies and the payment of a $500,000 retention by Dole. RSUI is the
only insurer involved in this appeal. All other Insurers have paid their policy limits
or settled with Dole.
The Policy provides, in relevant part, that the Insurers “shall pay on behalf of
the Insured Individual all Loss which is not indemnified by [Dole] . . . arising from
1
Throughout the course of events leading to this coverage dispute and the underlying actions
relevant to this appeal, variations of all or some of Dole’s nine D&O policy insurers were involved.
For ease of reference, we refer generally to Dole’s D&O insurers as the “Insurers,” but
acknowledge that this is, at times, a less than accurate reference because of the various times at
which each Insurer’s coverage was exhausted, either by paying its policy limits or settling with
Dole. Where necessary or appropriate, we refer specifically to RSUI.
2
RSUI’s excess policy follows form and incorporates the terms and conditions of the AXIS policy
except as otherwise stated in the RSUI excess policy, which primarily provides additional terms
that require the exhaustion of the underlying coverage before RSUI must pay its limits. For ease
of reference, we refer to the policies collectively as the Policy.
3
any Claim for a Wrongful Act.”3 The Policy defines an “Insured Individual” as
any persons who are or have been “duly elected or appointed director(s), officers(s),
trustee(s) . . . or Manager(s) of [Dole] . . . [and] employees of [Dole] . . . who are
named as defendants in any Securities Claim.”4 Under the Policy, a “Wrongful
Act” is “any actual or alleged error, misstatement, misleading statement, act,
omission, neglect or breach of duty by . . . any Insured Individual”5 in their capacity
as a director or officer. The Policy also covers “all Loss arising from any Securities
Claim first made against [Dole].”6 “Loss” is defined as “all monetary amounts
which the Insureds become legally obligated to pay on account of a Claim,
including damages, settlement amounts and judgments, including any award of
punitive, exemplary or multiple damages, pre-judgment or post-judgment interest,
costs and fees awarded pursuant to judgments, [and] Defense Costs.”7 Under
Section IV.6 of the Policy:
The Insurer shall not be liable for Loss on account of any Claim:
...
. . . based upon, arising out of or attributable to:
. . . any profit, remuneration or financial advantage to which the
Insured was not legally entitled; or
. . . any willful violation of any statute or regulation or any
deliberately criminal or fraudulent act, error or omission by the
Insured;
3
App. to Opening Br. at A447 (emphasis in original).
4
Id. at A433; A449 (emphasis in original).
5
Id. at A436 (emphasis in original).
6
Id. at A448 (emphasis in original).
7
Id. at A449 (emphasis in original).
4
if established by a final and non-appealable adjudication adverse to
such Insured in the underlying action.8
If a covered “Loss” is incurred jointly with other insured parties or non-insured
parties, Section VIII.A provides:
the Insureds and the Insurer agree to use their best efforts to determine
a fair and proper allocation of covered Loss. The Insurer’s obligation
shall relate only to those sums allocated to matters and Insureds which
are afforded coverage. In making such determination, the parties shall
take into account the relative legal and financial exposures of the
Insureds in connection with the defense and/or settlement of the
Claim.9
B.
In November 2013, David H. Murdock, director and CEO of Dole, took Dole
private through a merger transaction in which Murdock acquired all of Dole’s stock
not already owned by him. Before the transaction, Murdock owned approximately
40% of Dole’s stock. Murdock acquired the stock through a holding company that
he controlled, DFC Holdings, LLC (“DFC”). The merger was approved by a 50.9%
vote of disinterested stockholders, and the transaction closed in November 2013 with
Dole stockholders receiving $13.50 per share.
After the merger closed, Dole stockholders filed a lawsuit in the Court of
Chancery challenging the fairness of the transaction and alleging breach of fiduciary
duty claims against Murdock and Dole’s President, COO, and General Counsel, C.
8
Id. at A452–53 (emphasis in original).
9
Id. at A440–41 (emphasis in original).
5
Michael Carter (the “Stockholder Action”). The stockholders claimed that Murdock
and Carter acted over the course of several months to manipulate the value of the
company’s stock, which enabled Murdock to acquire the stock at an artificially low
price. The lawsuit was consolidated with another lawsuit initiated by other
stockholders who sought appraisal of their shares.
In its memorandum opinion (the “Memorandum Opinion”) following a nine-
day trial, the Court of Chancery determined that Murdock and Carter had breached
their duty of loyalty through a series of intentional, unfair, and fraudulent actions
that, among other things, drove down Dole’s pre-merger stock price, undermining it
as a measure of value and hampering the Special Committee’s negotiating position.
The court found that “[t]he evidence at trial established that the Merger was not a
product of fair dealing”10 and “demonstrated that . . . [Murdock’s and Carter’s]
actions were not innocent or inadvertent, but rather intentional and in bad faith.”11
According to the court, Carter had “engaged in fraud”12 and “intentionally tried to
mislead the [Special] Committee for Murdock’s benefit,”13 and that Murdock also
“engaged in fraud”14 and had “breached his duty of loyalty by orchestrating an
10
In re Dole Food Co., Inc. Stockholder Litigation, 2015 WL 5052214, at *26 (Del. Ch. Aug. 27,
2015).
11
Id. at *2.
12
Id. at *26, 38, 46.
13
Id. at *31.
14
Id. at *46.
6
unfair, self-interested transaction.”15 The court determined that “Murdock and
Carter’s . . . efforts to drive down the market price and their fraud during the
negotiations reduced the ultimate deal price by 16.9%”16 and found the two jointly
and severally liable for $148,190,590.18—or $2.74 per share—in damages.
Recognizing that the appraisal claimants were entitled to the remedy provided
by its decision, the acceptance of which might moot the appraisal demands, the Court
of Chancery did not rule on the issue of appraisal. Instead, the court directed the
parties to confer and advise the court whether any issues remained to be addressed.
Upon conferring, the parties began to discuss a settlement. Dole, which had
previously informed the Insurers of the Stockholder Action, provided the Insurers
with an update of the settlement discussions. All the Insurers responded with
updated coverage positions, citing Policy exceptions, potentially precluding
coverage, that were implicated by the Memorandum Opinion. The Insurers all
reserved their rights regarding coverage. Without further involvement by the
Insurers, Dole and the stockholders settled both the plenary and appraisal matters,
subject to the Court of Chancery’s approval, for the full amount of damages awarded
15
Id. at *39.
16
Id. at *46.
7
by the Court of Chancery. The court approved the settlement and entered a final
order and judgment. Murdock paid the settlement in full plus interest.
Meanwhile, and before the Court of Chancery approved the settlement, a
federal securities class action (the “San Antonio Action”) was initiated in the United
States District Court for the District of Delaware by Dole stockholders who had sold
their stock in Dole between January and October 2013 and were therefore not parties
to the Stockholder Action.17 Citing the findings of fraud and breach of loyalty in the
Memorandum Opinion, the stockholders claimed that they were entitled to damages
against Murdock, Carter, and Dole for violations of the Securities Exchange Act.18
Several months after the San Antonio Action was filed, the parties agreed to
pursue mediation. Dole, having previously given notice of the action to the Insurers,
informed the Insurers about the mediation and a potential settlement. The Insurers
adopted coverage positions similar to those they had taken in the Stockholder
Action. In its response, RSUI indicated that it would treat the Stockholder Action
and the San Antonio Action as a single claim under the Policy. 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. After the
17
See San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-1140-SLR
(D. Del. 2015).
18
See 15 U.S.C. §§ 78j(b), 78(t)(a).
8
federal district court approved the settlement, Dole’s insurer at the second layer of
excess D&O policy coverage paid approximately $7,000,000 of the San Antonio
Action settlement, exhausting Dole’s third layer of coverage; Dole paid the
remaining $66,000,000.19
C.
Following the Stockholder Action settlement, but before the Court of
Chancery approved it and the San Antonio Action was settled, several of Dole’s
excess policy insurers, including RSUI, filed a lawsuit in the Superior Court seeking
a declaratory judgment that they had no obligation to fund the settlement. In
response, Murdock and Dole (the “Insureds”) filed counterclaims against the
Insurers alleging breach of contract, breach of the implied covenant of good faith
and fair dealing, and fraud in the inducement. After the San Antonio Action was
settled, the Insureds filed an amended counterclaim alleging that the Insurers had
breached their duties by refusing to pay any part of the San Antonio settlement.
Tackling a host of issues in response to pre-trial motions,20 the Superior Court
19
The record before us is silent regarding the extent to which the excess insurers other than RSUI
indemnified Dole for this payment before the Superior Court entered its final judgment in this case.
But we do know that by the time that judgment was entered on March 26, 2020, of the six Insurers
that filed the declaratory-judgment action, RSUI was the only Insurer that had not paid its limits
or settled with the Insureds.
20
The rulings relevant to this appeal are found in several opinions issued over the course of a little
over three years. On December 21, 2016, the Superior Court granted in part and denied in part the
Insureds’ Motion to Dismiss, ruling that Exclusion IV.6 of the Policy did not apply because the
Memorandum Opinion was not a final and non-appealable adjudication and therefore could not
9
ultimately entered judgment in favor of the Insureds and against RSUI in the amount
of $10,000,000—its policy limits—plus $2,321,095.90 in prejudgment interest.21
On appeal, RSUI claims that the Superior Court erred in four respects. First,
RSUI claims that the Superior Court incorrectly concluded that Delaware law—and
not California law—governs the interpretation of the Policy. Second, RSUI argues
that, even if Delaware law were to apply, “Delaware law should . . . dictate that
fraudulent conduct is uninsurable.”22 Third, RSUI claims that the Superior Court
erred in its conclusion that Exclusion IV.6 of the Policy—what RSUI calls the
“Fraud/Profit Exclusion”—did not defeat coverage for the settlement of the
Stockholder Action and the San Antonio Action. Fourth and finally, RSUI contends
that the Superior Court improperly applied the “larger settlement rule,” contrary to
preclude coverage in this case. On March 1, 2018, the Superior Court granted in part and denied
in part the Insurers’ Motion for Summary Judgment, ruling that (1) collateral estoppel applies to
the factual issues litigated and decided in the Memorandum Opinion, (2) Delaware law applies to
the Policy, and (3) Delaware public policy does not preclude indemnification for the Insureds’
fraud. On May 1, 2019, the Superior Court granted summary judgment in favor of the Insurers on
the Insureds’ counterclaim of breach of the implied covenant of good faith and fair dealing. On
May 7, 2019, upon cross motions for summary judgment, the Superior Court held that the
Stockholder Action settlement and the San Antonio Action settlement constituted a “Loss” under
the Policy. On January 17, 2020, the Superior Court ruled that the Insurers could not allocate the
Insureds’ losses. On March 26, 2020, the Superior Court entered final judgment in favor of the
Insureds.
21
Throughout discovery and initial motion practice, five of the plaintiff insurers voluntarily
dismissed their claims against Murdock, Carter, Dole, and DFC. The claims were dismissed with
prejudice. Thus, as previously mentioned, RSUI remains the only Insurer involved in this litigation
on appeal. The plaintiff insurers’ first claim against Carter concerning coverage for the
Stockholder Action was similarly dismissed with prejudice. RSUI has not appealed the Superior
Court’s finding as to the plaintiff insurers’ second claim concerning rights to subrogation. RSUI
also voluntarily dismissed its claims against DFC.
22
Opening Br. at 7.
10
the Policy’s provision governing the allocation of losses to the extent they were
covered.
The Insureds raise two issues on cross appeal. First, the Insureds argue that
the Superior Court erred by granting summary judgment in RSUI’s favor on the
Insureds’ counterclaim alleging that RSUI had breached the implied covenant of
good faith and fair dealing. The Insureds also contend that the Superior Court erred
in determining that the findings of fraud in the Memorandum Opinion should be
given collateral estoppel effect in this coverage action.
II.
Because choice of law influences our analysis of the remaining issues, our
analysis rightly begins there. Our discussion proceeds from the premise that the
parties did not choose, in the Policy, the state law that is to govern their respective
contractual duties.
A.
In the Superior Court, relying heavily on Liggett Group, Inc. v. Affiliated FM
Insurance Co. (“Liggett”)23 and hoping to avail itself of California Insurance Code
Section 533’s bar on insurance coverage for wilful acts,24 RSUI contended that the
proper application of the “most significant relationship” test leads to a choice of
23
788 A.2d 134, 137 (Del. Super. Ct. 2001).
24
See CAL. INS. CODE § 533 (West 2021) (“An insurer is not liable for a loss caused by the
wilful act of the insured . . . .”).
11
California law. On appeal, RSUI makes the same argument but shifts its emphasis
from Liggett to this Court’s decisions in Certain Underwriters at Lloyds, London v.
Chemtura Corp.25 (“Chemtura”) and Travelers Indemnity Co. v. CNH Industrial
America, LLC26 (“CNH”). RSUI argues that the Superior Court placed undue
emphasis on Dole’s status as a Delaware corporation and, consequently, created “an
unprecedented and inflexible rule,”27 under which “the insured’s state of
incorporation is the dispositive factor in choice of law for D&O policies.”28
But the Insureds also say that this Court’s balancing of interests in Chemtura,
which laid emphasis on the location of the insured’s headquarters at the outset of the
parties’ relationship, should not constrain our choice-of-law analysis in this case.
The Insureds argue that the result in Chemtura was driven by the nature of the
25
160 A.3d 457 (Del. 2017). Although Chemtura was decided three months before the Insurers’
opening brief and five months before their reply brief were filed in support of their summary-
judgment motion in the Superior Court, neither of those briefs cites Chemtura. Chemtura was,
however, cited in the Insureds’ answering brief, but in support of a point different than RSUI now
relies upon. And though there was a brief discussion of Chemtura during the oral argument on the
Insurers’ summary judgment motion, the Insurers’ failure to cite Chemtura in their briefs provides
a likely explanation for the Superior Court’s failure to address or cite it in its opinion. But even
after the Superior Court issued its opinion, when the Insurers applied to this Court for certification
of an interlocutory appeal of the Superior Court’s opinion—by then a year after Chemtura was
decided—they still did not cite Chemtura. It was not until after we decided CNH in July 2018 that
the Insurers cited Chemtura for support. In a Motion to Vacate or Revise Prior Order, filed
concurrently with a motion to dismiss, the Insurers argued that CNH, which presented a
straightforward application of Chemtura, “reassessed” Delaware’s choice-of-law analysis in the
insurance context in such a significant way that the Superior Court should reconsider the issue.
App. to Opening Br. at A1452. The Superior Court properly denied that motion.
26
191 A.3d 288, 2018 WL 3434562 (Del. July 16, 2018) (TABLE).
27
Opening Br. at 24.
28
Id. at 27.
12
insurance contracts, which were part of comprehensive insurance programs
governing operations around the world. D&O policies, according to the Insureds,
are a different breed of cat and, as such, call for a different balancing of interests
under the “most significant relationship” test than was conducted in Chemtura. The
Insureds contend that the Superior Court struck the right balance in Mills Ltd.
Partnership v. Liberty Mutual Insurance Co.,29 when it found that Delaware had the
most significant relationship with the risks insured by a D&O policy that insures the
directors and officers of a Delaware corporation.
The Insureds also claim that, even if we were to determine that the Policy as
a whole should be interpreted under California law, the Policy’s definition of “Loss”
contains a choice-of-law provision requiring the application of Delaware law to the
determination of whether the Insureds’ losses here are uninsurable.30
29
2010 WL 8250837 (Del. Super. Ct. Nov. 5, 2010).
30
The definition states that matters uninsurable under the law applicable to the Policy will not be
covered, provided that
the law of the jurisdiction most favorable to the insurability of such matters shall
apply; provided further such jurisdiction is: (i) where such amounts were awarded
or imposed; (ii) where any Wrongful Act underlying the Claim took place; (iii)
where either the Insurer or any Insured is incorporated, has its principal place of
business or resides; or (iv) where this Policy was issued or became effective.
App. to Opening Br. at A450 (emphasis in original). Because we find that Delaware law is
applicable to the interpretation of the Policy, we need not address this argument.
13
B.
The Superior Court decided choice of law on a motion for summary judgment.
Choice of law is a legal question that we review de novo.31 Likewise, we review the
Superior Court’s grant of summary judgment de novo.32
C.
The starting point for our choice-of-law analysis in cases where the parties
have not made an effective choice of law in their contract was aptly described by
then-President Judge Ridgely in Liggett:
Delaware has adopted the Restatement’s “most significant
relationship test” for determining which state’s law to apply. Choice of
law questions involving insurance coverage disputes are resolved by an
analysis of the contacts set forth in Restatement (Second) Conflict of
Laws Section 188 and Section 193. These contacts must also be
evaluated in light of the related principles of Section 6.33
This Court has since embraced that analytical framework for choosing the
state law that applies to comprehensive insurance programs covering risks and
operations across multiple jurisdictions. Of particular note here are our decisions in
Chemtura34 and CNH.35
31
Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1141 (Del. 1989).
32
Chemtura, 160 A.3d at 464.
33
788 A.2d at 137 (internal footnotes omitted).
34
160 A.3d 457.
35
2018 WL 3434562.
14
In Chemtura, we noted that Section 193 “[t]he Second Restatement provides
a presumption for insurance contracts[] that, as a general matter, the law of the state
‘which the parties understood was to be the principal location of the insured risk’
should be applied because that state will have the most significant relationship.”36
But we also recognized that, if the facts of a case don’t fit the Second Restatement’s
presumptions—such as when the insurance contract is part of a comprehensive
program insuring risks that are not confined to a single jurisdiction—we must look
at “broader subject-matter-specific factors”37 that bear on the significance of the
different states’ relationship to the contract.
To perform this next level of analysis, we turn to Section 188 of the Second
Restatement, which addresses contract disputes more broadly. The contacts to be
taken into account at this step are: the place of contracting; the place of negotiation
of the contract; the place of performance; the location of the subject matter of the
contract; and the domicile, residence, nationality, place of incorporation and place
of business of the parties.38 And as we observed in Chemtura and CNH, we weigh
the relative importance of these contacts in light of the overarching choice-of-law
considerations set forth in Section 6 of the Second Restatement. They are:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
36
Chemtura, 160 A.3d at 465.
37
Id.38
Restatement (Second) of Conflict of Laws § 188.
15
(c) the relevant policies of other interested states and the
relative interests of those states in the determination of the
particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be
applied.39
Both sides agree that the choice-of-law analysis in this case should track the
framework outlined above, and by and large the Superior Court did just that. 40 But
as the Restatement drafters frankly admit, the “most significant relationship” test,
while providing “some clue to the correct approach, . . . does not furnish precise
answers.”41 So it is not surprising that the parties, applying the same test, would
come up with different answers, each urging the trial court—and now us—to choose
the state law that it believes will view its legal positions more favorably. Our job,
as it was in Chemtura and CNH, is to balance the factors in a manner that will best
accommodate the conflicting values represented in the test that both sides agree is
applicable. To get this job done, we first review how the parties would have us
balance the relevant factors.
39
Restatement (Second) of Conflict of Laws § 6.
40
The Superior Court did not refer specifically to Section 193’s emphasis on “the principal location
of the insured risk,” but, quoting the comments to Section 188, it did recognize that “[t]he state
where the thing or risk is located will have a natural interest in transactions affecting it.” Arch Ins.
Co. v. Murdock, 2018 WL 1129110, at *9 (Del. Super. Ct. Mar. 1, 2018).
41
Restatement (Second) of Conflict of Laws § 6 cmt. c.
16
D.
In support of its claim that “[t]he undisputed facts all point to the application
of California law,”42 RSUI emphasizes the Policy’s broad coverage of claims made
against the Insureds anywhere in the world that may or may not arise under Delaware
law.43 RSUI further notes the fact that the negotiation and procurement of the
policies occurred at Dole’s headquarters in Westlake Village, California through a
California-based insurance broker and that the policies were ultimately issued to that
broker in its Los Angeles office and then delivered to Dole’s headquarters. RSUI
also observes that AXIS, Dole’s primary insurer, managed Dole’s account from its
west coast regional office and that the Policy contains California amendatory
endorsements. RSUI also points out that Dole’s “directors and officers lived and
worked in California at the Company’s headquarters.”44 RSUI contends that “[t]he
single fact of Dole’s incorporation in Delaware—which is largely irrelevant to where
42
Opening Br. at 21.
43
RSUI asserts that, particularly with respect to securities claims that are subject to federal law,
“the coverage grant of the . . . Policy is much more expansive than claims that might only be raised
in Delaware under Delaware law.” Id. at 26. In oral argument before this Court, RSUI argued that
the Policy would cover claims such as state and federal securities claims, intellectual property and
trade secrets claims, antitrust claims, negligent hiring and supervision claims, and claims brought
under the Foreign Corrupt Practices Act among others. But as RSUI observes, “the facts relating
to underlying claims are irrelevant to the choice of law analysis.” Id. at 23 (citing CNH, 2018 WL
3434562, at *5–7). The relevant inquiry in a choice-of-law analysis for a D&O policy is not driven
by the type of underlying claim or the facts surrounding it. Rather, as we hold here, a choice-of-
law analysis for a D&O policy will most often reveal that the insured’s state of incorporation has
the most significant relationship to the D&O policy.
44
Id. at 27.
17
the insurance contracts were actually formed—does not remotely override the
remaining facts.”45
For their part, the Insureds argue that the Superior Court correctly determined
that Delaware had the most significant relationship to this case. The Insureds reason
that “Delaware has a substantial interest in its law being applied to interpret D&O
policies of Delaware corporations,”46 because under 8 Del. C. § 145(g), Delaware
law permits its Delaware corporations to purchase insurance to protect its directors
and officers against any liabilities whether or not the corporation has the power to
indemnify the director or office for such liability. Further, the Insureds assert that
“applying Delaware law would lead to certainty, predictability, and uniformity of
result.”47
Adhering closely to its analysis in Mills, the Superior Court agreed with the
Insureds that Delaware, and not California, had the more significant interest in the
subject matter of the Policy; it therefore applied Delaware law. We agree with this
conclusion.
E.
RSUI’s criticism of the Superior Court’s reliance on the court’s reasoning in
Mills is, in our view, misguided. For instance, RSUI argues that the Superior Court
45
Id. at 21.
46
Answering Br. at 24.
47
Id. at 25.
18
was wrong to rely on Mills because its choice-of-law analysis was merely dicta.48
But the Superior Court did not say that it was bound to follow Mills, only that it
thought it was “better authority for this situation”49 than Liggett, the authority RSUI
most steadfastly relied upon in support of its motion for summary judgment on
choice of law. In like manner, RSUI claims that “[t]he Superior Court . . . suggested
that Chemtura and CNH are limited solely to ‘general comprehensive liability’
policies.”50 Having reviewed the comment at oral argument on RSUI’s summary
judgment upon which RSUI bases this claim, we believe that it is an unfair
characterization of the Superior Court’s remark, especially when we consider that
the Insurers had not cited Chemtura in its briefs.51 Rather, we understand the
Superior Court to have recognized that its choice-of-law analysis should be faithful
to Chemtura’s framework, but nevertheless to have reached a different result after
balancing the Second Restatement factors.52
This last point highlights what we see as the fundamental flaw in RSUI’s
argument—it presents a false dichotomy. Both Chemtura and Mills adhere to the
same analytical framework. For RSUI, however, because Mills weighed the relevant
48
Opening Br. at 25.
49
Arch Ins. Co., 2018 WL 1129110, at *10.
50
Opening Br. at 25.
51
See supra note 25.
52
In the transcript page that follows the page RSUI cites on this point, the trial judge remarked: “I
analyzed it exactly how the Court said I was supposed to . . . in Chemtura . . . . [T]he only question
is[:] did I make a mistake on the facts[?]” Opening Br. Ex. C at 20.
19
factors differently than Chemtura did, it is inconsistent with, and must yield to,
Chemtura as a precedent of this Court. We disagree with this “either/or” conclusion.
In our view, the question is whether the Superior Court’s application of the
choice-of-law rules that all seem to agree are applicable—rules that the Superior
Court has followed for years and upon which we placed our seal of approval in
Chemtura—was erroneous as a matter of law. In answering that question, we must
determine whether the court’s analysis runs afoul of Chemtura. Put another way,
we ask whether Chemtura dictates that the balancing of the Second Restatement
factors must be conducted uniformly for all insurance policies without regard to their
subject matter and animating purpose. Our answer is that it does not; Chemtura
itself allows that the application of its framework can, on different facts, lead to
different results.
Contrary to what RSUI contends, Chemtura does not dictate that California
law applies to the interpretation of the Policy. RSUI’s contention ignores the
dynamic underlying the choice-of-law problem we confronted in Chemtura, which
was “the need for comprehensive insurance programs to have a single interpretive
approach using a single body of law.”53 In Chemtura, the trial court’s decision,
which held that “the insurance policy was not to be interpreted under a consistently
applied law but under the contract law of the different states where [environmental]
53
Chemtura, 160 A.3d at 460.
20
claims arose on a claim-by-claim basis,”54 frustrated that goal. Ultimately, we
recognized that “the proper inquiry under the Second Restatement should be to make
a reasoned determination of what state has the most significant interest in applying
its law to the interpretation of the insurance scheme and its terms as a whole in a
consistent and durable manner that the parties can rely on.”55
Because the policies covering the environmental claims in Chemtura were
part of a comprehensive insurance program addressing risks across corporate
operations in multiple jurisdictions, the selection of a single interpretive approach,
i.e., one state, as opposed to many, whose law would apply with regard to where a
claim arose, would best serve the parties’ expectations. This prompted us to give
additional weight to the insured’s principal place of business and the center of its
insurance activities when we balanced the Second Restatement factors. But we were
quick to acknowledge that “the facts of a particular case might lead to a different
outcome.”56 We think that this is just such a case and that the Superior Court’s
application of the Second Restatement test in Mills and in this case was correct.57
54
Id. at 459.
55
Id. at 460.
56
Id.57
The footnote in Homeland Insurance Co. v. CorVel Corp. upon which RSUI relies does not
compel a different result. In that case, the parties argued over the choice of law for CorVel’s bad-
faith claim, with CorVel arguing for the application of Louisiana law and Homeland contending
for Delaware. Although we observed that it was possible “that neither party [was] correct, given
the centrality of California to the nationwide insurance relationship set up between CorVel, as a
California based business, and Homeland, an insurer incorporated in New York with its principal
21
F.
The crux of the Mills choice-of-law analysis—whether it represents its
holding or is dicta is of no moment to us—is that “[w]hen the insured risk is the
directors’ and officers’ ‘honesty and fidelity’ to the corporation”—and we would
add to its stockholders and investors—“and the choice of law is between
headquarters or the state of incorporation, the state of incorporation has the most
significant interest.”58 This conclusion is consistent with the “three material framing
points” that influenced our analysis in Chemtura and, in particular, our guidance that
we must examine the insurance contract as a whole to determine its subject matter.
The subject matter of the Policy, as its title announces, is “Directors, Officers
and Corporate Liability.”59 The policy holder is Dole, a Delaware corporation at the
relevant time, and the individuals the Policy insures are Dole’s duly elected or
appointed directors and officers. And the Insurers’ obligation to pay a loss incurred
by a director or officer only extends to “wrongful act[s],” which, in the context of
this case, means “any actual or alleged error, misstatement, misleading statement,
place of business in Massachusetts,” we went no further than to recognize that the questions, the
answer to which was irrelevant to our decision, presented a “litigable issue.” Homeland Ins. Co.,
197 A.3d 1042, 1046 n.13 (Del. 2018). And, for the purpose of our decision, we assumed that
CorVel’s position was correct. This is hardly a ringing endorsement of RSUI’s position here—
that “the principles of Chemtura and CNH apply to errors and omissions policies, . . . which are
not general liability policies and in fact are more similar to D&O insurance.” Opening Br. at 25.
Much less does CorVel support the conclusion that the application of “the principles of Chemtura
and CNH” will necessarily result in the choice of California law in this case.
58
Mills, 2010 WL 8250837, at *6.
59
App. to Opening Br. at A429.
22
act, omission, neglect, or breach of duty by . . . [the director or officer] in their
capacity as such . . . .”60
Delaware has specific policies that affect this subject matter as expressed in 8
Del. C. § 145. Indeed, it is by virtue of this statute, which permits Delaware
corporations to provide broad indemnification and advancement rights to their
directors and officers and to purchase D&O policies to protect them even where
indemnification is unavailable, that Dole was authorized to purchase the Policy. The
enactment of Section 145 is evidence of Delaware’s 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 to fill those
roles.61 And as recently noted in Calamos Asset Management, Inc. v. Travelers
Casualty & Surety Co. of America (“Calamos”) “[b]ecause Delaware law governs
the scope and entitlement to indemnification and advancement, applying Delaware
60
Id. at A436 (emphasis added).
61
See Christopher French, The Insurability of Claims for Restitution, 18 U. Pa. J. Bus. L. 599,
614–15 (2016) (“The most common explanation for why D&O insurance is allowed and
considered desirable is that companies would not be able to attract talented people to run
companies if corporate managers had to risk their own personal assets in order to do so. For similar
reasons, many states, including Delaware where over 50% of all publicly traded corporations and
over 63% of the Fortune 500 are incorporated, have passed statutes that allow companies to
indemnify corporate managers for many types of misconduct and to purchase insurance to cover
the losses they are allowed to indemnify as well as the ones they are unable to indemnify.”)
(internal footnotes omitted).
23
law to the D&O policies that actually cover those costs advances the relevant policies
of the forum.”62
It is also the case—as observed in Mills and Calamos—that, in the vast
majority of cases, Delaware law governs the duties of the directors and officers of
Delaware corporation to the corporation, its stockholders, and its investors. 63 As
such, corporations must assess their need for D&O coverage with reference to
Delaware law.
These factors suggest that the state of incorporation is the center of gravity of
the typical D&O policy, including the Policy under consideration here. But that does
not end our analysis. We must yet consider whether the California contacts in this
particular instance are sufficient to tip the balance toward California. On this point,
RSUI stresses that Dole’s headquarters is in Westlake Village, California, where
Dole’s directors and officers also live and work. But this emphasis on physical
location underrates the significance of Dole’s status as a Delaware corporation—an
entity formed and existing by virtue of the Delaware Constitution64 and the Delaware
62
Calamos, 2020 WL 3470473, at *3 (D. Del. June 25, 2020).
63
Id. at *4; Mills, 2010 WL 8250837, at *6.
64
See Del. Const. art. IX, § 1 (“No corporation shall hereafter be created, amended, renewed or
revived by special act, but only by or under general law, nor shall any existing corporate charter
be amended, renewed or revived by special act, but only by or under general law . . . . The General
Assembly shall, by general law, provide for the revocation or forfeiture of the charters of all
corporations for the abuse, misuse, or non-user of their corporate powers, privileges or franchises.
Any proceeding for such revocation or forfeiture, shall be taken by the Attorney-General, as may
be provided by law.”).
24
General Corporation Law.65 As such, Dole is every bit a “citizen” of Delaware as it
is of California.66 And its directors and officers, to the extent they are acting “in
their capacity as such” and are therefore covered by the Policy, act on behalf of Dole
as a corporate entity, whose legal residence is in Delaware. Seen from this vantage
point, the Insureds’ legal ties to Delaware are more significant—and therefore
should be afforded greater weight—than their physical location in California.
Nor do we find the other previously discussed California contacts to be as
legally significant or as laden with policy considerations as Dole’s status as a
Delaware corporation and the individual insureds’ status as directors and officers,
all operating under the authority and guidance of Delaware law. To be clear, we do
not ignore the California contacts and acknowledge that they might be dispositive
were we addressing an insurance policy covering a different subject matter and
insureds with a more tenuous connection to Delaware than a Delaware corporation
and its directors and officers have. Yet when we balance the California contacts
against Delaware’s interest in protecting the ability of its considerable corporate
65
8 Del. C. § 101 et seq.
66
References in our case law to Delaware corporations as “citizens” of our State are legion. See,
e.g., Oceanport Indus., Inc. v. Wilmington Stevedores, Inc., 636 A.2d 892, 896 (Del. 1994) (“WSI
is a corporate citizen and taxpayer of the State of Delaware . . . .”); Asten v. Wangner, 1997 WL
634330, at *3 (Del. Ch. Oct. 3, 1997) (“Delaware is often called upon to apply the law of other
states at the request of its corporate citizens . . . .”); Dippold-Harmon Enters., Inc. v. Lowe’s Cos.,
Inc., 2001 WL 1414868, at *4 (D. Del. Nov. 13, 2001) (“Delaware has an interest in this action.
[The plaintiff] is a Delaware corporation. Clearly this forum’s interests extend to corporate
citizens that have sought the protection of Delaware’s laws.”).
25
citizenry to secure D&O insurance and thereby attract talented directors and officers,
and for the other reasons mentioned above, we find that Delaware has the most
significant relationship to the Policy and the parties. We therefore affirm the
Superior Court’s choice-of-law decision and proceed with our analysis accordingly.
III.
Having determined that Delaware law applies to our interpretation of the
Policy, we now turn to RSUI’s contention that the public policy of Delaware vitiates
coverage of the Insureds’ losses. According to RSUI, because the settlements in the
Stockholder Action and San Antonio Action were predicated on the Court of
Chancery’s findings of fraud on Murdock’s and Carter’s part, Delaware’s public
policy should bar their insurability. “Fraud,” RSUI argues, “should be uninsurable
in Delaware.”67 The Superior Court disagreed, holding that Delaware public policy
does not prohibit Delaware corporations from securing D&O insurance that covers
breach of loyalty claims based on fraud.
A.
We review questions that turn on public-policy grounds de novo.68
67
Opening Br. at 37.
68
Jones v. State Farm Mut. Auto. Ins. Co., 610 A.2d 1352, 1353 (Del. 1992).
26
B.
RSUI argues that allowing the Insureds a recovery under the Policy would
undermine the Court of Chancery’s disgorgement remedy and, more generally, that,
as a matter of public policy, “insurance should not be available for intentional
wrongdoing,”69 citing our recent opinion in USAA Casualty Insurance Co. v. Carr70
(“Carr”). Both of these arguments are extra-contractual; that is, unlike RSUI’s
contention that coverage is excluded under the Policy’s Profit/Fraud Exclusion,
which we will address later, RSUI assumes coverage but asks us to void it because
it contravenes public policy. We reject this invitation to void the Insureds’ otherwise
valid coverage.
C.
We start our analysis by reaffirming our respect for the right of sophisticated
parties to enter into insurance contracts as they deem fit “in the absence of clear
indicia that . . . [a countervailing public] policy exists.”71 As described earlier, the
Policy has an expansive definition of covered losses, which on its face does not
exclude losses occasioned by fraud. Among other things, the Insurers agreed to “pay
on behalf of the Insured Individual all Loss . . . arising from any Claim for a
69
Opening Br. at 39.
70
225 A.3d 357 (Del. 2020).
71
Whalen v. On-Deck, Inc., 514 A.2d 1072, 1074 (Del. 1986) (holding that “public policy in this
State does not prohibit the issuance of an insurance contract that covers punitive damages”).
27
Wrongful Act first made against . . . such Insured Individual . . . [and] pay on
behalf of the Policyholder all Loss arising from any Securities Claim first made
against the Policyholder for a Wrongful Act.”72 “Wrongful Act” is defined to
include “actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty.”73 And “Loss means all monetary amounts which the
Insureds become legally obligated to pay on account of a Claim, including
damages, settlement amounts and judgments, including any award of punitive,
exemplary or multiple damages, pre-judgment or post-judgment interest, costs and
fees pursuant to judgments, [and] Defense Costs.”74 Allegations of fraud fit
comfortably within these terms defining the scope of coverage. Indeed, the Policy’s
exclusion of losses “based upon, arising out of or attributable to . . . any deliberately
. . . fraudulent act,” but only if “established by a final and non-appealable
adjudication,”75 implies that fraud that does not fall within the exclusion because it
has not been finally adjudicated will otherwise be covered. Thus, leaving the
72
App. to Opening Br. at A447–48 (emphasis in original).
73
Id. at A432 (emphasis in original).
74
Id. at A449 (emphasis in original).
75
Id. at A453.
28
applicability of the Profit/Fraud Exclusion aside for the moment, RSUI’s public-
policy argument, if accepted, would defeat the parties’ contractual expectations.
As we have previously recognized,
[w]hen parties have ordered their affairs voluntarily through a binding
contract, Delaware law is strongly inclined to respect their agreement,
and will only interfere upon a strong showing that dishonoring the
contract is required to vindicate a public policy interest even stronger
than freedom of contract. Such public policy interests are not to be
lightly found, as the wealth-creating and peace-inducing effects of civil
contracts are undercut if citizens cannot rely on the law to enforce their
voluntary-undertaken mutual obligations.76
The question here then is: does our State have a public policy against the
insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom
of contract? We hold that it does not. To the contrary, when the Delaware General
Assembly enacted Section 145 authorizing corporations to afford their directors and
officers broad indemnification and advancement rights and to purchase D&O
insurance “against any liability” asserted against their directors and officers
“whether or not the corporation would have the power to indemnify such person
against such liability under this section,”77 it expressed the opposite of the policy
RSUI asks us to adopt.
76
ev3, Inc. v. Lesh, 103 A.3d 179, 2014 WL 4914905, at *2 n.3 (quoting then-Vice Chancellor
Strine in Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del. Ch. 2005), aff’d in pertinent part, 892 A.2d
1068 (Del. 2006)).
77
8 Del. C. § 145(g).
29
This conclusion is inherent in the limitation, found in Section 145(a), on a
corporation’s authority to indemnify its directors and officers for expenses incurred
if the person, in his underlying conduct, “acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation . . . .”78 Implicit in this limitation, when read together with Section
145(g)’s authorization to secure insurance against liabilities for which the
corporation does not have the power to indemnify, is the corporation’s statutory
authority to obtain D&O insurance for liabilities arising from bad-faith conduct.79
Nor is our conclusion inconsistent, as RSUI suggests, with our dicta in Carr.
There, quoting Hudson v. State Farm Mutual Insurance Co.,80 we referred to “the
‘well established common law principle that an insured should not be allowed to
78
Id. § 145(a).
79
We note that one of the drafters of Section 145 made remarks at a Delaware Corporation Law
symposium in 1977 that could be read as conflicting with our interpretation of the statute. See S.
Samuel Arsht, Indemnification Under Section 145 of the Delaware General Corporation Law, 3
Del. J. Corp. L. 159, 179–80 (1978). Yet we stand by our reading of the language of the statute
and believe that, to the extent that D&O carriers believe that public policy considerations are
relevant to their coverage, they should write them into their policies—as the insurers did here. See
E. Norman Veasey, Jesse A. Finkelstein & C. Stephen Bigler, Delaware Supports Directors with
a Three-Legged Stool of Limited Liability, Indemnification, and Insurance, 42 Bus. Law. 399, 418
(1987) (“While the language of section 145(g) contains no explicit limitations on the scope of
matters that may be insured against under that subsection, its drafters specifically intended that the
available insurance would be limited by public policy considerations written into D&O policies by
insurers.”) (emphasis added). See also R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law
of Corporations & Business Organizations § 4:13[A] (3d ed. 1998) (“Although underwriters
generally refuse to insure for, or are statutorily precluded from insuring for, intentional wrongs or
underwriting criminal wrongs, D&O insurance coverage for amounts paid in settlement of a claim
alleging such wrongs seems to be allowable.”) (footnote omitted).
80
569 A.2d 1168 (Del. 1990).
30
profit, by way of indemnity, from the consequences of his own wrong doing,’ in a
context where no announced public policy applies.”81 But here, as noted above, our
public policy—to the extent it is “announced” in Section 145—weighs in favor of
the insurability of losses incurred as the result of a breach of the duty of loyalty,
including one marred by fraud.
Other considerations support our conclusion. For instance, in the high-stakes
arena of stockholder litigation, 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. This conflicts with
the public policy that favors the compensation of innocent victims.
Our conclusion gains further support from this Court’s decision in Whalen v.
On-Deck, Inc.82 In that case, the Superior Court had granted summary judgment in
favor of a liability insurance carrier, holding, on public-policy grounds, that it was
not obligated to pay punitive damages assessed against its insured. In so holding,
the Superior Court found that
a rule prohibiting the issuance of insurance covering punitive damages
more accurately reflects the public policy of this State. It would be
unjust and contrary to reason to assess punitive damages against [the
insurer] when it has done no wrong, and the punitive and deterrent
purposes underlying punitive damages would be frustrated if one who
81
Carr, 225 A.3d at 362 (quoting Hudson, 569 A.2d at 1170).
82
514 A.2d 1072.
31
has acted wantonly were permitted to shift the burden to its insurer, and
ultimately to the public.83
This Court reversed the Superior Court, pointing to the Delaware legislature’s
primacy in establishing this State’s policy and the importance of the parties’ freedom
of contract:
[T]here is no evidence of public policy in this State against such
insurance. The Delaware Legislature has formulated no such policy,
and this Court has indicated in the past that it would defer to the
Legislature on the issue. While the Superior Court and [the insurer]
believe the purposes of punitive damages would be frustrated if such
damages were insurable, we cannot infer from that concern a policy
against such insurance. A wrongdoer who is insured against punitive
damages may still be punished through higher insurance premiums or
the loss of insurance altogether. More importantly, in light of the
importance of the right of parties to contract as they wish, we will not
partially void what might otherwise be a valid insurance contract as
contrary to public policy in the absence of clear indicia that such a
policy actually exists.84
We think that Whalen’s approach—deferring to the parties’ contractual
choices and to the legislature’s prerogative in matters of public policy—is a wise
one. We show this deference not because we condone fraud in Delaware; in fact,
we have an unwavering policy against it.85 But concluding that certain conduct,
including a director’s breach of loyalty sounding in fraud, is not uninsurable on
83
Whalen v. On-Deck, Inc., 1986 WL 2838, at *3 (Del. Super. Ct. Jan. 10, 1986).
84
Whalen, 514 A.2d at 1074.
85
See, e.g., Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 137 (Del. Ch. 2009) (noting
“Delaware’s strong policy against intentional fraud”); Abry Partners V, L.P. v. F & W Acquisition
LLC, 891 A.2d 1032, 1035 (Del. Ch. 2006) (“The public policy against fraud is a strong and
venerable one that is largely founded on the societal consensus that lying is wrong.”).
32
public-policy grounds is notably different than placing a stamp of approval on that
conduct. Hence, in the absence of clear guidance from the General Assembly to the
contrary, we must reject RSUI’s invitation to void its contractual obligations on
public-policy grounds. We therefore turn to RSUI’s contract-based arguments.
IV.
A.
RSUI next argues that, even if coverage is not defeated on public-policy
grounds, the Policy’s Profit/Fraud Exclusion precludes insurance coverage for the
Insureds’ actions. To reiterate, that exclusion provides that:
The Insurer shall not be liable for Loss on account of any Claim:
...
. . . based upon, arising out of or attributable to:
. . . any profit, remuneration or financial advantage to which the
Insured was not legally entitled; or
. . . any willful violation of any statute or regulation or any
deliberately criminal or fraudulent act, error or omission by the
Insured;
if established by a final and non-appealable adjudication adverse to such
Insured in the underlying action.86
As RSUI points out, “[a]t issue before the Superior Court was whether [the
Memorandum Opinion] . . . meets the Exclusion’s requirement of a ‘final and non-
appealable adjudication;’”87 the Superior Court found that it did not and that,
therefore, the Profit/Fraud Exclusion did not apply.
86
App. to Opening Br. at A453 (emphasis in original).
87
Opening Br. at 42.
33
B.
“The interpretation of an insurance policy is a question of law and subject to
de novo review.”88 A brief survey of the principles that guide our review is
appropriate here.
“Insurance contracts, like all contracts, ‘are construed as a whole, to give
effect to the intentions of the parties.’”89 Proper interpretation of an insurance
contract will not render any provision “illusory or meaningless.”90 If the contract
language is “clear and unambiguous, the parties’ intent is ascertained by giving the
language its ordinary and usual meaning.”91 Where the language is ambiguous, the
contract is to “be construed most strongly against the insurance company that drafted
it.”92 A contract is not ambiguous simply because the parties do not agree on the
proper construction.93 “Rather, a contract is ambiguous only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may
have two or more different meanings.”94
88
Carr, 225 A.3d at 360.
89
AT & T Corp. v. Faraday Capital Ltd., 918 A.2d 1104, 1108 (Del. 2007) (quoting Nw. Nat’l Ins.
Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996)).
90
O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 287 (Del. 2001).
91
Faraday Capital Ltd., 918 A.2d at 1108 (quoting Esmark, Inc., 672 A.2d at 43).
92
O’Brien, 785 A.2d at 288 (citing Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co.,
616 A.2d 1192, 1196 (Del. 1992) and Steigler v. Ins. Co. N. Am., 384 A.2d 398, 400 (Del. Super.
Ct. 1978)).
93
Rhone-Poulenc, 616 A.2d at 1196.
94
Id.34
Insurance contracts should be interpreted as providing broad coverage to align
with the insured’s reasonable expectations.95 “Generally, an insured’s burden is to
establish that a claim falls within the basic scope of coverage, while an insurer’s
burden is to establish that a claim is specifically excluded.”96 Courts will interpret
exclusionary clauses with “a strict and narrow construction . . . [and] give effect to
such exclusionary language [only] where it is found to be ‘specific,’ ‘clear,’ ‘plain,’
conspicuous,’ and ‘not contrary to public policy.’”97
C.
The Superior Court’s ruling on the applicability of the Profit/Fraud Exclusion
pre-dated the San Antonio Action settlement.98 Therefore, the court focused its
analysis on the Memorandum Opinion, and, as such, its decision did not mention the
San Antonio Action. RSUI’s briefing in this Court adopts a similar approach,
attending almost exclusively to whether the Memorandum Opinion in the
Stockholder Action is a “final and non-appealable adjudication.” But if Dole’s
settlement of the San Antonio Action is not subject to the Profit/Fraud Exclusion,
then the exclusion’s effect on the Stockholder Action settlement matters little; if
95
AT & T Corp. v. Clarendon Am. Ins. Co., 2006 WL 1382268, at *9 (Del. Super. Ct. Apr. 13,
2006), rev’d in part on other grounds, Faraday Capital Ltd., 918 A.2d 1108.
96
Id.97
Id.98
This ruling in found in the court’s December 21, 2016 opinion, granting in part and denying in
part the Insureds’ Rule 12(b)(6) motion to dismiss. The San Antonio Action settlement was not
approved by the federal district court until July 18, 2017.
35
RSUI is on the hook for the San Antonio Action settlement, that alone will exhaust
its coverage limits rendering consideration of the Profit/Fraud Exclusion’s
application to the Stockholder Action moot. We therefore address the San Antonio
Action settlement first.
RSUI’s sole reference in its opening brief to the San Antonio Action
settlement as it relates to this issue is alarmingly brief:
As for San Antonio, the allegations arose directly out of the findings
contained in the [Memorandum Opinion]. Thus, the settlement is
“based upon, aris[es] out of, or attributable to” the adjudication of fraud
in the Stockholder Action, meaning the Profit/Fraud Exclusion applied
equally to both Stockholder and San Antonio.99
Thus, RSUI contends that the relationship between the allegations of fraud in
the San Antonio Action and the Court of Chancery’s findings in the Stockholder
Action triggers the Profit/Fraud Exclusion. This, in our view, is contrary to the
exclusion’s requirement that the adjudication of fraud must be “in the underlying
action.”
RSUI seems to admit that there was no adjudication in the San Antonio
Action, but pronounces that “[t]he phrase ‘in the underlying action’ was clearly not
intended to limit the Exclusion’s application to follow-on collateral estoppel
litigation for the same conduct.”100 We are not convinced by this argument.
99
Opening Br. at 48.
100
Reply Br. at 39.
36
Contrariwise, we interpret “the underlying litigation” in the settlement context to
mean the litigation in connection with which the Insureds became legally obligated
to pay on account of a claim.101 According to the Policy, a “Claim” means “a civil
. . . proceeding against any Insured commenced by . . . the service of a complaint or
similar pleading.”102 The record establishes that the claims in the San Antonio
Action took the form of an Amended Class Action Complaint alleging federal
securities fraud claims, filed on June 23, 2016 in the United States District Court for
the District of Delaware as distinguished from the claims that were made in the
Stockholder Action.
That some findings in the Memorandum Opinion might have been implicated
in the resolution of the San Antonio Action had it not been settled is irrelevant to a
determination of whether there was an adjudication in the San Antonio Action;
holding otherwise would ignore the plain meaning of the Profit/Fraud Exclusion’s
stipulation that only “fraudulent act[s] . . . established by a final and non-appealable
adjudication adverse to [the] Insured in the underlying action” would be subject to
the exclusion. And even if we were to grant that the meaning of “the underlying
litigation” could be interpreted to include the San Antonio Action—and we don’t—
101
Under Section III.I, “Loss” is defined as “all monetary amounts which the Insureds become
legally obligated to pay on account of a Claim, including damages, settlement amounts and
judgments, including any award of punitive, exemplary or multiple damages, pre-judgment or
post-judgment interest, costs and fees awarded pursuant to judgments, [and] Defense Costs.” App.
to Opening Br. at A449 (emphasis in original).
102
Id. at A432 (emphasis in original).
37
that would not render the Insureds’ interpretation unreasonable. Instead, it would
merely be to recognize an ambiguity. And under our insurance law jurisprudence,
we would construe that ambiguity in favor of the Insureds.103 Either way, as applied
to Dole’s loss in the San Antonio Action, the Profit/Fraud Exclusion fails.
D.
As suggested earlier, the practical consequence of our conclusion that the
Profit/Fraud Exclusion fails as to Dole’s loss attributable to the San Antonio Action
is significant. In defending the Stockholder Action, AXIS, Dole’s primary insurer,
reached its $15 million limits. Shortly thereafter, Dole’s second layer of insurance
was also exhausted after reaching its $10 million limits in also defending the
Stockholder Action. Dole’s third layer of insurance was exhausted in part on defense
costs associated with the Stockholder Action and in part on the San Antonio Action
settlement. After that contribution to the San Antonio Action settlement, Dole paid
the remaining approximately $66 million settlement amount. The record is unclear
as to when the remaining layers of Dole’s coverage were exhausted. But we know
that all other Insurers have either paid their limits or settled with Dole. In any event,
103
Rhone-Poulenc, 616 A.2d at 1196 (citing Steigler, 384 A.2d at 400).
38
the $66 million settlement paid by Dole is more than enough to reach and exhaust
RSUI’s $10 million limits.104
V.
A.
In its amended complaint for declaratory relief, RSUI alleged that “[t]o the
extent that the Court determines that any portion of the Stockholder Settlement or
Defense Costs in connection with the Stockholder Action is covered, any amounts
to be paid must be allocated to covered Loss pursuant to the terms of the Policies.”105
According to RSUI, Section VIII.A of the Policy should govern that allocation.
Under that provision,
[i]f in any Claim, the Insureds who are afforded coverage for such
Claim incur Loss jointly with others (including other Insureds) who
are not afforded coverage for such Claim, or incur an amount
consisting of both Loss covered by this Policy and loss not covered by
this Policy because such Claim includes both covered and uncovered
matters, then the Insureds and the Insurer agree to use their best efforts
to determine a fair and proper allocation of covered Loss. The Insurer’s
obligation shall relate only to those sums allocated to matters and
Insureds which are afforded coverage. In making such determination,
the parties shall take into account the relative legal and financial
exposures of the Insureds in connection with the defense and/or
settlement of the Claim.106
104
At oral argument in this Court, when asked about this, RSUI’s counsel did not contest the
contention that, if we found that the San Antonio Action settlement was covered, then RSUI’s
coverage would be exhausted. Instead, counsel argued that the Profit/Fraud Exclusion should
defeat coverage of the San Antonio Action settlement.
105
App. to Opening Br. at A381–82 (emphasis in original).
106
Id. at A440–41 (bold type in original) (italics added).
39
Here, RSUI argues that, to give meaning to the plain language of Section
VIII.A, the Superior Court should have conducted a “relative exposure” analysis,
weighing the relative exposures between covered and non-covered losses. Instead,
the Superior Court applied the “larger settlement rule,” under which, broadly
speaking, a loss is fully recoverable unless the insurer can show that the liability for
non-covered conduct increased the insurer’s liability. Under a “relative exposure”
analysis, RSUI contends that its excess insurance layer would not be reached
because “significant liability was placed on non-insured DFC, and liability was
incurred for actions taken in uninsured capacities (Murdock as a controlling
shareholder and Carter as General Counsel).”107
B.
Because the resolution of this issue turns on the interpretation of the Policy,
our review is de novo.108
C.
In its January 17, 2020 Memorandum Opinion on Allocation, the Superior
Court rejected RSUI’s invitation to allocate the Insureds’ losses with reference to
“the relative legal and financial exposures of the Insureds” on various grounds.
Noting that the factual record would not support a finding that either RSUI or the
107
Opening Br. at 52–53.
108
Carr, 225 A.3d at 360.
40
Insureds requested a pre-suit allocation under Section VIII.A or that one was
requested by one party but the other failed to use its best efforts, the court found “the
Allocation Provision . . . mostly unhelpful under the facts presented here.”109
Section VIII.A was unhelpful in the Superior Court’s eyes because, for
example, it does not establish an allocation methodology to be applied in the absence
of an agreement between the parties. Moreover, limiting RSUI’s responsibility for
the Insureds’ losses in the manner favored by RSUI ignores other, more substantive,
policy language. The Court observed that it was
to interpret the insurance policy through a reading of all the relevant
provisions of the contract as a whole, and not any single passage in
isolation. The Policies cover all Loss that the Insured(s) become legally
obligated to pay. Such language implies . . . a complete indemnity for
Loss regardless of who else might be at fault for similar actions. The
Policies do not limit coverage because of the activities of others that
might overlap the claims against the Insureds. Any type of pro rata or
relative exposure analysis seems contrary to the language of the
Policies.110
We agree with both of these observations and the Superior Court’s resulting
conclusion that the “larger settlement rule” captures the extent to which RSUI’s
indemnity obligations might be reduced by an allocation of a portion of the
Stockholder Action settlement to non-covered losses or uninsured parties. Under
the rule, as articulated by the Ninth Circuit Court of Appeals in Nordstrom, Inc. v.
109
Arch Ins. Co. v. Murdock, 2020 WL 1865752, at *6 (Del. Super. Ct. Jan. 17, 2020).
110
Id. at *7 (emphasis in original) (internal quotations and citations omitted).
41
Chubb & Son, Inc., “responsibility for any portion of a settlement should be allocated
away from the insured party only if the acts of the uninsured party are determined
to have increased the settlement.”111
Here, RSUI has not argued that the acts of DFC or the actions of Murdock and
Carter in their uninsured capacities increased the amount of the Stockholder Action
settlement. Indeed, since DFC was found to be liable as an aider and abettor “to the
same extent as”112 Murdock, it would appear as though DFC’s actions could not have
increased the Stockholder Action settlement. And, aside from conclusory assertions,
RSUI has pleaded no facts that suggest the San Antonio Action settlement
represented an admixture of covered and non-covered losses.113 Nor, for that matter,
has RSUI ventured an explanation of how the application of their “relative exposure”
allocation theory would lead to a reduction in the coverage available to the Insureds.
We therefore affirm the Superior Court’s Memorandum Opinion on Allocation.
111
Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1432 (9th Cir. 1995) (emphasis in original)
(citing Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 358 (7th Cir. 1990) and
Caterpillar Inc. v. Great Am. Ins. Co., 864 F. Supp. 849, 853 (C.D. Ill. 1994)).
112
In re Dole, 2015 WL 5052214, at *39.
113
In its Brief in Opposition to Defendants’ Motions for Summary Judgment, RSUI asserted that
“the Settlements included non-covered “loss” and amounts paid on behalf of non-insureds.” App.
to Opening Br. at A2375. But RSUI’s briefing challenges the reasonableness of the San Antonio
settlement and whether the Stockholder Action settlement and San Antonio Action settlement
constitute a “Loss,” to the exclusion of explaining what portion of the San Antonio Action
settlement are attributable to a non-covered loss. Similarly, in its briefing in this Court, RSUI
focuses on the allocation of the Stockholder Action settlement, again to the exclusion of explaining
allocation of the San Antonio Action settlement.
42
VI.
The Insureds raise two issues on cross appeal. First, they argue that the
Superior Court erred by granting summary judgment in favor of RSUI on the
Insureds’ claims for breach of the implied covenant of good faith and fair dealing.
Second, the Insureds contend that the trial court erred in finding that collateral
estoppel applies to the Insureds as to factual issues litigated and decided in the
Memorandum Opinion. For the reasons discussed below, we conclude that the
Insureds’ implied-covenant argument on cross appeal is without merit. Because the
Insureds’ collateral-estoppel argument is relevant only “to the extent this Court
reverses any of the Superior Court’s rulings,”114 and we have not done so, we will
not address that argument.
A.
As we have stated above, this Court reviews the Superior Court’s grant of
summary judgment de novo.115
B.
“An insured has a cause of action for bad faith against an insurer ‘when the
insurer refuses to honor its obligations under the policy and clearly lacks reasonable
114
Answering Br. at 74.
115
Chemtura, 160 A.3d at 464.
43
justification for doing so.’”116 When judging reasonableness in this context, “[t]he
ultimate question is whether at the time the insurer denied liability, there existed a
set of facts or circumstances known to the insurer which created a bona fide dispute
and therefore a meritorious defense to the insurer’s liability.”117
Finding that “the Insurers advanced a number of well-reasoned arguments for
denying the coverage to Insureds—e.g., the Fraud Exclusion and failure to comply
with the Written Consent Provision and/or the Cooperation Clause,”118 the Superior
Court determined that the Insurers did not deny coverage and pursue declaratory
relief in bad faith. The court found further that, given the complexity of the choice-
of-law question, applying California law “as a default, while incorrect, was
reasonable.”119
C.
The Insureds do not argue that the determination of the reasonableness of the
legal bases of the Insurers’ coverage denial is not within the trial court’s province.
Instead, the Insureds’ principal argument is that the court “should have considered
what RSUI did and considered at the time [of the denial] in assessing RSUI’s good
116
Bennett v. USAA Cas. Ins. Co., 158 A.3d 877, 2017 WL 961806, at *4 (Del. 2017) (TABLE)
(quoting Enrique v. State Farm Mut. Auto. Ins. Co., 142 A.3d 506, 511 (Del. 2001).
117
Casson v. Nationwide Ins. Co., 455 A.2d 361, 369 (Del. Super. Ct. 1982).
118
Arch Ins. Co. v. Murdock, 2019 WL 1932536, at *6 (Del. Super. Ct. May 1, 2019). The Written
Consent Provision and the Cooperation Clause are not at issue in this appeal.
119
Id.44
faith.”120 Emblematic of this complaint is the Insureds’ critique of how RSUI’s
claims adjuster approached the choice-of-law question at the outset. The Insureds
acknowledge that the adjuster based his opinion that California law, including
Section 533’s bar, applied to the Policy on his knowledge that Dole was
headquartered in California and that the individuals insured resided in California.
But the Insureds argue that the adjuster’s failure to balance Delaware’s interests
against those facts and to review the provision that the Insureds have argued—
unsuccessfully—was the Policy’s choice-of-law provision precludes a determination
by the court that there was a reasonable basis for coverage.
The Insureds’ approach, in our view, ignores the test for reasonableness as
articulated in Casson.121 The question is whether the insurer is aware of facts and
circumstances, at the time of denial, that support a bona fide dispute as to whether
the loss is covered. Here, RSUI was aware of the Insureds’ and the Policy’s contacts
with California, and as the closeness of this case on the choice-of-law question
demonstrates, those contacts formed the basis of a bona fide dispute. In a similar
vein, RSUI was aware of the Court of Chancery’s findings that Murdock had
committed fraud and that the Policy contained a Profit/Fraud Exclusion. And while
we are not ultimately required to decide whether the exclusion applies to the
120
Answering Br. at 69.
121
Casson, 455 A.2d at 369.
45
Stockholder Action settlement, it would be unfair to characterize RSUI’s position
on that issue as lacking color.
In sum, the Superior Court did not err in granting summary judgment in favor
of RSUI on the Insureds’ implied-covenant-of-good-faith-and-fair-dealing claim.
VII.
We affirm the Superior Court’s final judgment.
46