Delaware Public Policy Does Not Preclude D&O Insurance Coverage for Fraud

In Arch Insurance v. Murdock, (Del. Ch. Mar. 1, 2018), a D&O insurance coverage dispute, the state Superior Court's complex commercial litigation division reasoned broadly to hold that, absent a contrary choice of law clause, Delaware law applies to Delaware corporations' D&O insurance policies, and that Delaware public policy does not prohibit insuring losses from insureds' breaching the fiduciary duty of loyalty through fraudulent conduct.

Background

The genesis for this coverage dispute was the Court of Chancery stockholder litigation against directors and officers of Dole Food Co. (See In re Dole Food Stockholder Litigation (Del. Ch. Aug. 27, 2015).) In Dole, the Court of Chancery reviewed a going-private transaction in which Dole's 40 percent stockholder, David Murdock, who also was a director, acquired the remaining shares of Dole he did not already own. Stockholders brought suit against defendants including Murdock and David Carter, Dole's president and CEO. In a post-trial opinion, the Court of Chancery held that Murdock and Carter breached the fiduciary duty of loyalty by inter alia manipulating Dole's trading price downward prior to the transaction, conduct that the court described as fraudulent. After the opinion but before entry of a final order, the parties settled the dispute for the full amount for which the Court of Chancery found Murdock and Carter liable. The court approved the settlement. The defendants also settled a related federal securities lawsuit.

Dole's D&O insurers then brought suit disputing coverage for the settlements. In a prior decision, the Superior Court dismissed the insurers' claim that a coverage exclusion for any “deliberately fraudulent act … if established by a final and nonappealable adjudication adverse to such Insured” applied to prevent coverage here. The Superior Court reasoned that the Court of Chancery's post-trial memorandum opinion was not a “final and nonappealable adjudication.” (See Arch Insurance v. Murdock (Del. Super. Dec. 21, 2016).) The insurers requested an interlocutory appeal, arguing that this was the first decision suggesting that corporate fiduciaries found at trial to have committed fraud may escape a fraud exclusion by settling. The Delaware Supreme Court refused the appeal. (See 155 A.3d 371 (2017) (Table).)

The Parties' Arguments, and the Court's Analysis

The Superior Court's March 1 opinion addressed the insurers' motion for summary judgment, which argued that California, not Delaware, law applied to interpret the policies, and in any event the public policy of both jurisdictions prohibited insurance coverage for fraud.

As the policies did not contain a choice of law provision, the Superior Court first considered the choice of law. The insurers argued that California law applied because Dole's principal place of business was there, it was where David Murdock and Michael Carter resided and it was the situs of the fraud. The insureds claimed, by contrast, that Delaware law applied because the dispute concerned their conduct as fiduciaries of Dole, and Delaware law (8 Del. C. Section 145(g)) authorized Dole to obtain insurance for them.