Delaware Supreme Court Finds D&O Coverage Applies To Fraudulent Conduct
M&A and Corporate Governance Litigation
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  • Delaware Supreme Court Finds D&O Coverage Applies To Fraudulent Conduct

    On March 3, 2021, the Supreme Court of Delaware unanimously affirmed a series of rulings by the Superior Court of Delaware requiring a directors and officers (“D&O”) excess insurer, RSUI Indemnity Co. (“RSUI”), to pay over $12 million towards settlements to resolve claims arising from the conduct of Dole Food Co.’s (“Dole”) CEO, which the Delaware Court of Chancery previously found was fraudulent.  In so holding, the Delaware Supreme Court ruled that losses stemming from fraudulent conduct are insurable under Delaware law.  RSUI Indemnity Co. v. David H. Murdock, et al., C.A. No. 154, 2020, opinion (Del. Mar. 3, 2021).  As we discussed in a prior post, the Superior Court applied Delaware law and ordered RSUI to pay the full policy limit plus interest.  The Supreme Court affirmed the ruling in its entirety, finding that, as the state of incorporation, Delaware had the “most significant relationship” with the D&O policy even though Dole was headquartered in California.  The Supreme Court also held that Delaware law did not prohibit D&O coverage for fraudulent conduct, noting that neither the policy nor the state’s corporation laws prohibited defendants from securing D&O insurance for fraudulent conduct by insureds.

    The action stemmed from a 2013 take-private action by Dole’s CEO.  After the merger closed, Dole stockholders filed suit, alleging that Dole officers, including the CEO, breached their fiduciary duties and violated federal securities laws during the transaction.  In a lengthy post-trial opinion, the Court of Chancery concluded that the CEO had “engaged in fraud” and breached his duty of loyalty; after the ruling, Dole settled the cases for $222 million.  RSUI sought a declaratory judgment that it was not obligated to fund the settlements because of the fraud ruling.  The Superior Court ultimately entered judgment against RSUI in the amount of $10 million—its policy limits—plus over $2.3 million in prejudgment interest.

    Because the D&O policy contained no choice of law provision, the Supreme Court first considered whether Delaware law or California law applied to coverage issues.  RSUI claimed that California law—where Dole was headquartered, its officers and directors lived, and the D&O policies were negotiated—governed the policy, while defendants argued that Delaware law applied because the policy insured the directors and officers of a Delaware corporation for liabilities arising out of their performance of duties owed to the corporation.  The choice-of-law analysis was key:  California explicitly prohibits coverage for fraudulent conduct, while Delaware does not. 

    The Court concluded that defendants’ “legal ties to Delaware are more significant—and therefore should be afforded greater weight—than” even significant physical ties to California.  The Court emphasized that Delaware law governs the performance of fiduciary duties owed to Delaware corporations and, accordingly, such corporations “must assess their need for D&O coverage with reference to Delaware law.” 

    The Court then rejected RSUI’s argument that fraud “should be uninsurable in Delaware.”  The Court first looked to the language of the D&O policy, reaffirming Delaware’s “respect for the right of sophisticated parties to enter into insurance contracts as they deem fit.”  Finding that allegations of fraud “fit comfortably” within the policy’s “expansive definition of covered losses,” the Court observed that adopting RSUI’s argument based on public policy “would defeat the parties’ contractual expectations.”  Accordingly, the Court assessed whether the public interest against insuring fraudulent acts was “so strong as to vitiate the parties’ freedom of contract.”  The Court determined that it was not, emphasizing that corporations have “statutory authority to obtain D&O insurance for liabilities arising from bad-faith conduct” and that without “clear guidance” from the Delaware legislature that insuring fraud was prohibited, RSUI could not avoid its contractual obligations on public policy grounds.