A recent Delaware Supreme Court decision addressed two important issues for directors and officers (“D&O”) policyholders incorporated in Delaware: 1) As a matter of public policy, whether insurance is available to cover fraudulent conduct by a corporation’s directors or officers; and 2) When a D&O corporate liability policy lacks an effective choice of law provision, which state’s law should be applied?
In RSUI Indemnity Co. v. Murdock,1 the Delaware Supreme Court affirmed the Superior Court’s decision2 in favor of D&O policyholders, concluding that absent a choice of law provision, when interpreting D&O insurance coverage for Delaware-incorporated corporations, Delaware law controls. The court further held that public policy does not preclude insurance coverage for fraudulent conduct by a corporation’s directors or officers under Delaware law.
In the Superior Court case, Dole Food Company, Inc. (“Dole”) stockholders brought a series of claims against then CEO and director, David Murdock, and COO, and General Counsel, C. Michael Carter, for breach of fiduciary duties and violations of federal securities laws after Murdock and Carter took the company private by acquiring Dole’s public stock at an artificially low price. Ultimately, the Court of Chancery of Delaware found Murdock jointly and severally liable for $148,190,590.18, finding they engaged in fraud and breached their duty of loyalty by engaging in the transaction. Dole settled with the stockholders and sought reimbursement for the settlement payment under its RSUI Indemnity Company (“RSUI”) excess D&O lability policy (“RSUI Policy”). RSUI later filed suit seeking a declaratory judgment that it had no obligation to fund settlements for claims of fraud. In its complaint, RSUI relied on California law, which barred insurance coverage for willful acts.3 Alternatively, Dole argued that Delaware law should apply because Dole was incorporated in Delaware.
Because the RSUI Policy did not have a choice of law provision, the court conducted a choice of law analysis to determine whether California or Delaware law applied. Applying the “most significant relationship test,” the court acknowledged Dole’s physical relationship with California, as the RSUI Policy was procured in California; Dole’s headquarters were in California; Dole’s directors and officers lived in California, and the RSUI Policy contained California endorsements. However, while the court discussed Dole’s physical presence in California, it placed more emphasis on Dole’s significant legal ties to Delaware.
The court explained that the law of the state of the insured’s risk should be applied, finding “when the insured risk is the directors’ and officers’ honesty and fidelity to the corporation … and the choice of law is between headquarters or the state of corporation, the state of incorporation has the most significant interest.” The court further emphasized that Dole was a Delaware-incorporated entity. Murdock and Carter were directors and officers of a Delaware corporation. The loss covered was for acts committed by Murdock and Carter in their capacity as Dole’s directors and officers. Therefore, Delaware law should govern the duties of the directors and officers of Delaware corporations and Delaware-incorporated companies “must assess their needs for D&O coverage with reference to Delaware law.”5
The court next considered whether the Superior Court erred in determining that Delaware public policy did not prohibit Delaware corporations from securing D&O insurance coverage for intentional wrongdoing or acts of fraud. The court concluded it did not, finding instead that Delaware public policy favored expanding the ability of Delaware corporations to attract talented directors and officers by allowing D&O insurance to minimize directors’ and officers’ risk in these roles. The court further stated that Delaware law permits corporations to purchase D&O insurance to protect them against any liability, including fraud.6
This decision is favorable to corporate policyholders incorporated in Delaware that may seek coverage for claims of fraud under Delaware law. It all but guarantees that Delaware law will govern the interpretation of D&O policies issued to these policyholders. That said, the court did note that Delaware law is strongly inclined to respect contractual agreements, so Delaware-incorporated policyholders should still be mindful of choice of law provisions and fraud exclusions in their D&O policies.
For more information, contact Samantha M. Oliveira at SOliveira@sdvlaw.com.
*Special thank you to Brittany Bisson, SDV Law Clerk, for contributing to this Case Alert.
1RSUI Indem. Co. v. Murdock, 248 A.3d 887 (2021).
2Arch Ins. Co. v. Murdock, No. N16C01104EMDCCLD, 2020 WL 1865752 (Del. Super. Ct. Jan. 17, 2020).
3Dole is headquartered in California and incorporated in Delaware. The RSUI policy was procured through a California broker, managed from a California office, and contained California amendatory endorsements. Dole’s directors and officers also lived and worked in California. Under these facts, RSUI claimed California law applied. Alternatively, Dole claimed Delaware law applied to D&O policies of Delaware corporations.
4Murdock, 248 A.3d at 900.
5Id. at 901.
6Id. at 903.