DealLawyers.com Blog

Remember the last line of the classic movie “Chinatown”?  My guess is that the D&O insurance industry has the same feeling as Jack Nicholson’s character after the Delaware Supreme Court’s recent decision in RSUI Indemnity v. Murdock & Dole Food Company, (Del. 3/21). In that case, the Court upheld a lower court’s decision that public policy considerations did not bar coverage for fraud & that Delaware law governed the dispute, despite the fact that the only connection to the state was that Dole Food was incorporated there.

I’ve previously blogged about the coverage dispute arising out of the $222 million settlement paid by Dole’s CEO, David Murdock, in connection with the company’s 2013 take-private transaction.  That litigation winded its way through the Delaware courts and ultimately reached the Delaware Supreme Court. Over on the D&O Diary blog, Kevin LaCroix recounts the procedural background of the case and the many issues addressed in the Court’s opinion, which concluded that the insurers were on the hook for the settlement. 

Among other things, the Court held that Delaware’s public policy does not bar insurance coverage for fraud, and that the terms of the policy’s fraud exclusion were not triggered.  But it’s not just the resolution of the public policy issue that gave D&O insurers their “Chinatown moment” – it’s also the way the Court addressed the choice of law issue raised in the case.

As to that issue, the insurer argued that California law should govern, and noted that all of the relevant parties were all located in California, that the policy was delivered to Dole’s California headquarters & that it included California endorsements. But as this excerpt from Kevin’s blog notes, the single fact that Dole was incorporated in Delaware outweighed all of the other factors:

The Court here gave little weight to the contract-related principles typically found to govern the “most significant relationship test” – such as where the contract was formed or where it was delivered – and instead gives outcome determinative weight to the mere fact that the company involved was incorporated in Delaware. And why do Delaware courts give determinative weight to this factor? I will give the Delaware Supreme Court credit here; they didn’t beat around the bush.

The Court was explicit that Delaware incorporation should be given preclusive weight because Delaware has an “interest in protecting” its considerable “corporate citizenry.” In other words, having your insurance coverage disputes determined under Delaware law is part of the package a corporation gets by incorporating in the state, a consideration that has substantial value given the state’s courts’ commitment to seeing that D&O claims are covered.

The blog notes that this decision may prove to be a Pyrrhic victory for insureds, since insurers will almost certainly consider the question of whether they need to add a forum selection provision to their policies in order to keep coverage disputes out of Delaware.

– John Jenkins