A March 1, 2018 Delaware Superior Court decision in Arch Insurance Company v. Murdock has far-reaching implications for insurers providing coverage to directors and officers of Delaware corporations. The decision (i) favors Delaware law for insurance indemnification of director and officer claims and (ii) allows an insured’s reasonable expectations to override clear exclusionary language absent prejudice to the insurer.

Choice of Law

The court ruled that the parties could not re-litigate the detailed findings of a memorandum opinion in the Delaware Chancery Court that determined the director and officer defendants had breached their duty of loyalty by fraudulently manipulating the company’s share price. The defendants paid the judgment amount of approximately $148 million plus interest in a settlement agreement to negate an appeal. The defendants sought indemnification from the company’s insurers for the settlement amount, which resulted in the Superior Court litigation. There was not a choice of law provision in the insurance policy. The insurers argued for application of California law because it is the principal location of the company and it was where the fraudulent misconduct occurred. California public policy militates against insurance coverage for fraudulent misconduct.

According to the court, Delaware law applied to the coverage dispute – primarily because the company was incorporated in Delaware. The court emphasized that “when the conduct of a corporation’s directors and officers is centrally implicated, the place of incorporation is important.” This is so important deemed the court, that the place of incorporation controls over the principal place of business in a most significant relationship analysis when the insured risk involves management’s “honesty and fidelity” to the corporation. The court supplemented this conclusion by pointing out that the defendants held management positions pursuant to Delaware law, the situs of the company stock was in Delaware and the prior court rulings applied Delaware law. This choice of law was significant because the court held that Delaware public policy does not preclude insurance from indemnifying the insureds’ fraud.

The court cites Catlin Specialty Insurance Company v. CBL & Associates Properties, Inc. as authority to support that the law of the place of incorporation should apply to insurance coverage for a company’s fraudulent scheme to overcharge customers.  However, the CBL decision did not apply the law of the place of incorporation (Delaware), but rather looked to the law of the company’s principal place of business (Tennessee). The CBL decision relied on the Delaware Supreme Court’s decision in Certain Underwriters at Lloyds, London v. Chemtura Corp., holding that the law of the company’s principal place of business applied to an insurance program with risk of claims in multiple jurisdictions. The Supreme Court accordingly focused its choice of law analysis for insurance coverage on the place of contracting for the policy, giving deference to the principal place of business to assure a single integrated insurance scheme for the company.

The Murdock decision makes no reference to the Supreme Court’s guidance in Chemtura. Since directors and officers of Delaware corporations are subject to claims in a multitude of jurisdictions, both state and federal, the logic of Chemtura (and CBL) should apply with equal force in Murdock.

Exclusion for Settlements without Written Consent

The defendants did not obtain the insurers’ written consent to the settlement, despite a clear and conspicuous exclusionary clause requiring the consent. Nevertheless, the court ruled that the “reasonable expectation doctrine” controls to fulfill an insured’s expectations, even where those expectations contravene the plain meaning of an exclusionary clause. The court further held that the insurers did not show sufficient prejudice from the lack of written consent, and accordingly rejected the lack of consent defense.

The court ruled that factual disputes required a further developed record on the insurers’ allegation that the defendants violated the policy’s cooperation clause when negotiating the settlement. The defendants’ counterclaim for bad faith was also deferred for further factual development. The court dismissed the defendants’ counterclaim for fraudulent inducement.

The Delaware Supreme Court rejected the insurers request for interlocutory appeal of the trial court’s rulings in an April 6, 2018 order.