Wasson and Jones Discuss How Insurance Type Can Affect Choice of Law Analysis in Delaware

A recent Delaware Superior Court case underscores the importance of the choice of law analysis in insurance coverage disputes — and reaffirms a distinction previously recognized, but not always applied, between D&O and general liability policies in this key initial determination.

In Arch Insurance Co., et. al. v. David H. Murdock, et. al.,[1] six excess insurers filed an action in the Complex Commercial Litigation Division of the Delaware Superior Court against Dole Food Company and two of its officers. The excess insurers sought a declaration that they did not have to fund the settlements of two underlying stockholder litigations, both of which were filed in Delaware. In one of the stockholder actions, In re Dole Food Company Inc. Stockholder Litigation,[2] Vice Chancellor J. Travis Laster held that the duty of loyalty was breached and the value of Dole’s stock artificially decreased due to the insureds’ fraudulent conduct. As a result, the excess insurers in the coverage litigation argued they had no duty to indemnify the insureds for the settlements.

In disclaiming their duty to indemnify, the excess insurers advocated for the application of California law. The excess insurers argued that California had the most significant relationship to the dispute, given that Dole’s management and board of directors was located there, the two director defendants resided there and the underlying facts forming the basis for the finding of liability occurred there. In turn, the insureds argued that Delaware law applied, reasoning that Dole is a Delaware corporation and Delaware law governed in the underlying actions.

After determining there was an actual conflict between California and Delaware law, Judge Eric Davis applied the familiar “most significant relationship test” from the Restatement (Second) of Conflicts of Laws. Judge Davis noted that, in complex insurance cases, “Delaware courts have generally held that the most significant factor for the conflict-of-law analysis is the principal place of business of the insured[.]”[3] If that analysis were applied here, California law would govern the dispute. However, the court went on to find that “when the risk is the directors’ and officers’ honesty and fidelity to the corporation, and the choice of law is between the headquarters or the state of incorporation, the state of incorporation has the most significant relationship.”[4]

In reaching this conclusion, the court cited Mills Ltd. Partnership v. Liberty Mutual Insurance Co.,[5] a D&O coverage case in which the insured was incorporated in Delaware, but its headquarters and the fraudulent conduct occurred in Virginia. In concluding that Delaware law applied under the Restatement analysis, the Court in Mills explained, “the point is that Liberty Mutual insured Mills’s directors and officers under Delaware law. Those directors and officers caused a Delaware corporation to defraud its investors, which made the corporation liable and triggered the corporation’s D&O policy. In a case like this, what difference does headquarters’ location make to the company or the people involved?”[6] Adopting the reasoning of Mills, Judge Davis held that Delaware, not California, had the most significant interest in the instant dispute, given that the policies covered directors and officers of a Delaware corporation, the underlying suit was brought in the Delaware Court of Chancery by Dole stockholders, and the Court of Chancery applied Delaware law in determining liability.

The court’s choice of law decision materially impacted the insurance coverage questions in the case. California Insurance Code § 533 expressly precludes coverage for an insured’s willful acts, but Delaware law contains no similar provision — and indeed, the court interpreted 8 Del. C. § 145 to permit coverage for fraud, given that the law broadly gives a corporation “the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, ... against any liability asserted against such person.” The court further found that no Delaware decision prohibited a corporation from obtaining insurance to cover breach of loyalty for fraud-based claims, and that under Whalen v. On-Deck Inc.,[7] Delaware public policy did not prohibit insurance companies from covering punitive damages for willful activity. Accordingly, the court held that the excess insurers could not avoid coverage on public policy grounds.

While the court’s application of Delaware law was crucial to its ultimate coverage rulings, the choice of law analysis in Murdock has broader implications for future D&O insurance litigation. Judge Davis’ reliance on Mills is noteworthy, in that it demonstrates the Delaware court’s willingness to distinguish between types of policies in determining governing law, and to apply its own law to insurance questions regarding the liabilities of a Delaware corporation. Prior to Murdock, Mills was seldom cited, much less invoked, by the court for the proposition that the principal place of business factor should not be weighted as heavily in D&O policy disputes. The approach that Mills and Murdock employ, however, is not inconsistent with the broader dictates of the Delaware Supreme Court’s most recent pronouncement of choice of law in the insurance context, set forth in Certain Underwriters at Lloyds, London v. Chemtura Corporation.[8] Though Chemtura was an environmental coverage case, the Supreme Court made clear that the restatement factors were to be applied flexibly, emphasizing the justified expectations of the parties with respect to the risks and contracts at issue. Chemtura.[9] Murdock applies the flexibility that Chemtura advocates in balancing the factors. And Murdock puts D&O insurers for Delaware corporations on notice that Mills is no longer an outlier; going forward, their policies may be governed by Delaware law, despite traditionally pivotal (and often dispositive) restatement factors such as where the policyholder is headquartered, where the policies were negotiated, and where the underlying liability occurred.

[1] C.A. No. N16C-01-104, 2018 WL 1129110 (Del. Super. Mar. 1, 2018)

[2] C.A. No. 8703-VCL, 2015 WL 5052214 (Del. Ch. Aug. 27, 2015)

[3] Arch Ins. Co., et. al., v. Murdock, 2018 WL 1129110, at *9 (Del. Super. Mar. 1, 2018).

[4] Id.

[5] 2010 WL 8250837 (Del. Super. Nov. 5, 2010)

[6] Mills, 2010 WL 8250837, at *6.

[7] 514 A.2d 1072 (Del. 1986)

[8] 160 A.3d 457 (Del. 2018)

[9] 160 A.3d at 468

This article was originally posted on April 26, 2018 in Law360.

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