The Delaware Supreme Court ruled that Delaware law applies to the interpretation of directors and officers liability (“D&O”) insurance coverage issued to Delaware corporations. RSUI Indem. Co. v. Murdock, et al., 248 A.3d 887 (Del. 2021). Dole Food Company (“Dole”), and some of its officers, were sued following a going private transaction. RSUI Indemnity Company (“RSUI”), one of Dole’s excess D&O insurance carriers, asserted that its policy did not cover the underlying claims against Dole and its officers, because California law bars coverage for willful acts. Because Dole is incorporated in Delaware, the Delaware Supreme Court determined that the policy coverage should be determined based on Delaware law.

Background

Dole went private through a merger involving its CEO and director, David Murdock (“Murdock”). As a result of the merger, the Dole stock held by the remaining stockholders was converted to cash.

Dole’s stockholders sued in Delaware, alleging that Murdock and Dole’s COO, Michael Carter (“Carter”), manipulated Dole’s stock price downward in advance of the merger.  The court found Murdock and Carter jointly and severally liable for $148 million in damages, but the parties settled in advance of a final judgment.  Separately, Dole settled a federal securities class action lawsuit based on stock price manipulation, and agreed to pay $74 million, plus interest.

RSUI and other Dole insurers sought a judgment in Delaware declaring that the insurers had no obligation to fund the first settlement. The court ruled against RSUI.  RSUI appealed, claiming that the court erroneously applied Delaware law instead of California law.

Analysis

RSUI alleged that the “most significant relationship” test should be applied to determine the choice of law to determine insurance coverage, which should have been California law.  Dole is headquartered in California, in addition to numerous other significant relationships with California.  RSUI sought to apply California law because the California Insurance Code bars coverage for willful acts, such as the alleged price manipulation by Murdock and Carter.

The Delaware Supreme Court stated that the “most significant relationship” test carries a presumption that insurance contracts should be governed by the law of the state that the parties understood to be the principal location of the insured risk.  However, if the insurance covers risks that are not confined to a single jurisdiction, “broader subject-matter-specific factors” should be analyzed.  In performing an analysis of the “broader subject-matter-specific factors,” the court noted that factors to be considered are (i) the place of contracting, (ii) where the contract was negotiated, (iii) the place of performance, (iv) the location of the subject matter of the contract, and (v) the domicile, residence, nationality, place of incorporation and place of business of the parties.  Most of these factors would point to California law.  However, the Court recognized that the critical inquiry should be to determine “what state has the most significant interest in applying its law to the interpretation of the insurance scheme and its terms as a whole in a consistent and durable manner that the parties can rely on.”

The court concluded that when the insured risk is the liability of directors and officers, and the choice of law is between the state where a company is headquartered and the state where a company is incorporated, the state of incorporation will always have the more significant interest. The court stated that Delaware law permits corporations to “provide broad indemnification and advancement rights to their directors and officers and to purchase D&O policies to protect them even where indemnification is unavailable.” Permitting broad indemnification and D&O coverage advances Delaware’s interest in minimizing the risks of people serving as directors and officers and helps Delaware corporations attract talented people. Because Delaware law prescribes the duties of directors and officers of Delaware corporations, the Court concluded that Delaware corporations must be able to assess their need for D&O insurance with regard to Delaware law as well.

Key Takeaway

Practitioners should carefully examine choice of law provisions in D&O policies to ensure that they are drafted to provide for the intended coverage.

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Photo of David R. Earhart David R. Earhart

Leader of the Capital Markets and Securities Practice Group, David’s practice covers all areas of corporate, transactional and securities law, everything from complex mergers, acquisitions and dispositions to representation of both issuers and underwriters in all types of public and private offerings of…

Leader of the Capital Markets and Securities Practice Group, David’s practice covers all areas of corporate, transactional and securities law, everything from complex mergers, acquisitions and dispositions to representation of both issuers and underwriters in all types of public and private offerings of debt and equity.