Delaware Supreme Court Rules that Fraud Can Be Covered Under D&O Insurance

May 27, 2021 | Blog

In an opinion penned by Justice Gary F. Traynor and handed down on March 3, 2021, the Delaware Supreme Court ruled in favor of Dole Food Company, Inc. in a fraud-related coverage dispute with RSUI Indemnity Company, an underwriter of wholesale specialty insurance (RSUI Indemnity Company v. David H. Murdock and Dole Food Company, Inc.).

In 2013, the director and CEO of Dole obtained the remainder of Dole’s stock that he didn’t already own in a going-private merger transaction, with stockholders receiving $13.50 per share. A group of Dole’s stockholders proceeded to file a federal securities action in the District of Delaware, alleging fraud and breach of fiduciary duty on the part of the CEO, claiming that he had manipulated Dole’s stock prices in order to purchase them at an artificially low rate.

Dole entered into mediation with the plaintiff stockholders and eventually reached a settlement agreement. Dole then turned to RSUI Indemnity Company—with whom it held a $10 million directors’ and officers’ (D&O) excess liability insurance policy—to help fund the settlement. However, RSUI refused to pay, claiming that it was not obligated to cover liability due to fraud under the D&O policy. After subsequent litigation in which the Delaware Superior Court ruled in favor of Dole against RSUI, the case was sent to the Supreme Court on appeal. The Supreme Court unanimously affirmed the lower court’s ruling, thereby instructing RSUI to pay the $10 million limit on the policy, plus interest.

The Delaware Supreme Court considered three major questions in its analysis:

1. Under which state’s law should the insurance policy be interpreted?

RSUI contended that the insurance policy should be interpreted under California law because Dole is headquartered in California, its officers and directors reside there, and the insurance policy was negotiated there. This “choice of law” would have been beneficial to RSUI since California prohibits the insuring of fraudulent conduct under D&O policies. However, Dole was incorporated in Delaware and is therefore a Delaware corporation—a fact Dole argued should place the policy interpretation under Delaware’s (much more corporation-friendly) legal framework. The Court determined that since the duties of Dole’s directors and officers to the corporation, stockholders, and investors were dictated by the Delaware Constitution and Delaware General Corporation Law, the insurance policy covering the liability of these same directors and officers should likewise be interpreted in Delaware.

2. Is fraudulent conduct insurable under Delaware public policy?

Considering that many states prohibit the inclusion of fraud under D&O policies, the next issue at hand was to determine whether Delaware public policy permitted such coverage. The Court cited Section 145(g) of Delaware Corporate Law, which authorizes corporations to “…afford their directors and officers broad indemnification and advancement rights and to purchase D&O insurance ‘against any liability’ asserted against their directors and officers ‘whether or not the corporation would have the power to indemnify such person against such liability…’” The court reasoned that this broad authorization did not exclude coverage for breach of loyalty claims based on fraud.

3. Did RSUI’s fraud exclusion clause apply in this case?

Dole’s insurance policy with RSUI included a Profit/Fraud Exclusion that stated the insurance company would not be liable for loss arising out of willful fraudulent activity if the fraudulent activity was established by a “final and non-appealable adjudication.” However, since the fraud-centered dispute with the Dole shareholders resolved through a negotiated settlement instead of a formal judgment, the criteria for a “final and non-appealable adjudication” was not met. Therefore, the Profit/Fraud Exclusion did not apply.

The decision in this case is significant in that it establishes the potential for a finding of insurance coverage for fraudulent conduct under D&O policies for Delaware corporations, and many U.S. companies of all sizes are incorporated in Delaware. It also reconfirms the need for reviewing such D&O policies under the framework of Delaware law, regardless of the actual physical locations of the corporation or its officers and directors. Particular attention should be given to the language of fraud exclusions which, as a result of this decision, may be rephrased by insurers going forward to include mediated settlements and arbitral awards within the ambit of the phrase “final and non-appealable adjudication,” though “adjudication” may also be revised to “determination” to include non-judicial resolutions of fraud claims.

If you have any further questions regarding insurance and D&O policies, please contact Kenneth N. Rashbaum and Marc O. Dedman.