The implications of the Delaware Supreme Court’s pronouncement that D&O liability for actual fraud is insurable

On March 3, 2021, the Delaware Supreme Court announced in RSUI Indemnity Co. v. Dole Food Company, Inc., et al., 248 A.3d 887 (Del. 2021) (“Dole”), that Delaware public policy permits indemnity insurance coverage for liability arising from fraud.  Therefore, in Delaware, unscrupulous executives found to have lied to investors may potentially avoid direct responsibility for any damages caused and simply pass the buck for any judgment or settlement to the company’s Director’s & Officer’s (“D&O”) insurer.  While we previously discussed the various issues addressed in Dole here, in this article we focus specifically on this particular consequence of the Delaware Supreme Court’s decision.

Relevant Background

In November 2013, the CEO of Dole Food Company, Inc. (“Dole”), David H. Murdock, steered the company private through a transaction in which he acquired all of Dole’s stock he did not already own.  Dole stockholders subsequently filed multiple lawsuits against Dole, Murdock, and Dole’s President, COO, and General Counsel, C. Michael Carter, challenging the transaction’s fairness.  Among other things, the stockholders alleged that Murdock and Carter manipulated the value of Dole’s stock so that Murdock could acquire the stock at an artificially low price.  Following trial in one of the actions, the Delaware Court of Chancery determined that Murdock and Carter had “engaged in fraud” in connection with the transaction.  Dole and the stockholders ultimately settled all of the actions.

Several of Dole’s D&O insurers, including RSUI, subsequently filed a declaratory judgment action against Dole and Murdock in Delaware state court, seeking a declaration that they had no obligation to fund the underlying settlements.  All of the plaintiff insurers, except for RSUI, eventually dismissed their claims voluntarily, leaving RSUI as the sole plaintiff insurer.  The trial court ultimately entered judgment in favor of Dole and Murdock and against RSUI.  RSUI appealed, arguing, among other things, that Delaware public policy precluded coverage for the underlying settlements because the settlements were predicated on the Court of Chancery’s findings of fraud. 

The Opinion

The Delaware Supreme Court rejected RSUI’s argument and held that Delaware public policy does not bar the insurability of fraud.  In so doing, the court “reaffirm[ed] [its] respect for the right of sophisticated parties to enter into insurance contracts as they deem fit.”  While acknowledging that Delaware did not approve of fraud, the court framed the issue as whether Delaware had “a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract[.]”  It determined that Delaware did not.  The court grounded this conclusion on 8 Del. C. § 145, which authorizes Delaware corporations to secure D&O insurance “against any liability” asserted against their directors and officers, including liabilities for which the corporations do not have the power to indemnify.  The court construed this statutory provision as expressing “the opposite” of the public policy RSUI advocated.  The Court also concluded that a policy exclusion for fraud was inapplicable because the insured had settled the particular underlying action at issue, prior to a finding of fraud in that specific action, even though the Court of Chancery found the insureds committed fraud in another, similar underlying action.

Implications

The Dole court’s pronouncement that Delaware public policy does not prohibit D&O insurers from indemnifying executives for actual fraud is inconsistent with the view adopted by many other courts in the context of insurance coverage for ill-gotten gains and intentional torts.  E.g., Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001) (Posner, J.) (determining that D&O insurance cannot cover claims for restitution of “ill-gotten gains”); Rogers v. Sure Conveyors, Inc., No. 3:19-cv-01732, 2021 WL 41802 at *2 (N.D. Ohio Jan. 4. 2021) (“Ohio’s public policy precludes insurance coverage for employer intentional torts”); Olson v. Slattery, 942 N.W.2d 263, 267 (S.D. 2020) (“it is settled public policy in this State that insurance coverage cannot extend ‘to an individual who intentionally harms others[,]’ even when ‘the harm is unforeseen by the victim’”); Great American Ins. Co. v. Houlihan Lawrence, Inc., 449 F. Supp.3d 354, 369 n. 13 (S.D.N.Y. 2020) (recognizing New York public policy against insurability of conduct intended to cause harm).

Dole undermines this public policy goal.  Instead of deterring wrongful conduct, Dole arguably encourages it.  Dole incentivizes company executives to engage in purposeful misrepresentation with the comfort that a significant D&O insurance coverage tower will come to the rescue when their fraud is exposed.  In times when truth has become an increasingly rare commodity, awarding “get-out-of-jail-free” cards to unprincipled executives who defraud large groups of investors hardly seems prudent.

Dole also potentially invites a race to the courthouse and multiple, duplicative coverage actions nationwide.  Officers of Delaware corporations seeking coverage for fraud will likely run to Delaware courts to take advantage of this pronouncement (and Dole’s additional announcement that Delaware law will almost always apply to D&O policies issues to Delaware corporations, which we discussed here).  D&O insurers are likely to commence coverage actions elsewhere, in jurisdictions that outlaw the insurability of fraud, which they never intended to underwrite.  All of these consequences, in turn, may ultimately contribute to the recent sharp increase in the cost of D&O insurance for all companies.

Read other items in Professions and Financial Lines Brief - July 2021