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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Addressing an issue for which there is a split in authority, the Delaware Superior Court held that a Civil Investigative Demand (“CID”) initiated by government authorities will trigger an insurer’s duty to defend and indemnify an insured. After plaintiff Conduent State Healthcare came under investigation for Medicaid fraud, defendant AIG declined to advance defense costs, arguing that the investigation, by itself, did not constitute an insurable claim under plaintiff’s policy. The Superior Court held that the policy language providing coverage for a “Claim alleging a Wrongful Act” extended to the CID. The Court rejected the argument that “investigating an unlawful act by the insured, is different from alleging an unlawful act,” finding that to be a distinction without a difference. The Court relied upon insurance contract interpretation principles and construed the policy against its drafter, holding that the duty to defend and indemnify should be interpreted broadly in favor of coverage.
This is an important insurance coverage decision. It upholds the claim of an insurer to bring a coverage suit to determine that a fraud exclusion applies to bar coverage on an underlying litigation that asserted a claim for fraud. This is important because fraud exclusions often depend on a finding in a final judgment of fraud by the insured in the underlying litigation. An insured may try to avoid such a judgment by settling and then asking the insurer to pay the settlement. See e.g. the decision in Arch Insurance Company v. Murdock, Del. Super. C.A. N16C-01-104 EMD (December 21, 2016), denying the use of a fraud exclusion when the underlying case was settled.
The backdrop to this decision is an interesting and unfortunate one involving a divorce, allegations of illegal obscene material possessed by the former husband, followed by a civil lawsuit between the former spouses after the former husband was acquitted. Under the facts of this case, the Court finds the homeowner insurance provider has a duty to defend the former wife given the allegations of intentional and negligent conduct in her providing a harddrive and statements to the authorities about her former husband, which allegedly led to his physical injury.