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Court of Chancery Upholds Right To Refuse To Settle

Barrett v. American Country Holdings Inc., C.A. 3071-VCS (Del. Ch. June 20, 2008)

There is a continuing tension between D&O insurers and the companies whose directors they insure to use the D&O coverage to pay for corporate transactions or, as in this case, for a settlement that no one but the company wants.  In this decision the Court of Chancery has strongly upheld the right of former directors to refuse a settlement of litigation against both them and their company when they do not want to settle.

This decision arose out of the company's wish to have its former directors agree to liability in litigation that would then permit the company to sue the D&O carrier for the remaining insurance coverage and so-called bad faith failure to settle damages, all under a side deal that the company would not actually ask the directors to pay anything themselves. The former directors did not want to settle, however, particularly when the insurer also did not want to settle and was defending them under a reservations of rights letter that may have permitted the insurer to go after the directors for the fees advanced.

The Court determined the directors were entitled to the continued advancement of their attorney fees and fees for fees in this case as well.