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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Delaware Superior Court Limits Fraud Exclusion

Arch Insurance Company v. Murdock, C.A. N16C-01-104 EMD CCLD (December 21, 2016)

This is an important decision because it limits the use of the typical fraud exclusion in a D&O policy to avoid liability to the insured.  The insured David Murdoch was found to have breached his fiduciary duty to Dole Foods resulting in a damage opinion awarding over $148,000,000. He soon settled the case by paying the damages and the suit was dismissed prior to the entry of a final judgment. He then sought to be reimbursed by the Dole D&O carriers. The insurers defended on the basis that the policy excluded coverage for litigation over a director’s personal gains obtained by fraud. However, the policy also required that the adjudication of wrongful conduct be reflected in a final judgment. The court held that even though there was a Court of Chancery opinion finding Murdock liable there was no final judgment and thus the exclusion for fraud did not apply. Further, the Court held that the insurers could not be subrogated in a suit against Murdock. While the case is not yet over, this result is probably upsetting to most insurers who do not expect to have to cover their insured’s frauds. But as the Superior Court correctly pointed out, there is precedent for this result. Hence, it can be said the insurers were on notice this might occur.  Of course, the answer to this problem is to change the policy wording to not require a final adjudication when a case is settled.