Posts tagged D&O Insurance

Delaware Superior Court Applies “But For” Test To Decide In What Capacity A Director Acted

Goggin v. National Union Fire Insurance Company Of Pittsburgh, PA., C.A.. N17C-10-083-PRW-CCLD (November 30, 2018)

D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage.  This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.

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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.

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Delaware Superior Court Explains Disgorgement Exclusion In Insurance Coverage

TIAA-CREF Individual & Institutional Services, LLC v. Illinois National Insurance Company, No. N14C-05-178 JRJ CCLD (October 20, 2016)

D&O policies often attempt to exclude from coverage sums paid to disgorge unlawful profits. The underlying theory is that the company did not suffer a true loss when it has to give back something that it never should have had in the first place. This decision tackles the hard problem of applying that theory in specific circumstances. The Court held that when a company settles a claim without admitting it has made an unlawful profit then the insurer has to prove the sums paid were in fact a return of an illegal profit. Merely settling a claim for some amount does not establish disgorgement occurred, even when the claim itself may have made that allegation. In particular, when the actual settlement agreement does not refer to a return of an illegal gain, there is no tie to actual disgorgement and the exclusion may not apply. Hence, when settling a claim it is important to consider how the settlement agreement should read.

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A Settlement Is A Settlement, Not An Adjudication Of Fraud For D&O Policy Exclusion Purposes

AT&T v. Clarendon America Ins. Co., C.A. No. 04C-11-167-JRJ (Del. Super. Ct. June 25, 2008).

This decision will be of interest to any parties drafting or negotiating D&O policy exclusions.

This coverage dispute arose out of stockholder litigation brought against certain AT&T directors, alleging false and misleading statements. That action settled during trial, with AT&T agreeing to pay $100 million to the plaintiffs. National Union, AT&T’s excess D&O carrier, denied coverage. 

The issue before the Superior Court here, on AT&T’s motion for partial summary judgment, was whether National Union could deny coverage based on the policy’s fraud exclusion. AT&T argued that the fraud exclusion requires an adjudication and does not apply to settlements. More ›

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