RSUI Indemnity Co. v. Murdock, 154, 2020

Background

Dole purchased a layered D&O insurance program; RSUI was the eighth excess layer providing $10M after exhaustion of underlying limits and a $500K retention.
In 2013 Murdock took Dole private; Delaware Chancery found Murdock and Carter breached their duty of loyalty and committed fraud, awarding ~ $148M.
A separate federal securities class action (San Antonio) asserted related claims; Dole settled that action for $74M (most paid by Dole), and earlier settled the Chancery claims for the Chancery award.
Several excess insurers (including RSUI) filed for declaratory relief denying coverage; Dole and Murdock counterclaimed for breach of contract and bad faith.
The Superior Court (and on appeal the Delaware Supreme Court) held: (1) Delaware law governs the Policy; (2) Delaware public policy does not bar insuring fraud-related D&O liabilities; (3) the Policy’s Fraud/Profit exclusion did not apply to bar the San Antonio settlement; and (4) allocation followed the “larger settlement rule,” not the insurer’s proposed relative-exposure approach.
Final judgment awarded the Insureds RSUI’s $10M policy limit plus prejudgment interest; RSUI appealed several discrete legal rulings.

Issues

Issue	Plaintiff's Argument (RSUI)	Defendant's Argument (Dole/Murdock)	Held
Choice of law for Policy interpretation	California law (most significant contacts: negotiation, broker, HQ) should apply	Delaware law should apply because subject is D&O risk of a Delaware corporation and §145 policy interests favor Delaware law	Delaware law governs; state of incorporation has greatest interest for D&O policies of Delaware corporations
Public-policy bar to insuring fraud	Delaware public policy forbids insurability of intentional fraud; coverage should be void	No Delaware statutory or clear policy bars D&O coverage for fraud; §145 permits corporations to insure such liabilities	No public-policy bar; freedom to contract and §145 support insurability absent legislative direction
Applicability of Profit/Fraud Exclusion (requires "final and non-appealable adjudication in the underlying action")	Chancery’s fraud findings and their use in San Antonio mean exclusion applies to both settlements	Exclusion only applies where the fraud adjudication occurred in the same underlying action that created the insured’s legal obligation; San Antonio had no such adjudication	Exclusion did not bar coverage for the San Antonio settlement (no final adjudication in that underlying action); thus RSUI’s limits were exhausted
Allocation of covered vs. non-covered loss	Apply Policy’s allocation language and a relative-exposure analysis to reduce RSUI’s share (uninsured DFC/conduct in uninsured capacities increased liability)	Policy and plain-language indemnity, plus the larger-settlement rule, preclude pro rata reduction absent proof uninsured conduct increased settlement	Court applied larger-settlement rule; RSUI failed to show uninsured parties increased settlement, so no allocation reduced RSUI’s obligation

Key Cases Cited

Chemtura Corp. v. Certain Underwriters at Lloyds, 160 A.3d 457 (Del. 2017) (establishes Restatement-based, subject-matter sensitive choice-of-law framework for insurance programs)
AT&T Corp. v. Faraday Capital Ltd., 918 A.2d 1104 (Del. 2007) (contracts construed as whole; clear policy interpretation governs)
Whalen v. On-Deck, Inc., 514 A.2d 1072 (Del. 1986) (declines to infer a public policy bar on insurance for punitive or other controversial liabilities absent legislative direction)
Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192 (Del. 1992) (insurance-contract interpretation principles; ambiguity construed against drafter)
Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir. 1995) (larger-settlement rule: allocate away insurer only if uninsured parties increased settlement)
Hudson v. State Farm Mut. Ins. Co., 569 A.2d 1168 (Del. 1990) (discusses limits on insurability of wrongful conduct in certain contexts)