RSUI INDEMNITY COMPANY v. DAVID H. MURDOCK and DOLE FOOD COMPANY, INC.
No. 154, 2020
IN THE SUPREME COURT OF THE STATE OF DELAWARE
March 3, 2021
Submitted: December 16, 2020
Upon appeal from the Superior Court. AFFIRMED.
Robert J. Katzenstein, Esquire, Kathleen M. Miller, Esquire, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Robert P. Conlon, Esquire (argued), Kevin A. Lahm, Esquire, Cassandra L. Jones, Esquire, WALKER WILCOX MATOUSEK LLP, Chicago, Illinois, for Appellant RSUI Indemnity Company.
Elena C. Norman, Esquire, Mary F. Dugan, Esquire, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Kirk A. Pasich, Esquire (argued), Pamela Woods, Esquire, Christopher T. Pasich, Esquire, PASICH LLP, Los Angeles, California, for Appellees David H. Murdock and Dole Food Company, Inc.
An excess insurer under a directors’ and officers’ liability insurance policy sought a declaration from the Superior Court that coverage under the policy was not available to fund the settlement of two lawsuits—a breach of fiduciary duty action in the Court of Chancery and a federal securities action in the United States District Court for the District of Delaware. In a series of decisions, the Superior Court rejected the insurer‘s claims and entered judgment in favor of the insureds.
In this appeal, the insurer contends that the Superior Court committed several errors along the way. The purported errors we take up in this opinion include: whether the insurance policy, which insures a Delaware corporation and its directors and officers but which was negotiated and issued in California, should be interpreted under Delaware law; whether the policy, to the extent that it appears to cover losses occasioned by one of the insureds’ fraud, is unenforceable as contrary to the public policy of Delaware; whether a policy provision that excludes coverage for fraudulent actions defeats coverage; and whether the Superior Court properly applied the policy‘s allocation provision.
For the reasons that follow, we hold that the Superior Court resolved each of these issues correctly; therefore, we AFFIRM.
A.
Dole Food Company, Inc. (“Dole“) holds a $15,000,000 directors, officers, and corporate liability insurance policy (generically, a “D&O policy“) issued by AXIS Insurance Company (“AXIS“). RSUI Indemnity Company (“RSUI“), among other insurers (together with AXIS and RSUI, the “Insurers”1), provides excess D&O policy coverage to Dole in policies that follow form to Dole‘s policy with AXIS (the “Policy”2). RSUI is Dole‘s eighth layer of D&O coverage, providing $10,000,000, payable upon the exhaustion of the $75,000,000 coverage from the underlying policies and the payment of a $500,000 retention by Dole. RSUI is the only insurer involved in this appeal. All other Insurers have paid their policy limits or settled with Dole.
The Policy provides, in relevant part, that the Insurers “shall pay on behalf of the Insured Individual all Loss which is not indemnified by [Dole] . . . arising from
The Insurer shall not be liable for Loss on account of any Claim:
. . .
. . . based upon, arising out of or attributable to:
. . . any profit, remuneration or financial advantage to which the Insured was not legally entitled; or
. . . any willful violation of any statute or regulation or any deliberately criminal or fraudulent act, error or omission by the Insured;
if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.8
If a covered “Loss” is incurred jointly with other insured parties or non-insured parties, Section VIII.A provides:
the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of covered Loss. The Insurer‘s obligation shall relate only to those sums allocated to matters and Insureds which are afforded coverage. In making such determination, the parties shall take into account the relative legal and financial exposures of the Insureds in connection with the defense and/or settlement of the Claim.9
B.
In November 2013, David H. Murdock, director and CEO of Dole, took Dole private through a merger transaction in which Murdock acquired all of Dole‘s stock not already owned by him. Before the transaction, Murdock owned approximately 40% of Dole‘s stock. Murdock acquired the stock through a holding company that he controlled, DFC Holdings, LLC (“DFC“). The merger was approved by a 50.9% vote of disinterested stockholders, and the transaction closed in November 2013 with Dole stockholders receiving $13.50 per share.
After the merger closed, Dole stockholders filed a lawsuit in the Court of Chancery challenging the fairness of the transaction and alleging breach of fiduciary duty claims against Murdock and Dole‘s President, COO, and General Counsel, C.
In its memorandum opinion (the “Memorandum Opinion“) following a nine-day trial, the Court of Chancery determined that Murdock and Carter had breached their duty of loyalty through a series of intentional, unfair, and fraudulent actions that, among other things, drove down Dole‘s pre-merger stock price, undermining it as a measure of value and hampering the Special Committee‘s negotiating position. The court found that “[t]he evidence at trial established that the Merger was not a product of fair dealing”10 and “demonstrated that . . . [Murdock‘s and Carter‘s] actions were not innocent or inadvertent, but rather intentional and in bad faith.”11 According to the court, Carter had “engaged in fraud”12 and “intentionally tried to mislead the [Special] Committee for Murdock‘s benefit,”13 and that Murdock also “engaged in fraud”14 and had “breached his duty of loyalty by orchestrating an
Recognizing that the appraisal claimants were entitled to the remedy provided by its decision, the acceptance of which might moot the appraisal demands, the Court of Chancery did not rule on the issue of appraisal. Instead, the court directed the parties to confer and advise the court whether any issues remained to be addressed. Upon conferring, the parties began to discuss a settlement. Dole, which had previously informed the Insurers of the Stockholder Action, provided the Insurers with an update of the settlement discussions. All the Insurers responded with updated coverage positions, citing Policy exceptions, potentially precluding coverage, that were implicated by the Memorandum Opinion. All the Insurers reserved their rights regarding coverage. Without further involvement by the Insurers, Dole and the stockholders settled both the plenary and appraisal matters, subject to the Court of Chancery‘s approval, for the full amount of damages awarded
Meanwhile, and before the Court of Chancery approved the settlement, a federal securities class action (the “San Antonio Action“) was initiated in the United States District Court for the District of Delaware by Dole stockholders who had sold their stock in Dole between January and October 2013 and were therefore not parties to the Stockholder Action.17 Citing the findings of fraud and breach of loyalty in the Memorandum Opinion, the stockholders claimed that they were entitled to damages against Murdock, Carter, and Dole for violations of the Securities Exchange Act.18
Several months after the San Antonio Action was filed, the parties agreed to pursue mediation. Dole, having previously given notice of the action to the Insurers, informed the Insurers about the mediation and a potential settlement. The Insurers adopted coverage positions similar to those they had taken in the Stockholder Action. In its response, RSUI indicated that it would treat the Stockholder Action and the San Antonio Action as a single claim under the Policy. Without consent or confirmation of coverage from the Insurers, Dole negotiated a settlement of the San Antonio Action, under which the plaintiffs released the claims against the Insureds and Dole agreed to pay or cause to be paid $74,000,000 plus interest. After the
C.
Following the Stockholder Action settlement, but before the Court of Chancery approved it and the San Antonio Action was settled, several of Dole‘s excess policy insurers, including RSUI, filed a lawsuit in the Superior Court seeking a declaratory judgment that they had no obligation to fund the settlement. In response, Murdock and Dole (the “Insureds“) filed counterclaims against the Insurers alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud in the inducement. After the San Antonio Action was settled, the Insureds filed an amended counterclaim alleging that the Insurers had breached their duties by refusing to pay any part of the San Antonio settlement. Tackling a host of issues in response to pre-trial motions,20 the Superior Court
On appeal, RSUI claims that the Superior Court erred in four respects. First, RSUI claims that the Superior Court incorrectly concluded that Delaware law—and not California law—governs the interpretation of the Policy. Second, RSUI argues that, even if Delaware law were to apply, “Delaware law should . . . dictate that fraudulent conduct is uninsurable.”22 Third, RSUI claims that the Superior Court erred in its conclusion that Exclusion IV.6 of the Policy—what RSUI calls the “Fraud/Profit Exclusion“—did not defeat coverage for the settlement of the Stockholder Action and the San Antonio Action. Fourth and finally, RSUI contends that the Superior Court improperly applied the “larger settlement rule,” contrary to
The Insureds raise two issues on cross appeal. First, the Insureds argue that the Superior Court erred by granting summary judgment in RSUI‘s favor on the Insureds’ counterclaim alleging that RSUI had breached the implied covenant of good faith and fair dealing. The Insureds also contend that the Superior Court erred in determining that the findings of fraud in the Memorandum Opinion should be given collateral estoppel effect in this coverage action.
II.
Because choice of law influences our analysis of the remaining issues, our analysis rightly begins there. Our discussion proceeds from the premise that the parties did not choose, in the Policy, the state law that is to govern their respective contractual duties.
A.
In the Superior Court, relying heavily on Liggett Group, Inc. v. Affiliated FM Insurance Co. (”Liggett“)23 and hoping to avail itself of
But the Insureds also say that this Court‘s balancing of interests in Chemtura, which laid emphasis on the location of the insured‘s headquarters at the outset of the parties’ relationship, should not constrain our choice-of-law analysis in this case. The Insureds argue that the result in Chemtura was driven by the nature of the
The Insureds also claim that, even if we were to determine that the Policy as a whole should be interpreted under California law, the Policy‘s definition of “Loss” contains a choice-of-law provision requiring the application of Delaware law to the determination of whether the Insureds’ losses here are uninsurable.30
The Superior Court decided choice of law on a motion for summary judgment. Choice of law is a legal question that we review de novo.31 Likewise, we review the Superior Court‘s grant of summary judgment de novo.32
C.
The starting point for our choice-of-law analysis in cases where the parties have not made an effective choice of law in their contract was aptly described by then-President Judge Ridgely in Liggett:
Delaware has adopted the Restatement‘s “most significant relationship test” for determining which state‘s law to apply. Choice of law questions involving insurance coverage disputes are resolved by an analysis of the contacts set forth in Restatement (Second) Conflict of Laws Section 188 and Section 193. These contacts must also be evaluated in light of the related principles of Section 6.33
This Court has since embraced that analytical framework for choosing the state law that applies to comprehensive insurance programs covering risks and operations across multiple jurisdictions. Of particular note here are our decisions in Chemtura34 and CNH.35
To perform this next level of analysis, we turn to Section 188 of the Second Restatement, which addresses contract disputes more broadly. The contacts to be taken into account at this step are: the place of contracting; the place of negotiation of the contract; the place of performance; the location of the subject matter of the contract; and the domicile, residence, nationality, place of incorporation and place of business of the parties.38 And as we observed in Chemtura and CNH, we weigh the relative importance of these contacts in light of the overarching choice-of-law considerations set forth in Section 6 of the Second Restatement. They are:
- the needs of the interstate and international systems,
- the relevant policies of the forum,
the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, - the protection of justified expectations,
- the basic policies underlying the particular field of law,
- certainty, predictability and uniformity of result, and
- ease in the determination and application of the law to be applied.39
Both sides agree that the choice-of-law analysis in this case should track the framework outlined above, and by and large the Superior Court did just that.40 But as the Restatement drafters frankly admit, the “most significant relationship” test, while providing “some clue to the correct approach, . . . does not furnish precise answers.”41 So it is not surprising that the parties, applying the same test, would come up with different answers, each urging the trial court—and now us—to choose the state law that it believes will view its legal positions more favorably. Our job, as it was in Chemtura and CNH, is to balance the factors in a manner that will best accommodate the conflicting values represented in the test that both sides agree is applicable. To get this job done, we first review how the parties would have us balance the relevant factors.
In support of its claim that “[t]he undisputed facts all point to the application of California law,”42 RSUI emphasizes the Policy‘s broad coverage of claims made against the Insureds anywhere in the world that may or may not arise under Delaware law.43 RSUI further notes the fact that the negotiation and procurement of the policies occurred at Dole‘s headquarters in Westlake Village, California through a California-based insurance broker and that the policies were ultimately issued to that broker in its Los Angeles office and then delivered to Dole‘s headquarters. RSUI also observes that AXIS, Dole‘s primary insurer, managed Dole‘s account from its west coast regional office and that the Policy contains California amendatory endorsements. RSUI also points out that Dole‘s “directors and officers lived and worked in California at the Company‘s headquarters.”44 RSUI contends that “[t]he single fact of Dole‘s incorporation in Delaware—which is largely irrelevant to where
For their part, the Insureds argue that the Superior Court correctly determined that Delaware had the most significant relationship to this case. The Insureds reason that “Delaware has a substantial interest in its law being applied to interpret D&O policies of Delaware corporations,”46 because under
Adhering closely to its analysis in Mills, the Superior Court agreed with the Insureds that Delaware, and not California, had the more significant interest in the subject matter of the Policy; it therefore applied Delaware law. We agree with this conclusion.
E.
RSUI‘s criticism of the Superior Court‘s reliance on the court‘s reasoning in Mills is, in our view, misguided. For instance, RSUI argues that the Superior Court
This last point highlights what we see as the fundamental flaw in RSUI‘s argument—it presents a false dichotomy. Both Chemtura and Mills adhere to the same analytical framework. For RSUI, however, because Mills weighed the relevant
In our view, the question is whether the Superior Court‘s application of the choice-of-law rules that all seem to agree are applicable—rules that the Superior Court has followed for years and upon which we placed our seal of approval in Chemtura—was erroneous as a matter of law. In answering that question, we must determine whether the court‘s analysis runs afoul of Chemtura. Put another way, we ask whether Chemtura dictates that the balancing of the Second Restatement factors must be conducted uniformly for all insurance policies without regard to their subject matter and animating purpose. Our answer is that it does not; Chemtura itself allows that the application of its framework can, on different facts, lead to different results.
Contrary to what RSUI contends, Chemtura does not dictate that California law applies to the interpretation of the Policy. RSUI‘s contention ignores the dynamic underlying the choice-of-law problem we confronted in Chemtura, which was “the need for comprehensive insurance programs to have a single interpretive approach using a single body of law.”53 In Chemtura, the trial court‘s decision, which held that “the insurance policy was not to be interpreted under a consistently applied law but under the contract law of the different states where [environmental]
claims arose on a claim-by-claim basis,”54 frustrated that goal. Ultimately, we recognized that “the proper inquiry under the Second Restatement should be to make a reasoned determination of what state has the most significant interest in applying its law to the interpretation of the insurance scheme and its terms as a whole in a consistent and durable manner that the parties can rely on.”55Because the policies covering the environmental claims in Chemtura were part of a comprehensive insurance program addressing risks across corporate operations in multiple jurisdictions, the selection of a single interpretive approach, i.e., one state, as opposed to many, whose law would apply with regard to where a claim arose, would best serve the parties’ expectations. This prompted us to give additional weight to the insured‘s principal place of business and the center of its insurance activities when we balanced the Second Restatement factors. But we were quick to acknowledge that “the facts of a particular case might lead to a different outcome.”56 We think that this is just such a case and that the Superior Court‘s application of the Second Restatement test in Mills and in this case was correct.57
The crux of the Mills choice-of-law analysis—whether it represents its holding or is dicta is of no moment to us—is that “[w]hen the insured risk is the directors’ and officers’ ‘honesty and fidelity’ to the corporation“—and we would add to its stockholders and investors—“and the choice of law is between headquarters or the state of incorporation, the state of incorporation has the most significant interest.”58 This conclusion is consistent with the “three material framing points” that influenced our analysis in Chemtura and, in particular, our guidance that we must examine the insurance contract as a whole to determine its subject matter.
The subject matter of the Policy, as its title announces, is “Directors, Officers and Corporate Liability.”59 The policy holder is Dole, a Delaware corporation at the relevant time, and the individuals the Policy insures are Dole‘s duly elected or appointed directors and officers. And the Insurers’ obligation to pay a loss incurred by a director or officer only extends to “wrongful act[s],” which, in the context of this case, means “any actual or alleged error, misstatement, misleading statement,
These factors suggest that the state of incorporation is the center of gravity of the typical D&O policy, including the Policy under consideration here. But that does not end our analysis. We must yet consider whether the California contacts in this particular instance are sufficient to tip the balance toward California. On this point, RSUI stresses that Dole‘s headquarters is in Westlake Village, California, where Dole‘s directors and officers also live and work. But this emphasis on physical location underrates the significance of Dole‘s status as a Delaware corporation—an entity formed and existing by virtue of the Delaware Constitution64 and the Delaware
Having determined that Delaware law applies to our interpretation of the Policy, we now turn to RSUI‘s contention that the public policy of Delaware vitiates coverage of the Insureds’ losses. According to RSUI, because the settlements in the Stockholder Action and San Antonio Action were predicated on the Court of Chancery‘s findings of fraud on Murdock‘s and Carter‘s part, Delaware‘s public policy should bar their insurability. “Fraud,” RSUI argues, “should be uninsurable in Delaware.”67 The Superior Court disagreed, holding that Delaware public policy does not prohibit Delaware corporations from securing D&O insurance that covers breach of loyalty claims based on fraud.
A.
We review questions that turn on public-policy grounds de novo.68
RSUI argues that allowing the Insureds a recovery under the Policy would undermine the Court of Chancery‘s disgorgement remedy and, more generally, that, as a matter of public policy, “insurance should not be available for intentional wrongdoing,”69 citing our recent opinion in USAA Casualty Insurance Co. v. Carr, 225 A.3d 357 (Del. 2020) (”Carr“). Both of these arguments are extra-contractual; that is, unlike RSUI‘s contention that coverage is excluded under the Policy‘s Profit/Fraud Exclusion, which we will address later, RSUI assumes coverage but asks us to void it because it contravenes public policy. We reject this invitation to void the Insureds’ otherwise valid coverage.
C.
We start our analysis by reaffirming our respect for the right of sophisticated parties to enter into insurance contracts as they deem fit “in the absence of clear indicia that . . . [a countervailing public] policy exists.”71 As described earlier, the Policy has an expansive definition of covered losses, which on its face does not exclude losses occasioned by fraud. Among other things, the Insurers agreed to “pay on behalf of the Insured Individual all Loss . . . arising from any Claim for a
[w]hen parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract. Such public policy interests are not to be lightly found, as the wealth-creating and peace-inducing effects of civil contracts are undercut if citizens cannot rely on the law to enforce their voluntary-undertaken mutual obligations.76
The question here then is: does our State have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract? We hold that it does not. To the contrary, when the Delaware General Assembly enacted Section 145 authorizing corporations to afford their directors and officers broad indemnification and advancement rights and to purchase D&O insurance “against any liability” asserted against their directors and officers “whether or not the corporation would have the power to indemnify such person against such liability under this section,”77 it expressed the opposite of the policy RSUI asks us to adopt.
Nor is our conclusion inconsistent, as RSUI suggests, with our dicta in Carr. There, quoting Hudson v. State Farm Mutual Insurance Co., 569 A.2d 1168 (Del. 1990), we referred to “the ‘well established common law principle that an insured should not be allowed to
Other considerations support our conclusion. For instance, in the high-stakes arena of stockholder litigation, a blanket prohibition, on public-policy grounds, against insuring for losses arising from a director‘s or officer‘s misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery. This conflicts with the public policy that favors the compensation of innocent victims.
Our conclusion gains further support from this Court‘s decision in Whalen v. On-Deck, Inc.82 In that case, the Superior Court had granted summary judgment in favor of a liability insurance carrier, holding, on public-policy grounds, that it was not obligated to pay punitive damages assessed against its insured. In so holding, the Superior Court found that
a rule prohibiting the issuance of insurance covering punitive damages more accurately reflects the public policy of this State. It would be unjust and contrary to reason to assess punitive damages against [the insurer] when it has done no wrong, and the punitive and deterrent purposes underlying punitive damages would be frustrated if one who
has acted wantonly were permitted to shift the burden to its insurer, and ultimately to the public.83
This Court reversed the Superior Court, pointing to the Delaware legislature‘s primacy in establishing this State‘s policy and the importance of the parties’ freedom of contract:
[T]here is no evidence of public policy in this State against such insurance. The Delaware Legislature has formulated no such policy, and this Court has indicated in the past that it would defer to the Legislature on the issue. While the Superior Court and [the insurer] believe the purposes of punitive damages would be frustrated if such damages were insurable, we cannot infer from that concern a policy against such insurance. A wrongdoer who is insured against punitive damages may still be punished through higher insurance premiums or the loss of insurance altogether. More importantly, in light of the importance of the right of parties to contract as they wish, we will not partially void what might otherwise be a valid insurance contract as contrary to public policy in the absence of clear indicia that such a policy actually exists.84
We think that Whalen‘s approach—deferring to the parties’ contractual choices and to the legislature‘s prerogative in matters of public policy—is a wise one. We show this deference not because we condone fraud in Delaware; in fact, we have an unwavering policy against it.85 But concluding that certain conduct, including a director‘s breach of loyalty sounding in fraud, is not uninsurable on
A.
RSUI next argues that, even if coverage is not defeated on public-policy grounds, the Policy‘s Profit/Fraud Exclusion precludes insurance coverage for the Insureds’ actions. To reiterate, that exclusion provides that:
The Insurer shall not be liable for Loss on account of any Claim:
. . . based upon, arising out of or attributable to:
. . . any profit, remuneration or financial advantage to which the Insured was not legally entitled; or
. . . any willful violation of any statute or regulation or any deliberately criminal or fraudulent act, error or omission by the Insured;
if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.86
As RSUI points out, “[a]t issue before the Superior Court was whether [the Memorandum Opinion] . . . meets the Exclusion‘s requirement of a ‘final and non-appealable adjudication;‘”87 the Superior Court found that it did not and that, therefore, the Profit/Fraud Exclusion did not apply.
“The interpretation of an insurance policy is a question of law and subject to de novo review.”88 A brief survey of the principles that guide our review is appropriate here.
“Insurance contracts, like all contracts, ‘are construed as a whole, to give effect to the intentions of the parties.‘”89 Proper interpretation of an insurance contract will not render any provision “illusory or meaningless.”90 If the contract language is “clear and unambiguous, the parties’ intent is ascertained by giving the language its ordinary and usual meaning.”91 Where the language is ambiguous, the contract is to “be construed most strongly against the insurance company that drafted it.”92 A contract is not ambiguous simply because the parties do not agree on the proper construction.93 “Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.”94
C.
The Superior Court‘s ruling on the applicability of the Profit/Fraud Exclusion pre-dated the San Antonio Action settlement.98 Therefore, the court focused its analysis on the Memorandum Opinion, and, as such, its decision did not mention the San Antonio Action. RSUI‘s briefing in this Court adopts a similar approach, attending almost exclusively to whether the Memorandum Opinion in the Stockholder Action is a “final and non-appealable adjudication.” But if Dole‘s settlement of the San Antonio Action is not subject to the Profit/Fraud Exclusion, then the exclusion‘s effect on the Stockholder Action settlement matters little; if
As for San Antonio, the allegations arose directly out of the findings contained in the [Memorandum Opinion]. Thus, the settlement is “based upon, aris[es] out of, or attributable to” the adjudication of fraud in the Stockholder Action, meaning the Profit/Fraud Exclusion applied equally to both Stockholder and San Antonio.99
Thus, RSUI contends that the relationship between the allegations of fraud in the San Antonio Action and the Court of Chancery‘s findings in the Stockholder Action triggers the Profit/Fraud Exclusion. This, in our view, is contrary to the exclusion‘s requirement that the adjudication of fraud must be “in the underlying action.”
RSUI seems to admit that there was no adjudication in the San Antonio Action, but pronounces that “[t]he phrase ‘in the underlying action’ was clearly not intended to limit the Exclusion‘s application to follow-on collateral estoppel litigation for the same conduct.”100 We are not convinced by this argument.
That some findings in the Memorandum Opinion might have been implicated in the resolution of the San Antonio Action had it not been settled is irrelevant to a determination of whether there was an adjudication in the San Antonio Action; holding otherwise would ignore the plain meaning of the Profit/Fraud Exclusion‘s stipulation that only “fraudulent act[s] . . . established by a final and non-appealable adjudication adverse to [the] Insured in the underlying action” would be subject to the exclusion. And even if we were to grant that the meaning of “the underlying litigation” could be interpreted to include the San Antonio Action—and we don‘t—
As suggested earlier, the practical consequence of our conclusion that the Profit/Fraud Exclusion fails as to Dole‘s loss attributable to the San Antonio Action is significant. In defending the Stockholder Action, AXIS, Dole‘s primary insurer, reached its $15 million limits. Shortly thereafter, Dole‘s second layer of insurance was also exhausted after reaching its $10 million limits in also defending the Stockholder Action. Dole‘s third layer of insurance was exhausted in part on defense costs associated with the Stockholder Action and in part on the San Antonio Action settlement. After that contribution to the San Antonio Action settlement, Dole paid the remaining approximately $66 million settlement amount. The record is unclear as to when the remaining layers of Dole‘s coverage were exhausted. But we know that all other Insurers have either paid their limits or settled with Dole. In any event,
A.
In its amended complaint for declaratory relief, RSUI alleged that “[t]o the extent that the Court determines that any portion of the Stockholder Settlement or Defense Costs in connection with the Stockholder Action is covered, any amounts to be paid must be allocated to covered Loss pursuant to the terms of the Policies.”105 According to RSUI, Section VIII.A of the Policy should govern that allocation. Under that provision,
[i]f in any Claim, the Insureds who are afforded coverage for such Claim incur Loss jointly with others (including other Insureds) who are not afforded coverage for such Claim, or incur an amount consisting of both Loss covered by this Policy and loss not covered by this Policy because such Claim includes both covered and uncovered matters, then the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of covered Loss. The Insurer‘s obligation shall relate only to those sums allocated to matters and Insureds which are afforded coverage. In making such determination, the parties shall take into account the relative legal and financial exposures of the Insureds in connection with the defense and/or settlement of the Claim.106
B.
Because the resolution of this issue turns on the interpretation of the Policy, our review is de novo.108
C.
In its January 17, 2020 Memorandum Opinion on Allocation, the Superior Court rejected RSUI‘s invitation to allocate the Insureds’ losses with reference to “the relative legal and financial exposures of the Insureds” on various grounds. Noting that the factual record would not support a finding that either RSUI or the
Section VIII.A was unhelpful in the Superior Court‘s eyes because, for example, it does not establish an allocation methodology to be applied in the absence of an agreement between the parties. Moreover, limiting RSUI‘s responsibility for the Insureds’ losses in the manner favored by RSUI ignores other, more substantive, policy language. The Court observed that it was
to interpret the insurance policy through a reading of all the relevant provisions of the contract as a whole, and not any single passage in isolation. The Policies cover all Loss that the Insured(s) become legally obligated to pay. Such language implies . . . a complete indemnity for Loss regardless of who else might be at fault for similar actions. The Policies do not limit coverage because of the activities of others that might overlap the claims against the Insureds. Any type of pro rata or relative exposure analysis seems contrary to the language of the Policies.110
We agree with both of these observations and the Superior Court‘s resulting conclusion that the “larger settlement rule” captures the extent to which RSUI‘s indemnity obligations might be reduced by an allocation of a portion of the Stockholder Action settlement to non-covered losses or uninsured parties. Under the rule, as articulated by the Ninth Circuit Court of Appeals in Nordstrom, Inc. v. Chubb & Son, Inc., “responsibility for any portion of a settlement should be allocated away from the insured party only if the acts of the uninsured party are determined to have increased the settlement.”111
Here, RSUI has not argued that the acts of DFC or the actions of Murdock and Carter in their uninsured capacities increased the amount of the Stockholder Action settlement. Indeed, since DFC was found to be liable as an aider and abettor “to the same extent as”112 Murdock, it would appear as though DFC‘s actions could not have increased the Stockholder Action settlement. And, aside from conclusory assertions, RSUI has pleaded no facts that suggest the San Antonio Action settlement represented an admixture of covered and non-covered losses.113 Nor, for that matter, has RSUI ventured an explanation of how the application of their “relative exposure” allocation theory would lead to a reduction in the coverage available to the Insureds. We therefore affirm the Superior Court‘s Memorandum Opinion on Allocation.
The Insureds raise two issues on cross appeal. First, they argue that the Superior Court erred by granting summary judgment in favor of RSUI on the Insureds’ claims for breach of the implied covenant of good faith and fair dealing. Second, the Insureds contend that the trial court erred in finding that collateral estoppel applies to the Insureds as to factual issues litigated and decided in the Memorandum Opinion. For the reasons discussed below, we conclude that the Insureds’ implied-covenant argument on cross appeal is without merit. Because the Insureds’ collateral-estoppel argument is relevant only “to the extent this Court reverses any of the Superior Court‘s rulings,”114 and we have not done so, we will not address that argument.
A.
As we have stated above, this Court reviews the Superior Court‘s grant of summary judgment de novo.115
B.
“An insured has a cause of action for bad faith against an insurer ‘when the insurer refuses to honor its obligations under the policy and clearly lacks reasonable
Finding that “the Insurers advanced a number of well-reasoned arguments for denying the coverage to Insureds—e.g., the Fraud Exclusion and failure to comply with the Written Consent Provision and/or the Cooperation Clause,”118 the Superior Court determined that the Insurers did not deny coverage and pursue declaratory relief in bad faith. The court found further that, given the complexity of the choice-of-law question, applying California law “as a default, while incorrect, was reasonable.”119
C.
The Insureds do not argue that the determination of the reasonableness of the legal bases of the Insurers’ coverage denial is not within the trial court‘s province. Instead, the Insureds’ principal argument is that the court “should have considered what RSUI did and considered at the time [of the denial] in assessing RSUI‘s good
The Insureds’ approach, in our view, ignores the test for reasonableness as articulated in Casson.121 The question is whether the insurer is aware of facts and circumstances, at the time of denial, that support a bona fide dispute as to whether the loss is covered. Here, RSUI was aware of the Insureds’ and the Policy‘s contacts with California, and as the closeness of this case on the choice-of-law question demonstrates, those contacts formed the basis of a bona fide dispute. In a similar vein, RSUI was aware of the Court of Chancery‘s findings that Murdock had committed fraud and that the Policy contained a Profit/Fraud Exclusion. And while we are not ultimately required to decide whether the exclusion applies to the
In sum, the Superior Court did not err in granting summary judgment in favor of RSUI on the Insureds’ implied-covenant-of-good-faith-and-fair-dealing claim.
We affirm the Superior Court‘s final judgment.
Notes
App. to Opening Br. at A450 (emphasis in original). Because we find that Delaware law is applicable to the interpretation of the Policy, we need not address this argument.the law of the jurisdiction most favorable to the insurability of such matters shall apply; provided further such jurisdiction is: (i) where such amounts were awarded or imposed; (ii) where any Wrongful Act underlying the Claim took place; (iii) where either the Insurer or any Insured is incorporated, has its principal place of business or resides; or (iv) where this Policy was issued or became effective.