The Delaware Superior Court recently decided Arch Insurance Company v. Murdock, Del. Super. C.A.N16C-01-104 EMD CCLD.
Six Directors and Officers Liability excess insurers (“Insurers), sought a declaration that they did not have to fund an underlying settlement due to Defendants’ alleged fraud. Alternatively, the Insurers moved to be allowed to subrogate against their insured pursuant to an exclusion provision contained in the relevant policies.
In the underlying action in the Court of Chancery, stockholders alleged Defendants engaged in a lengthy process that manipulated the stock price so that Mr. Murdock could acquire the stock at a lower price. Vice Chancellor Laster, in his Memorandum Opinion (the “Memorandum Opinion”), repeatedly cited to “fraud” and “fraudulent activity.” Vice Chancellor Laster found breaches of the duty of loyalty, and assessed liability against Mr. Murdock, Mr. Carter, and DFC in the amount of $148,190,590.18. Consequently, Dole signed a term sheet settling the underlying action. The underlying parties signed a formal Stipulation and Agreement of Settlement (the “Settlement”) In lieu of an appeal, the parties settled for 100% plus interest. Murdock agreed to pay the settlement on the Defendants’ behalf. Vice Chancellor Laster approved the settlement on February 10, 2016 (the “Order and Final Judgment”).
Defendants, the insureds, argued that there was no controversy between (i) the Insurers and Mr. Carter and Dole regarding Count I, or (ii) the Insurers and Mr. Murdock and Mr. Carter regarding Count II. First, Defendants contended Vice Chancellor Laster approved the Settlement, which obligated only Mr. Murdock to fund the settlement. As such, Mr. Carter and Dole were not seeking coverage from the Insurers. Additionally, as the case settled, Defendants claimed there were no defense costs to seek from the Insurers because the other lower-tiered insurers advanced all defense costs. Defendants also contended that the Insurers may not subrogate against an individual insured as a matter of law. Defendants argue that the Insurers refused to fund any amount of the settlement under the policy’s profit/financial gain exclusion. If the Insurers’ argument prevails, therefore, there is nothing to pay. If the Insurers’ argument fails, and the exclusion does not apply, then the policy clearly and expressly precludes subrogation. Defendants rely on Primary Policy Section VIII. H, which provides that the Insurers will not exercise their right of subrogation “against an Insured Individual unless Exclusion IV.6 applies to such Insured Individual.
The Insurers also contended they had a right to consent to the Settlement. The relevant policies provide:
- The Insureds shall not admit any liability, settle, offer to settle, stipulate to any judgment or otherwise assume any contractual obligation with regard to any Claim or Insured Inquiry without the Insurer’s prior written consent, which shall not be unreasonably withheld.
The Insurers alleged that Defendants failed to get consent prior to settling.
The Court disposed of the lack of controversy argument quickly and found that the Insurers had met all four necessary conditions to state a claim for declaratory relief. Moving to the subrogation issue, the Court noted that the parties disagreed on whether Exclusion IV.A.6 applied to the facts here. If it applied, then the Insurers would not have to fund the settlement, and if it did not apply then subrogation is not available to the Insurers. In the Endorsement No. 3 to the Primary Policy, Exclusion IV.A.6 was replaced – Section V.6. As replaced, Exclusion IV.A.6 reads as follows:
The Court found that the language of Exclusion IV.A.6 in this situation was not ambiguous.
(“The language is not complicated. If a deliberate act of fraud by an insured is determined through a final and non-appealable adjudication, the Insurer will not be responsible for any claim made by that insured relating to the adjudicated fraudulent act.”) The Memorandum Opinion, without more (i.e., a Chancery Rule 54(b) entry of judgment or a Chancery Rule 58 order), was not a final and non-appealable adjudication adverse to the defendants in the underlying action. The only final and non-appealable adjudication in the Chancery Court action was the Order and Final Judgment. Accordingly, Exclusion IV.A.6 did not apply to the facts of this case.
The Court found that there was no conflict between California law, under which an insurer cannot bring a subrogation action against its own insured and Delaware law under which no right of subrogation exists for the insurer against the insured, co-insured, or the wrongdoer if they are an insured under the policy. Section VIII. H of the policy provided that the Insurers will not exercise their right of subrogation against an “Insured Individual” unless Exclusion IV.A.6 applies. As discussed above, the Court decide that Exclusion IV.A.6 did not apply.
The lack of consent defense of the Insurers, while mentioned, was not decided for reasons unexplained in the opinion.
– James Semple