If you were born and raised in New Jersey like me, you’ve heard your share of New Jersey jokes from interlopers who think the entire state looks like the Turnpike near Newark Airport. (“What exit?” How wonderfully clever.) My response to these jokes is two-fold. First, trust me on this, we don’t like you, either. Second, we have Springsteen, Sinatra, the Sopranos, the Jersey Shore, three Stanley Cups, and two New York football teams.
So, the more important issue is: Why does Delaware even exist?
I know, I know, the current President comes from Delaware. And so did George Thorogood. And Valerie Bertinelli. But really, other than that, all they have down there is a big bridge, one beach, and an army of corporate lawyers, right?
I’m kidding, of course. One other thing Delaware has is a Supreme Court with a keen understanding of insurance law. And since other states look to Delaware Courts for guidance with respect to business issues, that’s very important to those of us who represent policyholders in coverage litigation.
In the current environment, when business dealings go sour, it’s common for one side to accuse the other of fraud. Fraud litigation can be exorbitantly expensive, and it’s not an exaggeration to say that the availability of insurance could mean the difference between bankruptcy and survival. Recently, the Delaware Supreme Court dealt with the question of whether claims alleging fraud are insurable. Insurance companies often say they’re not, and that’s what they argued before the Delaware Court. They lost.
The case, RSUI v. Murdock (which you can read here), dealt with whether a Directors’ & Officers’ excess liability policy covered shareholder litigation alleging illegal stock price manipulation by two officers of the Dole Corporation. RSUI provided insurance in the 8th layer of the coverage tower, with $10 million in insurance over $75 million in underlying limits. There were two shareholder lawsuits. The plaintiffs won $148 million in a bench trial in one of them. RSUI disclaimed coverage for defense costs and the verdict, on the ground that insuring fraud was against public policy.
Insurance companies love to argue that business policyholders shouldn’t get the benefit of the rules of insurance policy construction, which generally favor coverage, because of their “sophistication.” (If you’ve been involved in coverage litigation long enough, this concept is funny. No matter how “sophisticated” you are, you still may need flowcharts, a dictionary, and a healthy dose of luck to figure out what most policies cover.)
Here, the Delaware Supreme Court turned the tables, and essentially found that the insurance company was “sophisticated” and shouldn’t be allowed to escape paid-for coverage based on some kind of implied morals clause. (“Your Honor, we’d love to cover this claim, but we all have to think of the greater good…”)
Specifically, the Court wrote:
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,” it expressed the opposite of the policy RSUI asks us to adopt.
There are a couple of interesting lessons from this case. First, the policies under the RSUI layer paid out an astonishing $75 million in defending the securities fraud claims. While this case is an extreme example, litigation is breathtakingly expensive. Always avoid it if you can, by paying careful attention to risk management protocols. Second, don’t take the boilerplate language in insurance company denial letters as the last word. If the policyholders here had given up after RSUI’s claim denial, they would have been left with crushing liabilities. So: Get yourself a good lawyer who understands insurance law.
Here, that good lawyer was Kirk Pasich of Pasich LLP, who has been doing battle with carriers for decades. Props to Kirk on a fantastic result.