On March 3, 2021, the Delaware Supreme Court issued a landmark victory for policyholders in the insurance dispute concerning Dole Food Company, Inc. under a directors and officers liability policy, in RSUI Indem. Co. v. Murdock, et al., No. 154, 2020, 2021 WL 803867, at *1 (Del. Mar. 3, 2021). Dole’s dispute was with its eighth-layer excess insurer, RSUI Indemnity Company, which provided $10 million excess of $75 million. As discussed below, the court ruled in favor of Dole on multiple key issues concerning choice of law, the insurability of fraud, the Profit/Fraud exclusion, and allocation.


In November 2013, Dole went private through a merger in which its CEO, David Murdock, acquired any stock he did not already own, which was approximately 60% of the company. After the merger closed, stockholders filed suit alleging breach of fiduciary duty claims against certain of Dole’s directors and officers on the ground that they artificially deflated the stock price prior to the merger. At trial, the directors and officers were found to have fraudulently manipulated the stock price and, as a result, were liable for more than $148 million in damages.

Before judgment was entered, the parties began discussing settlement. Dole informed its insurers, including RSUI, of the settlement discussions, and the insurers issued updated coverage positions. Dole and the stockholders then entered into settlement, which was approved by the trial court and entered in the case as a final order and judgment.

Before the court had approved the settlement, stockholders who had sold their stock prior to the merger filed a separate securities action in Delaware federal court. Several months later, the stockholders in the federal court action agreed to pursue mediation. Dole’s insurers again reserved rights, and RSUI stated it would treat the state court and federal court actions as a single claim. Without the insurers’ consent, Dole entered a settlement in the federal court action for more than $74 million.

After the settlement of the state court action, but before the settlement of the federal court action, RSUI filed for declaratory judgment in Delaware state court against Dole seeking a ruling that it had no obligation to fund the settlement. Dole asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud in the inducement. The coverage action resulted in a policy-limits judgment against RSUI in the amount of $10 million, plus more than $2.3 million in prejudgment interest.

RSUI appealed, asserting that: (i) California law should govern, and not Delaware law; (ii) Delaware law should prohibit as a matter of public policy the insurability of fraudulent conduct; (iii) the policy’s Fraud/Profit Exclusion should bar coverage; and (iv) the “larger settlement rule” should not apply with respect to allocation of loss.

Choice of Law and the “Most Significant Relationship” Test

The court began with a choice-of-law analysis. RSUI wanted California law to apply because California Insurance Code section 533 bars insurance coverage for willful acts. RSUI asserted that, under the “most significant relationship” test, California law should apply because the D&O policy was issued in California and Dole is headquartered in California.

Under the Restatement’s “most significant relationship” test, the court recognized that there is “a presumption for insurance contracts that, as a general matter, the law of the state which the parties understood was to be the principal location of the insured risk should be applied because that state will have the most significant relationship.” However, the court also recognized that, where the facts of the case do not fit such presumptions—such as where the policy insures risks that are not confined to one jurisdiction—the court will look at “broader subject-matter-specific factors.”

Under this standard, the court considered the following Restatement factors, among others: (i) the place of contracting; (ii) the place of negotiation of the contract; (iii) the place of performance; (iv) the location of the subject matter of the contract; and (v) the domicile, residence, nationality, place of incorporation and place of business of the parties. Applying these factors, the court determined that Delaware law applied. This is because, “‘[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.’”

The court stated that its conclusion is consistent with the principle that courts must examine the insurance contract as a whole to determine its subject matter. For example, the Dole D&O policy was intended to cover a Delaware corporation, and Delaware law provides “broad indemnification and advancement rights to their directors and officers to purchase D&O policies to protect them even where indemnification is unavailable,” which enables Delaware corporations “to attract talented people to fill those roles.” The court stated that the choice-of-law factors suggest that “the state of incorporation is the center of gravity of the typical D&O policy.”

Finally, the court determined that Dole’s California contacts did not outweigh Delaware’s interest in “protecting the ability of its considerable corporate citizenry to secure D&O insurance and thereby attract talented directors and officers.”

Insurability of Fraud as a Matter of Public Policy

Delaware permits sophisticated parties to enter into insurance contracts as they deem fit, in the absence of clear indicia that a countervailing public policy exists. Dole’s D&O policy provided coverage for loss arising from a claim for a “wrongful act,” which the policy defined to include “actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty.” The policy also excluded losses based upon, arising out of, or attributable to any deliberately fraudulent act, but only if “established by a final and non-appealable adjudication.” The court determined that allegations of fraud “fit comfortably within these terms defining the scope of coverage.”

Further, the court stated that Delaware law does not “have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract.” To the contrary, Delaware statute authorizes corporations to afford their directors and officers broad indemnification and advancement rights and to purchase D&O coverage “against any liability” asserted against the directors and officers “whether or not the corporation would have the power to indemnify such person against such liability under this section.” Therefore, Delaware public policy did not prohibit the insurability of the fraudulent or allegedly fraudulent conduct of Dole or its directors and officers.

Profit/Fraud Exclusion

RSUI next asserted that, aside from any public policy considerations, the D&O policy itself prohibited coverage for the insureds’ fraudulent conduct under the Profit/Fraud Exclusion, which stated 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.”

Based on traditional principles of insurance contract interpretation, the court determined that the exclusion unambiguously applied only to an adjudication of fraud “in the underlying action.” The court focused on the federal-court action against Dole’s directors and officers for breach of the Securities Exchange Act because liability for that settlement would exhaust the policy’s limits. However, because that lawsuit resulted in a settlement, it was not a final adjudication of fraud in an underlying action. The court stated that “the underlying litigation” in this context means “the litigation in connection with which the Insureds became legally obligated to pay on account of a claim” and was “not convinced” by RSUI’s arguments regarding the “intent” behind that language to apply more broadly to collateral litigation for the same conduct. Therefore, the Profit/Fraud Exclusion did not apply.

Allocation and the “Larger Settlement Rule”

Having determined that RSUI was liable for Dole’s losses, the court next turned to the applicable allocation method. The D&O policy contained an allocation provision stating:

[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.

Under that allocation provision, RSUI asserted that the court should apply a “relative exposure” allocation method by weighing the relative exposures between covered and non-covered losses.

However, the court declined to apply the “relative exposure” method because: (i) the allocation provision does not establish an allocation method where the parties disagree; and (ii) limiting RSUI’s responsibility for paying Dole’s losses using the insurer’s preferred allocation method ignores other, more substantive policy language, stating that RSUI must cover “all monetary amounts which the Insureds become legally obligated to pay on account of a Claim.” The Delaware Supreme Court agreed with the lower court’s observations that this language implies “complete indemnity for Loss regardless of who else might be at fault for similar actions.” Moreover, the policies did not “limit coverage because of the activities of others that might overlap the claims against the Insureds,” making any type of pro rata or “relative exposure” analysis “contrary to the language” of the policies.

Instead, following the seminal decision in Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1432 (9th Cir. 1995), the court applied the “larger settlement rule,” under which a loss is fully recoverable unless the insurer can show that the liability for non-covered conduct increased the insurer’s liability. Under that method, the court determined that RSUI was responsible for the entire amount of the settlement because it had not shown that any of the insureds’ actions increased the amount of the settlement.

Key Takeaways

For policyholders, the key takeaway from this decision may be that Delaware law contemplates affording Delaware corporations the benefit of attracting talented directors and officers by enabling them to purchase D&O coverage that will protect them against risks anywhere, even where the corporation may be headquartered in a different state.

This theme is consistent with the recent opinions of Delaware trial courts favoring policyholders under D&O policies, on issues concerning the advancement of defense costs and the jurisdiction of Delaware courts over certain coverage issues. A discussion of those case decisions can be accessed here.

Other important takeaways from the Dole decision include the following:

  • Delaware determines choice of law issues by applying the “most significant contacts” test, but courts will consider broader factors in the insurance context, where the insurance policy insures risks that are not confined to one jurisdiction.
  • Delaware does not have a public policy against insuring fraudulent conduct.
  • The settlement of a case involving allegations of fraud will not qualify as a final adjudication of fraud in an underlying action for purposes of a Profit/Fraud Exclusion like the one in Dole’s D&O policy.
  • Even where a policy contains an allocation provision, Delaware law may require applying the “larger settlement rule” to determine whether allocation is needed, if the policy’s allocation provision does not provide a method for when the parties disagree and/or when the policy, read as a whole, does not support limiting the insurer’s liability through allocation between covered and potentially uncovered loss.