Joseph P. Monteleone of Weber Gallagher. Courtesy photo.
Delaware state courts are becoming the preferred jurisdiction for policyholders seeking to litigate coverage disputes for two reasons. First, Delaware insurance law is thought by many legal professionals to be generally favorable to policyholders. Second, Delaware trial judges have become quite familiar with insurance coverage litigation. Most insurance coverage litigation is brought in the Superior Court, typically the Commercial Court of the Law Division. Few matters are brought in Chancery Court, which is a court of equity. That is because in most insurance coverage litigation, whether commenced by a policyholder or an insurer, seeks damages, recoupment, and other monetary relief in addition to a declaratory judgment. Many trial court jurists are perceived to have a manifest anti-insurer bias, whether or not they actually do.
Looking at recent decisions, however, Delaware courts are not necessarily a bad forum for insurers. Certainly, the federal court in Delaware is perceived as being more even-handed than the state trial court. Federal jurisdiction can only be obtained when there is either (1) a federal question (e.g., one of constitutional law) or (2) there is complete diversity of citizenship between the adverse parties (no defendant or plaintiff has the same state of incorporation or residence as anyone on the other side) and the amount in controversy exceeds $75,000. Unfortunately for insurers, federal jurisdiction is usually premised on the latter option because most insurance coverage disputes do not present a question of federal law. Diversity, however, is often defeated because both the corporate policyholder and the defendant insurer are Delaware-chartered corporations. As a practical matter, without diversity, virtually all cases can only go forward in state court.
Some say the Delaware Supreme Court is neither manifestly pro-insurer nor anti-insurer; there have been a number of recent decisions in the state high court in favor of insurers. There is no intermediate appellate court in Delaware, so any appeal from a trial court goes directly to the Delaware Supreme Court. This benefits both policyholders and insurers because it considerably shortens the time within which to get a final and non-appealable ruling in a case. Of course, it is not the best litigation strategy, because the appellate route is expensive and fraught with uncertainty.
Many key recent coverage decisions in Delaware have involved directors and officers (D&O) liability insurance. Most D&O policies and other liability insurance do not have choice of law provisions and are also silent on the choices of jurisdiction and venue. For an excellent discussion of why many insurance policies do not contain choice of law provisions, see Professor John F. Coyle's article The Mystery of the Missing Choice-of-Law Clause, which will be published in the U.C. Davis Law Review in the near future.
The perception that Delaware law is generally more favorable to the policyholder than the insurer may be more based upon jurisdictional considerations rather than choice of law. In many cases, there is no significant conflict between Delaware law and the law of another jurisdiction, so the choice of law issue becomes moot as a practical matter.
Several recent Delaware decisions illustrate these issues.
In The Travelers Indemnity Company v. CNH Industrial America, LLC, 2018 Del. LEXIS 334 (Del. 2018), the Delaware Supreme Court held that Texas law applied to a comprehensive insurance program issued to a Texas corporation and its subsidiaries nationwide based on five factors found in the Restatement (Second) on Conflict of Laws: (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.
Relying heavily on its decision in Certain Underwriters at Lloyd's, London v. Chemtura Corp., 160 A.3d 457 (Del. 2017), the court held that, under the Restatement (Second) on Conflict of Laws factors, Texas had the most significant relationship to the contracting parties because the contract of insurance was negotiated and performed in Texas, and the policyholder was both domiciled and incorporated in Texas.
In another case, Stillwater Mining Co. v. National Union Fire Ins. Co., 2021 Del. Super. LEXIS 720 (Del. Super. Ct. 2021), Stillwater Mining Company was acquired by and merged into Sibanye Gold Limited; an appraisal action by Stillwater shareholders followed. As in many other appraisal actions, a significant cost was incurred in defending and appealing the appraisal action.
Coverage litigation with Stillwater's D&O insurers followed as the insurers took a no coverage position with respect to the underlying appraisal action. In prior appraisal coverage litigation involving a different policyholder and group of insurers, the Delaware Supreme Court had found in favor of the insurers. Based on that ruling, Stillwater filed a motion to dismiss its Delaware Superior Court complaint without prejudice so that it could pursue Montana specific claims in a Montana court, or in the alternative to be allowed to file an amended complaint in the Delaware proceeding asserting Montana law claims. Ultimately, the Delaware Superior Court dismissed Stillwater's claims with prejudice based on the Delaware Supreme Court precedent.
The Superior Court noted that "this Court cannot ignore precedent that indicates that Delaware has a strong interest in disputes involving D&O coverage", relying upon the Second Restatement factors discussed above and Delaware law and a prior landmark D&O insurance decision from the Delaware Supreme Court in RSUI Indem. Co. v. Murdock, 248 A.3d 887 (Del. 2021), commonly known as the Dole Foods case because Dole Foods was the corporation at issue.
The Stillwater court noted that Murdock held that the Restatement factors "suggest that the state of incorporation is the 'center of gravity of the typical D&O policy.'" Because Delaware law governed the underlying liability issues, Delaware "ha[d] a strong interest in the scope and applicability of coverage," and Delaware law therefore governed the policy. The Stillwater court also noted parenthetically that the most significant contacts test analysis is "not mathematical" and at least under the view of Delaware law "the state with the 'most significant relationship' to the parties may not necessarily be the state with the most contacts."
Stillwater is presently on appeal to the Delaware Supreme Court, with oral argument having taken place in October 2022.
Perhaps the most significant ruling in Murdock may be that Delaware governs the interpretation of D&O insurance issued to a company incorporated in Delaware. The court rejected the insurer's arguments that California law should apply under a policy that was purchased and issued in California to a Delaware corporation headquartered in California.
So what is the key takeaway? Delaware jurisdiction does not always mean that Delaware law will apply.
Increasingly, insurers consider placing choice of law provisions in their policies. Historically, this idea has been resisted by insurance brokers representing policyholder interests. However, there may be less resistance among policyholders if the law chosen is that of the state where the policyholder has its principal place of business; many corporations, though incorporated in Delaware, have their headquarters somewhere else. Also, it may not be overly burdensome on insurers to select the policyholder's headquarters state for jurisdictional purposes, as many insurers do business on a nationwide basis and can readily litigate in different states.
These views are the author's own.
Joseph P. Monteleone is a partner at Weber Gallagher and serves as coverage and monitoring counsel for errors and omissions (E&O), directors and officers (D&O), employment practices liability (EPL), and other claims-made insurance products. Joe frequently serves as a consulting and testifying expert witness in insurance disputes involving claims handling practice and industry custom and practice in the underwriting area. In particular, he has concentrated this work in the D&O and professional liability product lines. He also serves as an arbitrator and mediator in insurance and reinsurance coverage disputes. Joe has successfully litigated D&O disputes in California and New York, and served as a party-appointed arbitrator in a major employment practices insurance dispute in an international forum in London, England.