Judge Davis Holds Insurers Have Valid Controversy Against Insureds but Are Barred from Subrogation Against Defendants as a Matter of Law

February 16, 2017

Publication

In Arch Insurance Co., et al. v. Murdock et al., C.A. No. N16C-01-104-EMD-CCLD, Judge Davis granted in part and denied in part the defendants’ motion to dismiss, holding that there was a valid controversy between the plaintiffs (excess insurance carriers) and the defendants (the insureds) regarding the funding of a settlement for an underlying lawsuit. Judge Davis also held that the plaintiffs were barred from subrogation against the defendants as a matter of law.

In this case, the plaintiff insurers argued that they had no obligation to indemnify the defendants for a settlement due to allegations of fraud. Despite the defendants’ arguments that no actual controversy existed because individual defendant David H. Murdock paid the entire amount owed under the underlying settlement and defendants C. Michael Carter and Dole Food Company had not sought indemnification under the governing insurance policies, the Court held that the plaintiffs adequately established a controversy regarding indemnification upon which relief could be granted.

The plaintiffs also argued that they should be entitled to subrogate against their insureds (the defendants) in light of an exclusion in the governing insurance policy that enables subrogation against an individual when that individual committed a deliberate act of fraud as determined by a final and non-appealable adjudication. Specifically, the plaintiffs pointed to Vice Chancellor Laster’s memorandum opinion citing to the individual defendants’ fraudulent conduct in the underlying lawsuit. Although Judge Davis acknowledged that Vice Chancellor Laster did make findings in his memorandum opinion that some of the individual defendants committed fraudulent acts, the memorandum opinion did not constitute a final and non-appealable adjudication, as required for the exclusion to apply.

Rather, the insureds entered into a settlement following the memorandum opinion that did not make findings of fraudulent conduct by an insured. Thus, despite the role of the memorandum opinion as a “step towards a final adjudication,” Vice Chancellor Laster’s decision alone was not final and appealable. Accordingly, the exclusion did not apply, and the plaintiffs were barred from subrogation against the individual defendants as a matter of law.

Analysis: Unlike many states, Delaware retains a split between law courts and courts of equity. The CCLD was designed to complement the Court of Chancery, and Judge Davis’s decision highlights how proceedings in one court can create related proceedings in another court. Further, the Delaware Court of Chancery has shown a willingness to transfer cases to the CCLD when the case does not fit within the Court of Chancery’s jurisdiction. See, e.g., Mass. Mut. Life Ins. Co. v. Certain Underwriters at Lloyd’s of London, 2010 WL 3724745 (Del. Ch.) (“The availability of the Superior Court’s Complex Commercial Litigation Division further ensures that a remedy in that court will be ‘as practical to the ends of justice and to its prompt administration as the remedy in equity.’ The Complex Commercial Litigation Division offers special procedures designed to ensure that cases are handled expeditiously. The judges currently assigned to the Division have significant experience with complex insurance disputes.”).