(Article from Insurance Law Alert, February 2020)
For more information, please visit the Insurance Law Alert Resource Center.
A Delaware court ruled that allocation of settlement payments between covered and non-covered payments must be based on the “Larger Settlement Rule,” notwithstanding policy language referencing the insured’s “relative legal and financial exposure” with respect to defense and settlement costs. Arch Ins. Co. v. Murdock, No. N16C-01-104 (Del. Super. Ct. Jan. 17, 2020).
The dispute arose out of underlying shareholder litigation against Dole Food Company and its executives. The lawsuits were settled for a total of $222 million. Previous rulings in this matter addressed various coverage issues under policies in Dole’s insurance program. In the present motion, the court addressed allocation of the settlement payments.
A policy provision addressing the allocation of insurance coverage stated that:
If 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. . . . 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.
The insurers argued that the provision requires allocation between covered and uncovered loss (the “relative exposure” rule), and that the Dole parties bear the burden of proving whether and to what extent a settlement payment pertains to a covered loss. In contrast, the Dole parties asserted that the Larger Settlement Rule applies, under which the entire amount of the settlement is recoverable unless the insurers are able to establish that some uncovered liability increased the overall settlement amount.
The court deemed the allocation provision unambiguous, but “mostly unhelpful.” The court explained that the provision relates only to a situation in which the parties work together to arrive at a “fair and proper allocation,” and does not address the situation presented here, where the parties have failed to agree on allocation and leave that determination to the court. Absent language providing guidance, the court concluded that the Larger Settlement Rule must apply. In so ruling, the court noted that policy language covers “all Loss that the Insured(s) become legally obligated to pay” and does not limit coverage based on “[a]ny type of pro rata or relative exposure analysis.” The court emphasized that the insurers retained their subrogation rights under the policies to seek payment from uncovered underlying defendants.