G-New, Inc. d/b/a Godiva Chocolatier, Inc. v. Endurance American Insurance Company ( 2022 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
G-NEW, INC. DBA GODIVA )
CHOCOLATIER, INC., )
)
Plaintiff, )
)
v. ) C.A. No. N21C-10-100 MMJ CCLD
)
ENDURANCE AMERICAN )
INSURANCE COMPANY, and )
NATIONAL UNION FIRE INSURANCE )
COMPANY OF PITTSBURGH, PA., )
)
Defendants. )
)
)
)
)
Submitted: June 16, 2022
Decided: September 12, 2022
On Defendants’ Motions to Dismiss
GRANTED IN PART, DENIED IN PART
On the Parties’ Cross-Motions for Partial Summary Judgement
GRANTED IN PART, DENIED IN PART
1
OPINION
Jennifer C. Wasson, Esq., Carla M. Jones, Esq., Potter Anderson & Corroon LLP,
Wilmington, DE, Vivek Chopra, Esq., Jonathan G. Hardin, Esq. (Argued), Perkins
Coie LLP, Washington, DC, Attorneys for Plaintiff
Marc S. Casarino, Esq., Kennedys CMK LLP, Wilmington, DE, Michael L.
Zigelman, Esq. (Argued), Kristina I. Duffy, Esq. (Argued), Kaufman Dolowich &
Voluck, LLP, New York, NY, Attorneys for Defendant Endurance American
Insurance Company
Kurt M. Heyman, Esq., Aaron M. Nelson, Esq., (Argued), Heyman Enerio Gattuso
& Hirzel LLP, Wilmington, DE, Scott B. Schreiber, Esq., Arthur Luk, Esq.,
Matthew Bemis, Esq., Elliot Rosenwald, Esq., Arnold & Porter Kaye Scholer LLP,
Washington, DC, Attorneys for Defendant National Union Fire Insurance
Company of Pittsburgh, Pa.
JOHNSTON, J.
FACTUAL AND PROCEDURAL CONTEXT
Plaintiff G-New, Inc. d/b/a Godiva Chocolatier, Inc. (“Godiva”) is a Delaware
incorporated chocolate manufacturer. Defendant Endurance American Insurance
Company (“Endurance”) is an insurer incorporated in Delaware. Defendant
National Union Fire Insurance Company of Pittsburgh, PA. is a subsidiary of
American International Group (“National Union”), incorporated in Pennsylvania.
National Union is licensed to do business in Delaware. This insurance coverage
2
action arises from primary and excess insurance policies issued by Defendants 1 to
Plaintiff.
The Insurance Policies
Godiva purchased from Endurance a “Primary Management Liability
Insurance for Private Companies” policy covering the period from June 30, 2018
through June 30, 2019 (the “Endurance Policy”). The Endurance Policy obligates
Endurance to indemnify Godiva for Losses resulting from a Claim made against
Godiva during the Policy Period for Wrongful Acts, including Directors and Officers
(“D&O”) Liability Coverage. The Endurance Policy provides a $10 million limit on
liability. Godiva also purchased an excess policy through National Union that
incorporates all of the same terms and conditions of the Endurance Policy and
provides coverage for “Loss” (as defined in Endurance Policy) in excess of $10
million up to $20 million.
The Underlying Dispute
Godiva’s original storefront was located in Brussels, Belgium. Because of
this connection to Belgium, Godiva’s products exhibit the phrase “Belgium 1926.”
In early 2019, Adam Buxbaum and Steven Hesse sued Godiva, asserting that the
“Belgium 1926” label on its products misled consumers. Buxbaum and Hesse
1
Defendant Endurance National Union are collectively referred to as
“Defendants.”
3
alleged thirteen counts against Godiva for violations of New York and California
consumer protection statutes, and common law. The suits were consolidated in the
U.S. District Court for the Southern District of New York (“Class Action”).
Godiva, Buxbaum, and Hesse engaged in mediation. Mediation resulted in a
settlement that obligates Godiva to pay: (i) a maximum of $15 million in monetary
relief; (ii) a maximum of $5 million in attorneys’ fees; (iii) all settlement notice and
administration costs; and (iv) up to $10,000 in class representative service awards
(the “Settlement”). On September 23, 2021, a Settlement Agreement was executed,
reflecting the terms of mediation. The Settlement Agreement is pending the final
approval of the Judge for the Southern District of New York.
Endurance and National Union were notified of the Class Action and the
Settlement Agreement, but declined to extend coverage to Godiva. Godiva seeks
insurance coverage from Endurance and National Union for the Settlement and
defense costs.
On October 13, 2022, Godiva brought this action, alleging breach of contract
and breach of the implied covenant of good faith a fair dealing. Godiva also requests
declaratory judgment confirming Defendants’ obligations to indemnify Godiva
under the policies. On December 22, 2021, Defendants jointly moved to dismiss
Godiva’s Complaint with prejudice. On February 25, 2022, Godiva filed a Cross-
Motion for Partial Summary Judgment.
4
The main issue before this Court is whether Godiva has alleged facts which,
if true, would establish that the Settlement Agreement amounts and defense costs in
connection with the Class Action are covered by the Endurance and/or Excess
Policies.
STANDARD OF REVIEW
Motion to Dismiss
A party may move to dismiss under this Court’s Civil Rule 12(b)(6) for failure
to state a claim upon which relief can be granted. In resolving a Rule 12(b)(6)
motion, the standard is well settled: (i) all well-pleaded factual allegations are
accepted as true; (ii) even vague allegations are “well-pleaded” if they give the
opposing party notice of the claim; (iii) the Court must draw all reasonable
inferences in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances susceptible to proof.3
The Court need not accept a plaintiff’s “conclusory allegations unsupported
by specific facts,” or “draw unreasonable inferences in the plaintiff’s favor.”4 Nor
must the Court adopt “every strained interpretation of the allegations the plaintiff
proposes. However, even with those cautions in mind, Delaware’s pleading standard
3
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002).
4
Windsor I, LLC v. CW Capital Asset Mgmt. LLC, 238 A.2d 863, 871 (Del. 1968).
5
is “minimal” and “plaintiff friendly.”5 The operative test is one of reasonable
conceivability, which asks whether there is a possibility of recovery.6
Summary Judgment
Under Rule 56, “summary judgment should be entered when there is no
dispute of material fact, and the moving party is entitled to judgment as a matter of
law.”7 “The trial court shall examine the factual record and make reasonable
inferences therefrom in the light most favorable to the nonmoving party to determine
if there is any dispute of material fact.”8 Summary judgment should not be granted
when the record indicates that there is a reasonable “material fact … in dispute.”9
The non-moving party “must set forth specific facts showing that there is a genuine
issue for trial” in order to overcome a motion for summary judgment.10
When demonstrating a genuine issue of material facts, “an adverse party may
not rest upon the mere allegations or denials of the adverse party’s pleading,” but
instead must “set forth specific facts showing that there is a genuine issue for trial.”11
5
Tygon Peak Capital Mgmt, LLC v. Mobile Investco, LLC, 2022 WL 34688, at *11 (Del. Ch.).
6
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 1942).
7
Nash v. Connell, 99 A.2d 242, 243 (Del. Ch. 1953).
8
Motorola, Inc. v. Amkor Tech., Inc., 849 A.2d 931, 935 (Del. 2004) (citing Rhudy v.
BottleCaps, Inc., 830 A.2d 402, 405 (Del. 2003)).
9
Burris v. Penn Mart Supermarkets, Inc. 2006 WL 2329373, at *3 (Del. Super.)(citing Ebersole
v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962); see also Cross v. Hair, 258 A.2d 277, 279
(Del. 1969).
10
Carriere v. Peninsula Ins. Co., 810 A.2d 349, at *2 n.7 (Del. 2002)(citing Del. Super. Ct. Civ.
R. 56(e)).
11
Id.6
Ultimately, unless there is a reasonable certainty that there is no triable issue, the
Court has discretion to decline to decide the case in summary judgment and instead
push the case to trial.12
To the extent genuine issues of material fact are not raised, the Court will treat
the motions as cross-motions on the issues presented. Superior Court Rule 56(h)
provides:
Where the parties have filed cross motions for summary judgment and
have not presented argument to the Court that there is an issue of fact
material to the disposition of either motion, the Court shall deem the
motions to be the equivalent of a stipulation for decision on the merits
based on the record submitted with the motions.13
The Court will evaluate any contested facts pursuant to Rule 56(c). All facts
are viewed in a light most favorable to the non-moving party.14 The Court will
evaluate the facts relating to each precise issue. The Court will take all reasonable
inferences into consideration.
12
Cross, 258 A.2d at 278.
13
Super. Ct. Civ. R. 56.
14
Burkhart v. Davies, 602 A.2d 56, 58–59 (Del. 1991).
7
ANALYSIS
Parties’ Requests for Relief
Godiva has moved for partial summary judgement. Godiva requests that the
Court find:
1. Delaware law applies to this D&O coverage dispute;
2. Godiva’s Settlement and Defense Costs come within the definition
of insured “Loss;”
3. Exclusion IV.B.6 (“matters uninsurable under the law”) does not
apply;
4. Exclusion IV.A.12.e (anti-competitive conduct) does not apply; and
5. Exclusion IV.B.2 (“fines and penalties”) does not apply.
First, Godiva asserts that Endurance’s choice-of-law analysis contradicts
Delaware Supreme Court precedent set forth in Certain Underwriters at Lloyds,
London v. Chemtura Corporation15 and RSUI Indemnity Company v. Murdock.16
Godiva relies on Murdock, arguing that Delaware law applies unless the “contacts
in this particular instance are sufficient to tip the balance toward”17 New York.
Godiva further relies on Chemtura, arguing that contacts associated with the
underlying claims in this action are irrelevant to the choice-of-law analysis. Godiva
asserts that the facts in this action support a finding that Delaware law applies to this
claim.
15
160 A.3d 457 (Del. 2017).
16
248 A.3d 887 (Del. 2021).
17
Id. at 901.
8
Next, Godiva contends that the Settlement Agreement and defense costs in
the Underlying Action are covered losses under the terms of the Endurance Policy
because: (1) insurance policies “should be interpreted as providing broad coverage
to align with the insured's reasonable expectations;”18 and (2) exclusions are
“construed narrowly in favor of coverage.”19
Godiva also asserts that Exclusion IV.B.6 does not apply. Godiva argues that
Delaware law permits coverage for restitution and disgorgement. Therefore,
Exclusion IV.B.6 (matters uninsurable under the law) cannot bar coverage for the
Settlement Agreement. Godiva further asserts that the Settlement Agreement is not
uninsurable disgorgement even if New York law applies because: (1) there has been
no final, non-appealable judgment that Godiva’s gains were “ill-gotten;” and (2)
because the trial court in the underlying action could not possibly have awarded
restitution or disgorgement had the case gone to trial.
Godiva further argues that Exclusion IV.A.12.e does not apply because it is
an antitrust exclusion focused on violations of anti-competition statutes. Godiva
contends that this antitrust exclusion bears no relation to the Underlying Action,
which alleges improper advertising under consumer protection statutes and the
common law.
18
Id. at 906.
19
Ferrellgas Partners L.P. v. Zurich Am. Ins. Co., 2020 WL 363677, at *13 (Del. Super.).
9
Finally, Godiva asserts that Exclusion IV.B.2 (fines and penalties) bars
coverage because: (1) the Settlement is not a “penalty;” (2) Godiva did not
knowingly or willfully violate any law; and (3) there is no final judgment or
admission establishing liability.
In response, Defendants Endurance and National Union have jointly moved
to dismiss Godiva’s complaint. Defendants request the following.
First, Endurance contends that contends that the Chemtura standard mandates
that New York law applies.
Second, Endurance contends that Godiva has not satisfied it burden of
proving the claim constitutes a “Loss” under the Insuring Agreements. Under the
Insuring Agreement, “Loss” is defined, in pertinent part, as:
The total amount the Insureds become legally obligated to pay on
account of Claims made against them for Wrongful Acts for which
coverage applies, including, but not limited to, damages (including
punitive, exemplary or multiple damages), judgments, any awards of
prejudgment and post-judgment interest with respect to covered
damages, settlements, Defense Costs and civil money penalties
assessed against an Insured pursuant to Section 2(g)(2)(B) of the
Foreign Corrupt Practices Act, 15 U.S.C. §78dd-2(g)(2)(B) or for a
violation of any other federal, state, local or foreign law if such law
violation is not knowing or willful.21
Third, Endurance asserts that the claim is excluded from coverage by
Exclusion IV.A.12.e (unfair trade practices), which provides:
21
Def. Ex. 4 Part 2 at p. 7.
10
A. The Insurer shall not be liable under the Coverage Section for Loss
on account of that portion of any Claim made against any Insured:…
***
12. solely with respect to Insuring Clause C:…
***
e. based upon, arising out of or attributable to an actual or
alleged violation of… any other federal, state, local,
common or foreign laws involving… unfair trade
practices…22
Fourth, Endurance claims that Exclusion IV.B.2 excludes coverage for fines
or penalties imposed by law, provides that “Loss does not include…”
2. fines or penalties imposed by law, other than civil money
penalties expressly referenced in the definition of Loss
above,
***
6. matters uninsurable under the law pursuant to which the
Policy is construed, provided
Fifth, Endurance contends that Godiva’s breach of the covenant of good faith
and fair dealing and bad faith claims must be dismissed because:
(1) the claim for breach of the covenant of good faith and fair dealing
is duplicative of the breach of contract claim because both claims
are premised upon Endurance’s denial of coverage for both the
defense costs and settlement in the Underlying Lawsuit; and
(2) the bad faith claim fails to state a cause of action.
22
Def. Endurance Op. Br. at 12 (emphasis in original).
11
National Union also asserts that Godiva’s cross-motion for partial summary
judgment should be denied. National Union has moved to join Endurance’s Motion
to Dismiss Count I (Breach of the Excess Policy) and Count II (Breach of the Implied
Covenant of Good Faith and Fair Dealing) of Godiva’s complaint, adding the
additional reason that Godiva has not incurred any covered Loss reaching National
Union’s excess policy. National Union also asserts that the provisions of Godiva’s
policies foreclosing coverage are unambiguous. National Union argues that: (1)
under the choice-of-law analysis, New York law applies; (2) under New York law,
insurance of disgorgement or restitution for ill-gotten gains retained by the insured
is prohibited; and (3) the policy language is unambiguous and precludes coverage
for the Settlement in the underlying action.
Insurance Contract Interpretation
In Delaware, it is well established that insurance policies are contracts.23
Contract interpretation is a question of law.24
The Court must give effect to the parties’ mutual intent at the time of
contracting. The Court should interpret contract language as it “would
be understood by any objective, reasonable third party.” Absent
ambiguity, contract terms should be accorded their plain, ordinary
meaning. Ambiguity exists when the disputed term “is fairly or
reasonably susceptible to more than one meaning.”25
23
Zurich Am. Ins. Co. v. Syngenta Crop Prot., LLC, 2020 WL 5237318, at *4 (Del. Super.).
24
Id.25
Id.12
Generally, insurance policies are adhesion contracts that are not the
result of arms-length negotiations.26 Therefore, the rules of construction
“differ from those applied to most other contracts.”27
Where policy language is ambiguous, the doctrine of contra
proferentem requires the Court to interpret the policy in favor of the
insured because the insurer drafted the policy. The Court, pursuant to
this doctrine, looks to “the reasonable expectations of the insured at the
time when [the insured] entered the contract[.]” The Court
will only apply this doctrine where the policy is ambiguous. When the
policy language is “clear and unambiguous[,] a Delaware court will not
destroy or twist the words under the guise of construing them” and each
party “will be bound by its plain meaning.”28
“The insured bears the burden of proving that a claim is covered by an
insurance policy.”29 Once coverage is found, the burden shifts to the insurer to prove
an exclusion precludes coverage.30
Choice of Law
The parties dispute whether Delaware law or New York law applies.
Defendants argue that New York has most significant relationship to this
dispute. Defendants assert that there is an actual conflict between the relevant laws,
26
Id.27
Id. (internal citations omitted).
28
Id.29
Id. at 5.
30
Id. See also Northrop Grumman Innovation Sys., Inc. v. Zurich Am. Ins. Co., 2021 WL
347015, at *9 (Del. Super.).
13
warranting an analysis pursuant to (Restatement) Second Conflict of Laws Sections
193 and 188.31 Defendants rely primarily on Section 193.
In Chemtura, the Delaware Supreme Court, explains that the Restatement
§193 “provides 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 typically have the most
significant relationship.”32 Defendants further rely on the five factors in Section 188
to determine which state has the most significant relationship:
a) the place of contracting,
b) the place of negotiation of the contract,
c) the place of performance,
d) the location of the subject matter of the contract, and
e) the domicile, residence, nationality, place of incorporation and place
of business of the parties33
Specifically, Defendants argue:
i. The place of contracting is New York;
ii. The corporate representatives responsible for negotiating and
approving the Endurance Policy were either located in or required
approval from New York employees;
iii. The Endurance Policy was negotiated in New York;
iv. The Endurance Policy states it was executed and issued in New
York;
v. Godiva’s world headquarters is in New York and the Underlying
litigation involves decisions made by employees working at
headquarters;
31
Restatement (Second) of Conflict of Laws §§ 188, 193 (1971).
32
Chemtura, 160 A.3d at 465 (citing Rest. (Second) of Conflict of Laws at § 193).
33
Id.
14
vi. The Endurance Policy specifically provides that all notices are to be
sent to Endurance’s New York offices, such that Endurance
receives, processes, and adjusts its claims in New York;
vii. Godiva is currently seeking a declaratory judgment that Endurance
must provide coverage for the Underlying Lawsuit, venued in the
Southern District of New York; and
viii. The principal place of business for both Godiva and Endurance is
New York;
Goliva contends that Delaware has the most significant relationship to this
dispute. Plaintiff primarily argues that Section 193 does not apply. Plaintiff relies
on Murdock, in which the Delaware Court of Delaware opined:
[W]e also recognized that, if the facts of a case don't fit the Second
Restatement’s presumptions—such as when the insurance contract is
part of a comprehensive program insuring risks that are not confined to
a single jurisdiction—we must look at ‘broader subject-matter-specific
factors’ that bear on the significance of the different states’ relationship
to the contract.34
Godiva argues that the Court should look to the broader factors in Section 188
because: (1) the parties did not make an “effective choice of law through their
contract” because the Policies do not contain a choice of law provision; (2) there is
no actual conflict between Delaware and New York law; and (3) Delaware has the
most significant relationship to the dispute. Godiva cites the following Delaware
contacts:
i. Godiva and Endurance are both incorporated in Delaware; and
ii. The Policies in this action provide Directors and Officers Liability
Coverage—which was issued to Godiva’s office in Wilmington,
Delaware.
34
Murdock, 248 A.3d 887, at 896 (quoting Chemtura 160 A.3d at 465).
15
Godiva further reasons that there are multiple contacts throughout various states.
Originally, in January 2019, the Underlying Action was brought in California
and New York.35 Subsequently, the California action was voluntarily dismissed and
consolidated into an action brought in the Southern District of New York. 36 The
Underlying Action remains in the New York District Court.
The Court finds the reasoning in Mills Limited Partnership v. Liberty Mutual
Insurance Company persuasive. “In a case like this, where the insured risk is the
conduct of directors and officers located in states throughout the world,
Comment b and § 193 itself, are less pertinent than § 188.”37 Section 193 does not
rigidly apply to determine choice of law in the context of a complex multistate
insurance program.38 The Court finds that this litigation could have been brought in
35
National Union Br. at 6. (“On January 31, 2019, two putative class actions were filed against
Godiva: Hesse v. Godiva Chocolatier, Inc., No. 1:19-cv-00972- AJN in the Southern District of
New York, and (2) Buxbaum v. Godiva Chocolatier, Inc., No. 3:19-cv-00558-DMR, in the
Northern District of California.”).
36
Id.
37
Mills Ltd. P'ship v. Liberty Mut. Ins. Co., 2010 WL 8250837, at *5 (Del. Super.). See
Restatement (Second) of Conflict of Laws § 188 cmt. B (“An insured risk, namely the object or
activity which is the subject matter of the insurance, has its principal location, in the sense here
used, in the state where it will be during at least the major portion of the insurance period…. And
where the honesty and fidelity of a particular person is the subject of the insurance, the parties
will usually know beforehand where he will spend most of his time during the life of the
policy…. The location of the insured risk will be given greater weight than any other single
contact in determining the state of the applicable law provided that the risk can be located, at
least principally, in a single state. Situations where this cannot be done, and where the location of
the risk has less significance, include (1) where the insured object will be more or less constantly
on the move from state to state during the term of the policy and (2) where the policy covers a
group of risks that are scattered throughout two or more states.”)
38
Chemtura Corp., 160 A.3d at 466.
16
numerous jurisdictions, therefore the “significant contacts” factor cannot be
determinative.
It is well established that Delaware law generally applies to directors and
officers (“D&O”) coverage. “[I]n the vast majority of cases, Delaware law governs
the duties of the directors and officers of Delaware corporation[s] to the corporation,
its stockholders, and its investors.”40 “When the insured risk is the directors' and
officers' ‘honesty and fidelity’ to the corporation, and the choice of law is between
headquarters or the state of incorporation, the state of incorporation has the most
significant relationship.”41 Delaware law applies to D&O coverage where the state
of incorporation is centrally-implicated. Delaware courts consistently have found
that Delaware law applies to insurance coverage disputes regarding D&O policies
where the insured companies are Delaware corporations.42
The dispute in Chemtura involved insured risk in operations around the world,
obviously in multiple jurisdictions. The Chemtura Court conducted a three-part
analysis: (1) determining if the parties made an effective choice of law through their
contract; (2) if not, determining if there is an actual conflict between the laws of the
different states each party urges should apply; and (3) if so, analyzing which state
40
Murdock, 248 A.3d at 900–01.
41
Mills, 2010 WL 8250837, at *6.
42
Ferrellgas, 2020 WL 363677, at *4.
17
has the most significant relationship.43 If there is no agreed central location for the
dispute, the Court must look at other factors to determine the center of gravity.44 In
the context of an insurance contract, the Court considers the expectations of the
parties in the contract dispute and the insurance contract itself, not the underlying
litigation.45 The Court also looks to the factors set forth in Section 188 of the
Restatement. Section 188 factors are meant to be considered in conjunction with the
factors set forth in Section 6.46
Liggett Group Incorporated v. Affiliated LM Insurance Company47 also
involved an insurance dispute affecting consumers nationwide. This Court
recognized that where nationwide liability claims are involved, there is no single
principal location of the risks. 48 When evaluating the dispute, the Court has held that
“the most significant factor for conflict of laws analysis in a complex insurance case
with multiple insurers and multiple risks is the principal place of business of the
43
Chemtura, 160 A.3d 457, at 464.
44
Id. at 466.
45
Id. at 467 (“In analyzing the contacts relevant to determining the most significant relationship,
we focus on the reality that this is a contract dispute and that the important purpose of fulfilling
the justified expectations of the parties in contract disputes is best served by providing terms in the
contract with a meaning that does not vary based on the happenstance of the locations of a
particular claim.”).
46
Id. at 468. See Rest. (Second) Conflict of Laws §6 ((a) the needs of the interstate and international
systems; (b) the relevant policies of the forum; (c) the relevant policies of other interested states
and the relative interests of those states in the determination of the particular issue; (d) the
protection of justified expectations; (e) the basic policies underlying the particular field of law; (f)
certainty, predictability and uniformity of result, and (g) ease in the determination and application
of the law to be applied.).
47
788 A.2d 134 (Del. Super. 2001).
48
Id. at 138.
18
insured because it is ‘the situs which link[s] all the parties together.’”49 Although
this Court found that North Carolina had the most significant relationship to the
transaction, no party argued that Delaware law should apply to the case.
Defendants argue that this action is not a traditional D&O insurance coverage
dispute. Endurance alleges that the Endurance Policy is not a public company D&O
policy, rather it is a private company management liability policy. Endurance
attempts to distinguish Murdock from this action, arguing that Murdock pertains to
claims against individual directors and officers for breach of their fiduciary duties
resulting in harm to corporate shareholders, whereas the consumer fraud claims
against Godiva originated from Godiva’s New York headquarters to impact
consumers throughout the nation. National Union asserts that the Underlying Action
does not include any allegations of an individual director’s or officer’s wrongdoing,
or breach of fiduciary duty owed to a Delaware corporation.
The choice-of-law analysis in this instant action impacts two issues:
disgorgement; and bad faith.
49
Id. (internal citations omitted).
19
Disgorgement/Restitution
Disgorgement is defined as "the act of giving up something (such as illegally
obtained profits) on demand or by legal compulsion.”51 New York courts opine that
the purpose of disgorgement is “to deprive a party of ill-gotten gains and to deter
improper conduct.”52
Restitution occurs where a party is “restored to the position, he formerly
occupied either by the return of something which he formerly had or by the receipt
of its equivalent in money. Ordinarily, the measure of restitution is the amount of
enrichment received….”53 “A person who has been unjustly enriched at the expense
of another is required to make restitution to the other.”54 In order for the Court to
order restitution, the Court must find that the Defendants were unjustly enriched. 55
Under Delaware law, disgorgement may be insurable if permitted by statute.
Losses are uninsurable as against public policy only if the legislature so provides.56
Public policy is the domain of the General Assembly.57 This Court has declined to
51
TIAA-CREF Individual & Institutional Servs., LLC v. Illinois Nat'l Ins. Co., 2016 WL 6534271,
at *10 (Del. Super.)(internal citations omitted).
52
Id. at *10 (quoting Vigilant Ins. Co. v. Credit Suisse First Boston Corp., 2003 WL 24009803,
at *4 (N.Y. Sup. Ct.).
53
Restatement (First) of Restitution § 1 (1937).
54
Restatement (First) of Restitution § 1 (1937).
55
Schock v. Nash, 732 A.2d 217, 232 (Del. 1999).
56
Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 WL 761639, at *11 (Del.
Super.).
57
Id. See also Murdock, 248 A.3d 887, at 905 (“[I]n the absence of clear guidance from the General
Assembly to the contrary, we must reject RSUI's invitation to void its contractual obligations on
public-policy grounds.).
20
legislate from the bench by applying “judicially fashioned policy limitations.”58
Thus, “the Court will not hold that restitution or disgorgement is uninsurable as a
matter of Delaware public policy unless a Delaware statute commands it to do so.”59
The parties have not identified any Delaware case law or Delaware statute
articulating public policy regarding insurability of disgorgement.
Under New York law, disgorgement is not insurable if it results in ill-gotten
gains retained by the insured.60 It is well established in New York that “one may not
insure against the risk of being ordered to return money or property that has been
wrongfully acquired. Such orders do not award ‘damages’ as that term is used in
insurance policies.”61 In Reliance Group Holdings, Incorporated v. National Union
Fire Insurance Company of Pittsburgh, PA, the Appellate Division for the New York
Supreme Court reasoned that “the D & O policy covers corporate indemnification
of directors and officers for their incurred liability, not the corporation's own
liability.”62
Defendants rely on J.P. Morgan Securities Incorporated v. Vigilant Insurance
Company, where the New York Court of Appeals held that the “policy rationale for
58
Id.59
Id.60
Vigilant Ins. Co. v. Credit Suisse First Boston Corp., 782 N.Y.S.2d 19, 20 (App. Div. 2004).
61
Reliance Grp. Holdings, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 594 N.Y.S.2d 20,
24 N.Y. (N.Y. App. Div. 1993)(quoting Bank of the W. v. Superior Court, 833 P.2d 545, 553
(Cal. 1992)).
62
Id. at *56 (emphasis in original).
21
precluding indemnity for disgorgement” is to prevent the “unjust enrichment of the
insured by allowing it to, in effect, retain the ill-gotten gains by transferring the loss
to its carrier.”63 However, the J.P. Morgan Court used this rationale to distinguish
cases relied upon by the insurers where the “insured was barred from obtaining
coverage for SEC-ordered disgorgement because the SEC's findings ‘conclusively
link[ed]’ the disgorgement payment to improperly acquired funds in the hands of the
insured.”64 J.P. Morgan involved regulatory proceedings for actions that resulted in
“ill-gotten gains” and “improperly acquired funds.”
The J.P. Morgan dispute arose from the monetary settlement of an SEC
proceeding and related litigation predicted on violation of federal securities laws.
The J.P. Morgan insured settled and agreed to pay separate amounts specified as
“disgorgement” and “civil penalty.” The insured sought indemnification from
insurers, conceding that it is “reasonable to preclude an insured from obtaining
indemnity for the disgorgement of its own ill-gotten gains.” The insured argued that
a portion of the disgorgement was not unjust enrichment because the portion was
attributable to the profits of its customers.
In In re TIAA-CREF Insurance Appeals,65 the Delaware Supreme Court held:
The New York cases upon which [the insurers] principally rely involve
regulatory proceedings which resulted in settlements ordering the
63
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 992 N.E.2d 1076, 1083 (N.Y. 2013).
64
Id.65
192 A.3d 554 (Del. 2018)(internal citations omitted).
22
insured to pay disgorgement damages. It appears that the principle
which emerges from these cases is that New York public policy
prohibits enforcement of insurance agreements in cases involving
disgorgement where the payment is conclusively linked, in some
fashion, to improperly acquired funds in the hands of the insured. In
this case, TIAA disputed and defended itself against the claims asserted
in the class actions, repeatedly asserting that the procedures that
resulted in TFE and its treatment were proper and lawful. No finding
that the TFE was ill-gotten gain was made in any forum. Nor could one
have been…. Under these circumstances, we conclude that the Superior
Court was correct in distinguishing the New York cases barring
insurability, which proscribe it in situations in which the insured's
wrongdoing resulted in ill-gotten gains, and finding that TIAA
established that New York's public policy against enforcing insurance
agreements in cases of disgorgement does not apply to the facts of this
case.66
The Settlement Agreement in the Underlying Action does not reference the
terms “disgorgement” or “restitution.” Additionally, in the Settlement Agreement,
Godiva explicitly “continu[es] to deny all allegations of wrong-doing,” “disclaim[s]
all liability with respect to all claims,” and settles “without any admission or
concession of liability or wrongdoing or the lack of merit of any defense whatsoever
by Godiva.”67 There has been no order of disgorgement, no admission of
wrongdoing, and no gain for personal profit or remuneration. Essentially, the
Settlement Agreement represents the approximate difference in value, that is, the
value of the product (if properly advertised) versus the value of the product as falsely
advertised.
66
In re TIAA-CREF Ins. Appeals, 2018 WL 3620873, at *2 (Del.).
67
Pl’s Ex. E ¶¶ 17-18.
23
The Court finds that the Settlement Agreement in the Underlying Action does
not involve disgorgement. Therefore, the Court need not resolve any choice-of-law
conflict between New York and Delaware law on this issue.
Bad Faith
New York and Delaware laws differ as they pertain to bad faith claims.
Defendants rely on Fishberg v. State Farm Fire and Casualty Company,
arguing that New York does not recognize an independent cause of action for bad
faith denial of insurance coverage.68 Defendants further assert that Godiva’s claim
is duplicative of its breach of contract claim because both claims are premised upon
Endurance’s denial of coverage for Defense Costs and the Settlement in the
Underlying Lawsuit.
Godiva contends that Defendants misapply Fishberg. Godiva argues that the
full proposition recognized in Fishberg is that “except in cases where an insurance
company refuses to defend or settle a claim brought by a third party against an
insured, ‘New York law does not recognize an independent cause of action for bad
faith denial of insurance coverage.’”69 Godiva asserts that Fishberg actually refused
to dismiss an insured’s separate cause of action for bad faith. Godiva further argues
that the bad faith cause of action in this instant litigation should survive under New
68
2021 WL 3077478, at *3 (S.D.N.Y.)
69
Id. (quoting Vitrano v. State Farm Ins. Co., 2008 WL 2696156, at *3 (S.D.N.Y.))(emphasis
added).
24
York law because Defendants refused to defend or settle class action lawsuits
brought by third parties against Godiva.
“New York law ... does not recognize a separate cause of action for breach of
the implied covenant of good faith and fair dealing when a breach of contract claim,
based upon the same facts, is also pled.”70 However, “New York courts do recognize
that an insurance company's handling of a claim can give rise to a breach of the duty
of good faith and fair dealing.”71
Godiva contends that its bad faith claim is not entirely duplicative. Godiva
argues the claim could be plead independently even in New York because it includes
factual allegations of bad faith that are separate and distinct from its breach of
contract claim. Godiva provides one example in the Complaint where Godiva
alleged that “Endurance violated its good-faith obligations by unreasonably denying
defense cost reimbursement after Endurance acknowledged defense costs
coverage.”72
Defendants argue that the claim also must be dismissed under Delaware law.
Defendants rely on Dunlap v. State Farm Fire & Casualty Company, where the
Delaware Supreme Court found that “the implied covenant requires ‘a party in a
contractual relationship to refrain from arbitrary or unreasonable conduct which has
70
Id. (internal quotations omitted).
71
Id.72
Compl. at ¶ 44.
25
the effect of preventing the other party to the contract from receiving the fruits of
the bargain.”73 Defendants primarily assert that: (1) Godiva’s Complaint never
alleges that Endurance exercised any measure of control over the underlying
litigation; and (2) the Complaint makes no mention of conduct amounting to gross
disregard on the part of Endurance, let alone a pattern of behavior.
Godiva contends that there is no conflict between Delaware and New York
law, therefore Delaware law should apply. Godiva provides minimal citations to the
record or judicial authority in response to Defendant’s arguments.
The Court finds that Godiva has failed to present facts supporting a separate
and distinct cause of action for bad faith. Therefore, the Court finds that Godiva has
failed to establish a prima facie case for bad faith failure to settle. Thus, it is
irrelevant whether New York or Delaware law applies.
“Loss”
Under the Endurance Policy, “Loss,” is defined to mean:
The total amount the Insureds become legally obligated to pay on
account of Claims made against them for Wrongful Acts for which
coverage applies, including, but not limited to, damages (including
punitive, exemplary or multiple damages), judgments, any awards of
prejudgment and post-judgment interest with respect to covered
damages, settlements, Defense Costs and civil money penalties
assessed against an Insured pursuant to Section 2(g)(2)(B) of the
Foreign Corrupt Practices Act, 15 U.S.C. §78dd-2(g)(2)(B) or for a
violation of any other federal, state, local or foreign law if such law
violation is not knowing or willful.
73
878 A.2d 434, 442 (Del. 2005).
26
The Endurance Policy defines “Wrongful Act” to mean:
1. any error, misstatement, misleading statement, act, omission,
neglect, or breach of duty actually or allegedly committed or
attempted by any of the Insured Persons in their capacity as such.
Or in an Outside Position, or with respect to Insuring Agreement
C, by the Company, or
2. any matter claimed against the Insured Persons solely by reason of
their serving in such capacity or in an Outside Position.
Defendants argue that Godiva did not allege facts sufficient to show that
Godiva’s action were not knowing and willful.
Godiva argues that coverage broadly encompasses both intentional and
unintentional conduct. Godiva primarily relies on Charter Twp. of Shelby v.
Argonaut Insurance Company, where the Michigan Court of Appeals held: “To
contend…that the alleged wrongful acts are not covered under the policy because
the claimants alleged ‘knowing, intentional, and purposeful acts’ that do not
constitute ‘negligence, mistake or error’ is misplaced, as the policy does not limit
the definition of wrongful acts to acts performed negligently or mistakenly.” 76 In
Charter, the policy's definition of “wrongful act” included policy language that
states, in pertinent part “any act, error or omission flowing from or originating out
of [the activity].”
76
2015 WL 9392727, at *8 (Mich. Ct. App.). See also Amos ex rel. Amos v. Campbell, 593 N.W.2d
263, 266 (Minn. Ct. App. 1999)(“The term ‘wrongful act’ has ordinarily been understood to
encompass intentional as well as negligent misconduct.”).
27
Godiva further contends that the “knowing or willful” language is
inapplicable here because the case does not involve civil money penalties.
Alternatively, Godiva argues that the civil money penalty is still an insurable “Loss”
unless Defendants prove “knowing” or “willful” violation of false advertising laws.
To avoid coverage with regard to civil money penalties, there needs to be
some evidence or admission that the violation of law was knowing or willful.
Defendants have failed to present such evidence. The Endurance Policy language
provides broad coverage. It covers settlement and many types of damages. The
Court finds that the Settlement Agreement is a covered loss within the meaning of
the term “Loss” as explicitly defined to include settlements in the Policy.
Exclusion IV.A.12.e (Unfair Trade Practices)
Exclusions IV.A.12.e—the Antitrust Exclusion—excludes claims
based upon, arising out of or attributable to an actual or alleged
violation of the Sherman Anti-Trust Act, the Clayton Act or the Federal
Trade Commission Act, as amended, or any other federal, state, local,
common or foreign laws involving anti-trust, monopoly, price fixing,
price discrimination, predatory pricing, restraint of trade, unfair trade
practices or tortious interference with another’s actual or prospective
business or contractual relationships or opportunities77
The issue is whether “unfair trade practices” includes consumer protection
and false advertising. “Unfair trade practices” is not defined. No authority has been
presented by either party specifically resolving this issue. Generally, consumer
77
Pl.’s Ex. A p. 23 (emphasis added).
28
protection involves violations of statutes, regulations, and common law standards.
The Endurance Policy does not explicitly exclude consumer protection actions from
coverage.
Plaintiff relies on James River Insurance Company v. Rawlings Sporting
Goods Company, Incorporated, where the United States District Court for the
Central District of California found that “other than the ambiguous term ‘unfair trade
practices,’ all of the excluding conduct identified in the Anti-Trust Exclusion refer[s]
to anti-competitive business practices and not to any conduct directed at
consumers.”78 The Rawlings court reasoned that the “Anti-Trust Exclusion similarly
fails to mention anything – other than “unfair trade practices” – that would suggest
consumer protection claims. The Court stated that it would be odd to include a
consumer-protection component in an exclusion titled “Anti-Trust Exclusion”
without mentioning words such as “fraud” or “misrepresentation’” or “consumer
protection.”79
Defendants assert that the remaining counts in the Underlying Litigation
fundamentally establish a consumer fraud case. The underlying complaint alleges
“misleading, false, unfair, and fraudulent” trade practices.82 Essentially, the
78
2021 WL 346418, at *7 (C.D. Cal.).
79
Id.82
Pl’s Ex. C ¶¶ 13, 14, 37, 54.
29
underlying complaint alleges that the product is mis-labeled—which Defendants
assert is deceptive— resulting in what Defendants characterize as “ill-gotten gains.”
The Court questions whether unfair trade practices are the equivalent of
consumer fraud. Defendant insurers have presented no authority demonstrating that
these terms are interchangeable or legally equivalent.
Godiva argues that this litigation really involves statutory violations of
consumer protection laws which do not trigger an exclusion. The alleged statutory
violations are not classified as anti-competition or unfair trade practices. Godiva
asserts that Exclusion IV.A.12.e is an Antitrust Exclusion focused on violation of
anti-competition statute, which bears no relation to the Underlying Class Action—
which Godiva asserts is consumer protection based. Godiva further asserts that
Exclusion IV.A.12.e is not an Unfair Trade Practices Exclusion as Defendants
contend.
The Court finds that the Settlement Agreement does not contain language
specifically stating that the agreed “monetary relief” is for unfair trade practices.
The Court has found that the broad definition of Loss results in a finding that the
Settlement is covered. To the extent that some of the underlying statutory and
regulatory allegations reasonably can be interpreted as relating to or governing
unfair trade practices, it is possible that some the Settlement could be allocated to
amounts subject to Exclusion IV.A.12.e. Endorsement One allocates costs for both
30
covered and non-covered claims. The Court finds that this Exclusion does not apply
to prevent coverage of the entire Settlement.
Exclusion IV.B.2 (Fines or Penalties)
Exclusion IV.B.2 (fines or penalties) provides that “Loss” does not include
“fines or penalties imposed by law, other than civil money penalties expressly
referenced in the definition of Loss above….”
Defendants assert that Exclusion IV.B.2 applies to exclude coverage because
the Settlement constitutes “fines or penalties imposed by law,” which are not
covered. However, Endurance conceded at oral argument that a genuine issue of
material fact exists about whether the entire Settlement constitutes “penalties.”
Endurance suggests that discovery is necessary to determine the portion of
Settlement attributable to penalties.
Godiva contends that the Underlying Action alleges violations of state law as
referenced in the definition of covered Loss. Godiva argues that the Settlement can
only constitute a penalty if Defendants prove: (1) the Settlement actually constitutes
a “penalty;” (2) Godiva committed a knowing or willful violation of state law, and
(3) such willful violation of law has been established by a final and non-appealable
judgment in the underlying Class Action or by a written admission under oath—
pursuant to Exclusion IV.A.6.
31
Godiva asserts that Exclusion IV.B.2 does not apply because the Settlement
Agreement is not a penalty. Godiva relies on Delaware Bay Surgical Services, P.A.
v. Swier, where the Delaware Supreme Court defined “penalty” as “a sum inserted
into a contract that serves as a punishment for default, rather than a measure of
compensation for its breach. In other words, it is an agreement to pay a stipulated
sum upon breach, irrespective of the damage sustained.”86
The Settlement Agreement uses the term “monetary relief,” not “damages,”
“penalties,” or “restitution.” The Settlement Agreement does not specifically state
that relief is for “civil money penalties assessed.” Defendants conceded at oral
argument that not all statutes and regulations in the underlying complaint involved
“penalties.”
In the Settlement Agreement, Godiva did not acknowledge any knowing or
willful violation of law. Godiva alleges that the Settlement Agreement represents
the approximate difference between the price of the falsely-advertised product as
sold, and the value of the product if there had been no false advertising. Godiva
alleges that this amount is compensatory in nature, not punitive.
Exclusion IV.A.6 provides:
The Insurer shall not be liable under this Coverage Section for Loss on
account of that portion of any Claim made against any Insured …
based upon, arising out of, or attributable to such Insured having
86
900 A.2d 646, 650 (Del. 2006).
32
gained any personal profit or remuneration to which such Insured was
not legally entitled or having committed any deliberate fraud or willful
violation of law, if a final and non-appealable judgment or adjudication
adverse to such Insured in any proceeding not brought by the Insurer,
or if a written admission under oath by such Insured, establishes that
such Insured in fact gained any such personal profit or remuneration
or committed such deliberate fraud or willful violation of law….
Godiva argues that there has been no final, non-appealable judgment or
admission establishing a willful violation of law. Godiva relies on Gallup,
Incorporated v. Greenwich Insurance Company.88 The Gallup plaintiff argued that
a fraud/ill-gotten gains exclusions—which required final adjudication—did not
apply because the settlement was not a final adjudication. The Gallup contract
contained a similar exclusion to the Exclusion at issue in his case.89 This Court found
that:
this provision shows that Defendant contemplated coverage for
restitution and specifically decided that reimbursement for restitution
would only be precluded upon a final adjudication that the money
Plaintiff received was actually restitution. As the drafter of the Policy,
Defendant could have precluded coverage of all settlements but it did
not. Instead, Defendant drafted the Policy to explicitly include
“settlements” under the definition of “Loss” subject to the Policy's other
exclusions.
88
2015 WL 1201518 (Del. Super.).
89
Id. at *2. (The Gallup exclusions provides: “The Insurer shall not be liable to make any payment
for Loss, and shall have no duty to defend or pay Defense Expenses, in connection with
any Claim made against an Insured:
(A) brought about or contributed to in fact by any:
(1) intentionally dishonest, fraudulent or criminal act or omission or any willful violation
of any statute, rule or law; or
(2) profit or remunerations gained by any Insured to which such Insured is not legally
entitled;
as determined by a final adjudication in the underlying action or in a separate action or
proceeding (‘Fraud/Ill–Gotten Gains Exclusion’)”).
33
Additionally, because Defendant drafted the Fraud/Ill–Gotten Gains
Exclusion to require a final adjudication and Defendant has not
received a final adjudication that the Settlement is for restitution, the
Court need not decide whether or not public policy prevents
reimbursement. If the Court were to find that the Settlement is not for
restitution then the Settlement is covered under the definition of “Loss”
under the terms of the Policy. Alternatively, if the Court were to find
that the Settlement is for restitution, the Fraud/Ill–Gotten Gains
Exclusion requires that there be a “final adjudication in the underlying
action or in a separate action or proceeding.” 90
The Court finds that the Settlement Agreement is not for “fines or penalties
imposed by law.” Some portion of the Settlement may amount to “civil money
penalties,” which are explicitly omitted from Exclusion IV.B.2. Therefore, the Court
finds that Exclusion IV.B.2 does not apply to prevent coverage of the entire
Settlement.
Implied Covenant of Good Faith and Fair Dealing
The implied covenant of good faith and fair dealing is inherent in all contracts.
The purpose of the implied covenant of good faith and fair dealing is to fill
unanticipated contractual gaps.91 The doctrine “operates only in that narrow band of
cases where the contract as a whole speaks sufficiently to suggest an obligation and
point to a result, but does not speak directly enough to provide an explicit answer.”92
“Generally, a plaintiff cannot base a claim for breach of the implied covenant on
90
Id. at *10.
91
Buck v. Viking Holding Mgmt. Co. LLC, 2021 WL 673459, at *5 (Del. Super.).
92
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009).
34
conduct authorized by the terms of the agreement.”93 The implied covenant is
properly used to fill gaps only when a contract truly is silent on the disputed issue.94
Merely repeating the defendant's allegedly improper acts or omissions
already the subject of a separate breach of contract claim is insufficient
to support a claim for breach of the implied covenant of good faith and
fair dealing. Where the contract specifically addresses the alleged
misconduct, its terms will be applied, and an implied covenant claim
will not stand. There cannot be a separate implied covenant claim
involving the same conduct as the breach of contract claim.95
Godiva’s claim for breach of the covenant of good faith and fair dealing is
premised on the denial of coverage. Godiva alleged that “Endurance violated its
good-faith obligations by unreasonably denying defense cost reimbursement after
Endurance acknowledged defense costs coverage.” Godiva concedes that some of
the allegations are duplicative of its breach of contract claim.
The Court finds that the contract covers the subject matter at issue. Therefore,
Godiva’s claim for breach of the implied covenant of good faith and fair dealing
must be dismissed.
CONCLUSION
The Court finds that the Settlement is not disgorgement, therefore the Court
need not conduct a choice-of-law analysis between New York and Delaware law.
93
Trumbull Radiologists, Inc. v. Premier Imaging Tri Holdings LLC, 2021 WL 5577249, at *5
(Del. Super.) (citing Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005)).
94
Buck, 2021 WL 673459, at *5.
95
Trumbull, 2021 WL 5577249, at *6.
35
Because the Settlement is not for a matter uninsurable as a matter of Delaware
or New York law, Exclusion IV.B.6 (matters uninsurable under the law) cannot bar
coverage.
The Court finds that Godiva has failed to present facts supporting a separate
and distinct cause of action for bad faith. Therefore, the Court finds that Godiva has
failed to establish a prima facie case for bad faith failure to settle, and that claim is
hereby dismissed.
The Court finds that the Settlement Agreement is a covered loss within the
meaning of the term “Loss” as explicitly defined to include settlements in the Policy.
The Court finds that Exclusion IV.A.12.e does not apply to prevent coverage
of the entire Settlement. To the extent that some of the underlying statutory and
regulatory allegations reasonably can be interpreted as relating to or governing
unfair trade practices, it is possible that some the Settlement could be allocated as
costs for both covered and non-covered claims.
The Court finds that the settlement is not for “fines or penalties imposed by
law.” Some portion of the Settlement may amount to “civil money penalties,” which
are explicitly omitted from Exclusion IV.B.2. Therefore, the Court finds that
Exclusion IV.B.2 does not apply to prevent coverage of the entire Settlement.
36
The Court finds that the contract covers the subject matter at issue. Therefore,
Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing is
dismissed.
THEREFORE, Defendants’ Motions to Dismiss are hereby GRANTED IN
PART and DENIED IN PART. The Parties’ Cross-Motions for Partial Summary
Judgement are hereby GRANTED IN PART and DENIED IN PART.
IT IS SO ORDERED.
/s/ Mary M. Johnston
The Honorable Mary M. Johnston
37