Delaware Court Sets New Precedent
Six excess insurers sought declaratory judgment to disclaim coverage for two settlements arising from alleged breaches of D&O policies by an insured corporation and its director. The Delaware Superior Court initially determined both settlements constituted “Loss” under the policies, but deferred the issues relating to subrogation, allocation and exhaustion. The court later heard argument on the allocation standard that applies to the policies. The insured director advocated adoption of the “larger settlement rule” to determine how any indemnifiable loss under the settlements should be allocated between covered and uncovered loss. The carriers countered that this rule did not apply because the allocation provision in the primary policy expressly required an allocation between covered and uncovered loss.
Tackling this quandary for the first time, the Delaware Superior Court held the “larger settlement rule” governs where, (i) a settlement resolves, at least in part, insured claims, (ii) the parties cannot agree as to the allocation of amounts attributable to covered versus non-covered claims, and (iii) the policy’s allocation provision does not prescribe a specific allocation method.