Delaware Law Applies to Coverage Dispute over Stockholder Appraisal Action

The Delaware Supreme Court has held that Delaware law, rather than Montana law, applies in a dispute over D&O coverage for defense costs incurred in a stockholder appraisal action. Stillwater Mining Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2023 WL 165968 (Del. Jan. 12, 2023). The court rejected the insured’s argument that Montana law applied to its claim for defense costs, after the insured had previously argued that Delaware law should apply to its indemnity claims prior to an adverse change in Delaware law.

The insured company, incorporated in Delaware, sought coverage under its D&O program for a stockholder appraisal action brought in Delaware after the insured was taken private. The insured initially argued that Delaware law should apply to its indemnity claims. At the time, the Delaware Superior Court held in Solera I that appraisal actions were covered securities claims under D&O policies. However, after the Supreme Court of Delaware reversed in Solera II, holding that appraisal actions were not covered securities claims, the insured dropped its indemnity claims and sought to apply Montana law to its claims for defense costs and claims handling practices. The Superior Court granted the insurers’ motion to dismiss for failure to state a claim, holding that Delaware law applied to the dispute.

The Delaware Supreme Court affirmed the choice-of-law determination. The court conducted a choice-of-law analysis, concluding that there was an actual conflict between Montana and Delaware law as to duty to defend claims, as Montana provides for coverage by estoppel but Delaware does not. In light of the conflict, the court concluded that Delaware law had the most significant relationship to the dispute. Considering that the insurance policies were part of a comprehensive insurance program extending beyond any one jurisdiction, the court weighed the five Second Restatement factors, concluding that Delaware has a strong interest in D&O policies issued to Delaware corporations.