News & Events
Delaware Court Dismisses D&O Coverage Suit Based on the Insureds’ Default in an Underlying Class Action
Skarzynski Marick & Black attorneys Ted Carleton and Juan Luis Garcia, representing Great American Insurance Company, obtained a favorable dismissal in a coverage action in the Delaware Superior Court.
The insurance action was filed by Ernesto Rodriguez and Alan Hall, former stockholders of Zhongpin, Inc. (“Zhongpin”). Rodriguez and Hall were lead representatives of a certified class action of Zhongpin stockholders who sued various Zhongpin fiduciaries arising from a going-private transaction in which a controlling shareholder acquired all publicly held shares of the company. The class action was litigated over a number of years in the Delaware Chancery Court. However, before class certification, defense counsel withdrew their representation. The Delaware Chancery Court entered a judgment upon default of $41,282,758, plus pre- and post-judgment interest, after the remaining defendants failed to retain new counsel or appear.
In the insurance coverage litigation against our client, Rodriguez and Hall sought to enforce the default judgment under a directors and officers’ liability insurance policy issued to Zhongpin. Our firm argued that under Delaware law, the plaintiffs did not have legal standing to sue a liability insurer directly, and a “No Action” clause barred the coverage litigation because the insureds breached the policy by admitting liability without the insurer’s consent and failing to defend the class action, which they had the obligation to do so.
On February 23, 2022, the Delaware Superior Court granted the motion to dismiss. The Court noted that it was unlikely that Delaware common law would grant standing to Rodriguez and Hall against a liability insurer since Rodriguez and Hall were not third-party beneficiaries under the policy and their claims did not fit within principles of the subrogation doctrine. The Court found it unnecessary to resolve Delaware’s common law, which appears unclear, because the “No Action” clause in the policy barred the coverage lawsuit. The Court agreed that the insureds breached the policy by failing to retain new defense counsel and contest liability.
A copy of the decision is available here.
The insurance action was filed by Ernesto Rodriguez and Alan Hall, former stockholders of Zhongpin, Inc. (“Zhongpin”). Rodriguez and Hall were lead representatives of a certified class action of Zhongpin stockholders who sued various Zhongpin fiduciaries arising from a going-private transaction in which a controlling shareholder acquired all publicly held shares of the company. The class action was litigated over a number of years in the Delaware Chancery Court. However, before class certification, defense counsel withdrew their representation. The Delaware Chancery Court entered a judgment upon default of $41,282,758, plus pre- and post-judgment interest, after the remaining defendants failed to retain new counsel or appear.
In the insurance coverage litigation against our client, Rodriguez and Hall sought to enforce the default judgment under a directors and officers’ liability insurance policy issued to Zhongpin. Our firm argued that under Delaware law, the plaintiffs did not have legal standing to sue a liability insurer directly, and a “No Action” clause barred the coverage litigation because the insureds breached the policy by admitting liability without the insurer’s consent and failing to defend the class action, which they had the obligation to do so.
On February 23, 2022, the Delaware Superior Court granted the motion to dismiss. The Court noted that it was unlikely that Delaware common law would grant standing to Rodriguez and Hall against a liability insurer since Rodriguez and Hall were not third-party beneficiaries under the policy and their claims did not fit within principles of the subrogation doctrine. The Court found it unnecessary to resolve Delaware’s common law, which appears unclear, because the “No Action” clause in the policy barred the coverage lawsuit. The Court agreed that the insureds breached the policy by failing to retain new defense counsel and contest liability.
A copy of the decision is available here.