Delaware Court Strengthens Applicability of 'Larger Settlement Rule' to D&O Allocation Disputes Despite 'Relative Legal Exposure' Policy Provision

Disputes over D&O insurance claims often involve the scope and extent of coverage in so-called mixed claim cases — those that involve both covered claims and claims argued to be “uncovered,” covered and “uncovered” parties, or a combination of both. In a January 2020 decision, in the case Arch Insurance Company v. Murdock, C.A. No. N16C-01-104 EMD, CCLD (Del. Super. Jan. 17, 2020), the Delaware Superior Court adopted the so-called “larger settlement rule” favored by policyholders, which provides allocation only in those cases where liability for the “uncovered” claims or parties increases the total amount of the underlying settlement. The court so ruled despite the fact that the D&O policies in the case required allocation based on the parties’ “relative legal exposures.”

The decision is significant for policyholders because it potentially revives the larger settlement rule as the method of allocation in certain cases where the policy at issue requires allocation based on relative legal exposure.