No Action Clause in D&O Policy Does Not Bar Insureds From Seeking Declaratory Relief on Duty to Defend, Says Delaware Court

Highlights

Delaware's recent Origis ruling does not bar an insured from bringing a declaratory relief action on a duty to defend

Delaware Superior Court judge held that a standard no action clause does not preclude suits by insureds against insurers for declaratory relief

Insureds in Delaware continue to have meaningful recourse against insurers who wrongfully deny coverage under a liability policy

A recent decision from the Delaware Superior Court, Commercial Division, brings good news for Delaware insureds seeking to enforce an insurer's contractual defense obligations under a liability policy.

By allowing Pangea Equity Partners, LP v. Great American Ins., a declaratory relief suit, to move forward in Delaware Superior Court, Judge Meghan Adams reaffirmed Delaware's broad interpretation of the duty to defend and commonsense interpretation of standard "no action" clauses. The ruling also placed a check on the recent Origis ruling, an unpublished opinion from earlier this year that had the potential to upend decades of Delaware jurisprudence on this issue. Where Origis stood to turn Delaware's duty to defend jurisprudence on its head, a second Delaware superior court has now corrected course.

In March 2024, Judge Sheldon Rennie of the Delaware Superior Court issued Origis USA LLC v. Great Am. Ins. Co. The insured in Origis sought declaratory relief as to Great American's duty to advance under the relevant D&O policy within the context of an allocation provision. The primary issue was the amount of Great American's contribution to the insured's defense under a duty to advance policy. In its motion to dismiss, Great American argued that the no action clause, a standard clause in liability policies, precluded the insureds from seeking declaratory relief until the insureds' liability was established in the underlying action through either an adjudication against the insured or an agreed upon settlement.

In Origis, Judge Rennie relented to Great American's interpretation on the basis that the insured "freely assented" to the no action clause and the contract must be interpreted as written. The Origis court also reasoned that this conclusion did not foreclose relief for the insureds, but merely delayed it until the conditions of the no action clause were met. In addition, the court stated the insured had largely waived its arguments because it had not raised them in its filings.

In Pangea, however, Judge Adams disagreed with and distinguished from Origis. In making her decision, she considered several arguments, including 1) the language of the no action clause is ambiguous, 2) the insured would need to incur liability to collect a defense, 3) Great American's interpretation would permit insurers to sue insureds for declaratory relief but would tie the hands of insureds, and 4) Great American's interpretation of the no action clause would decimate the duty to defend.

Ruling from the bench, Judge Adams declined to apply Great American's interpretation of the no action clause and denied the motion to dismiss, finding that she could not "[square] the language of the duty to defend with this no-action clause," and "that it's at least ambiguous at the motion to dismiss stage as [to] what the policy language is supposed to mean and if it can be harmonious or not."

For more information, please contact the Barnes & Thornburg attorney with whom you work or Lilit Asadourian at 310-284-3786 or [email protected], Alice Kyureghian at 310-284-3788 or [email protected], William Burton at 302-300-3451 or [email protected] or Janice Chase at 619-321-5024 or [email protected].

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