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Vol. 5, Iss. 11
November 9, 2016

Jim Semple:
Practicing Insurance Coverage Law In Delaware

Last issue’s inaugural “My Hometown” column was a big success. Its objective is for a coverage lawyer, practicing in a lesser-populated state, to describe some of his or her state’s key coverage decisions and aspects of practicing there that may differ from other states. The point being that, when it comes to larger states, we often know the key coverage decisions and things about practicing there that make it unique. California has Cumis. New York has §3420(d). New Jersey has Burd. Arizona has Morris. But what about the lesser-populated states? They have their own DNA too. But it is not as well known.

Brenda Wallrichs, of Lederer Weston Craig, in Cedar Rapids, Iowa, took the plunge and got “My Hometown” off the ground. Brenda did a wonderful job of discussing Iowa’s extrinsic evidence duty to defend standard, the Iowa Supreme Court’s recent pronouncement on the definition of “occurrence,” construction of the pollution exclusion and bad faith, which Brenda noted is favorable from the industry standpoint.


I am grateful to Jim Semple, of Cooch and Taylor in Wilmington, for stepping into the box and continuing the “My Hometown” column. Delaware may be small, but there is a lot to say about its coverage rules. As Jim discusses, Delaware is unique because, as the state of incorporation for thousands of companies, it sees more complicated cases than its population would otherwise predict.

Hello from Delaware, where I have practiced for the over 40 years. Delaware insurance law is generally consistent with the majority of jurisdictions. In determining whether an insurer has a duty to defend an action against its insured, Delaware courts apply the following principles: (a) where there exists some doubt as to whether the complaint against the insured alleges a risk insured against, that doubt should be resolved in favor of the insured; (b) any ambiguity in the pleadings should be resolved against the carrier; [and] (c) if even one count or theory of plaintiff's complaint lies within the coverage of the policy, the duty to defend arises. Cont’l Cas. Co. v. Alexis I. DuPont Sch. Dist., 317 A.2d 101, 105 (Del. 1974).

In construing an insurer’s duty to indemnify or defend a claim asserted against its insured, courts typically look to the allegations of the complaint to decide whether the third party’s action against the insured states a claim covered by the policy, thereby triggering the duty to defend. The rationale underlying this principle is that the determination of whether a party has a duty to defend should be made at the outset of the case, both to provide the insured with a defense at the beginning of the litigation and to permit the insurer, as the defraying entity, to control the defense strategy. American Ins. Group v. Risk Enterprise Management, Ltd. , 761 A.2d 826 (Del. 2000). But, where the demand for indemnification occurred after development of a complete discovery record in the underlying lawsuit, the Superior Court should not limit its analysis solely to the allegations of the complaint. Id. At 827; Pike Creek Chiropractic Ctr., P.A. v. Robinson, 637 A.2d 418, 421 (Del. 1994). (“A court construing an indemnification agreement should look to the actual facts developed during discovery, or at trial, to determine if the indemnitee is free from actual wrongdoing and therefore entitled to complete indemnification.”). Once the duty to defend is triggered by at least one count, the duty applies to “the entire suit.” See Consol. Rail Corp. v. Liberty Mut. Ins. Co., 2005 WL 697943, at *3 (Del. Super. 2005) (“[T]he duty to defend extends to all causes of action in a complaint as long as one cause of action is potentially covered.”).

Delaware’s rules of contract interpretation are succinctly stated. Interpreting the language of a contractual provision is a question of law. Pellaton v. Bank of New York, 592 A.2d 473, 478 (Del. 1991). The Court’s analysis must focus on determining the intent of the parties. See E.I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985). The Court must first attempt to ascertain the parties’ intent from the language of the contract. Citadel Holding Corp. v. Roven, 603 A.2d 818, 822 (Del.1992). When the contractual provision is clear and unambiguous, the court will give the provision’s terms their plain meaning. Hallowell v. State Farm Mut. Auto. Ins. Co., 443 A.2d 925, 926 (Del. 1982). The Court should not render policy provisions meaningless, or seek to re write contractual obligations. See Warner Communications, Inc. v. Chris Craft Industries, Inc., 583 A.2d 962 (Del. Ch. 1989), aff’d. 567 A.2d 419 (interpretation of contract that gives effect to each term of the agreement is to be preferred to interpretation that accounts for some terms as redundant); E. I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108 (Del. 1985) (whenever possible, court should give effect to all contract provisions); Ed Fine Oldsmobile, Inc. v. Diamond State Tel. Co., 494 A.2d 636 (Del. 1985) (function of court is not to rewrite plain language of an otherwise valid contractual provision); Emmons v. Hartford Underwriters Ins. Co., 697 A.2d 742 (Del.1997) (contract interpretation that adds limitation not found in plain language of contract is untenable).

Where the language is clear and unambiguous a court may not use “ambiguity” as an excuse to create a more perfect contract never agreed to by the parties. Hallowell v. State Farm Mut. Auto. Ins. Co., 443 A.2d 925, 926 (Del. 1982). The Court will not twist, distort or torture contractual terms to create an ambiguity when the language is clear and unambiguous. Rhone Poulenc Basic Chems. Co. v. American Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992); Aetna Casualty and Sur. Co. v. Kenner, Del. Supr., 570 A.2d 1172, 1174 (Del. 1990). Contractual language is not ambiguous merely because parties in litigation disagree concerning the provision’s proper construction. City Investing Co. Liquidating Trust v. Continental Casualty Co., 624 A.2d 1191, 1198 (Del. 1993); Rhone Poulenc at 1196. The Court may not consider extrinsic evidence in an effort to construe an unambiguous contract. City Investing, 624 A.2d at 1198; Citadel Holding, 603 A.2d at 822; Pellaton, 592 A.2d at 478.

The principal question is whether or not the contractual language is ambiguous. An ambiguity exists when the contractual provisions are “reasonably or fairly susceptible” of different interpretations or two different meanings. Rhone Poulenc at 1196. Both interpretations must be reasonable readings of the provision’s text. Kenner at 1174. As the Delaware Supreme Court stated: “Ambiguity does not exist where the court can determine the meaning of a contract without any other guide than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends.” Rhone Poulenc, 616 A.2d at 1196. The reasonable expectations rule - that an insurance policy should be construed to effectuate the reasonable expectations of the buyer - only applies where ambiguity is found. Hallowell v. State Farm Mutual Automobile Ins. Co., 443 A.2d 925, 927 (Del.1982); O’Donnell v. State Farm Mutual Automobile Ins. Co., 443 A.2d 925, 927 (Del.1982).

The Delaware Supreme Court has upheld the qualified pollution exclusion, and said that it unambiguously limits coverage to discharges of pollutants that are both initially abrupt and unintended. E.I. DuPont v. Allstate Ins. Co., 693 A.2d 1059 (Del. 1997). The court ruled that (1) the insured has the burden of proving the exception to the exclusion; (2) sudden means abrupt; (3) drafting history is not a basis for introducing ambiguity into words whose meaning is otherwise plain; (4) the focus of the exclusion is on the initial release; and (5) regulatory estoppel does not apply in Delaware.

The Delaware law on “bad faith” is grounded in contract, not tort. The implied covenant of good faith and fair dealing inheres in every contract, including insurance contracts. Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del.2005). (“[T]he implied covenant requires a ‘party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.’ Thus, parties are liable for breaching the covenant when their conduct frustrates the ‘overarching purpose’ of the contract by taking advantage of their position to control implementation of the agreement's terms.”). In order to establish “bad-faith” the plaintiff must show that the insurer’s refusal to honor its contractual obligation was clearly without any reasonable justification. Casson v. Nationwide Insurance Co., 455 A.2d 361, 369 (Del Super. 1982); ConAgra Foods, Inc. v. Lexington Ins. Co., 2010 WL 663746 (Del. Super. 2010).

The Delaware Supreme Court has ruled that an insurer may be forced to produce otherwise privileged reports from its lawyers if it placed the documents at issue in a bad faith case. The court declared that “a party cannot force an insurer to waive the protections of the attorney/client privilege merely by bringing a bad faith claim. Where, however, an insurer makes factual assertions in defense of a claim which incorporate, expressly or implicitly, the advice and judgment of counsel, it cannot deny an opposing party “an opportunity to uncover the foundation for those assertions in order to contradict them.” Tackett v. State Farm Fire and Casualty Insurance Company, 653 A.2d 254, 259 (Del. 1995).

Although Delaware insurance law, by and large, is not very different from the majority of jurisdictions, Delaware is unique because it sees more complicated cases than its population would otherwise predict because Delaware is the state of incorporation for thousands of companies. As a result those companies can both sue and be sued here. Moreover, in addition to its highly regarded Supreme Court, Delaware trial courts have an excellent reputation for their handling of such disputes. The Court of Chancery, its equity court, is generally viewed as the top business court in the nation. The Superior Court, its law court, has also been consistently rated as a top jury trial court by the U.S. Chamber of Commerce for its fairness and reasonableness in handling cases. Both have entertained complex insurance disputes. Probably the best thing about practicing in Delaware is its people. We’re not only a small state, but a fairly small legal community. Because we see one another not only in our courts but in our streets, schools, communities, restaurants and clubs, and because we still tend to observe traditional values, our attorneys and judges are generally congenial, collegial and a pleasure to be around.

James W. Semple is a Director at Cooch and Taylor P.A. in Wilmington, and assists his clients in assessing and resolving complex business disputes. An ABA-trained mediator for the Delaware Superior Court, Jim has mediated, arbitrated and advocated in hundreds of legal and alternative dispute resolution proceedings. He drafted the 1994 revision to 18 Del. C. §3902, Delaware’s uninsured motorist statute. He also frequently speaks and writes, locally, nationally, and internationally, on business dispute resolution and professional ethics issues. He is a member of the American and District of Columbia Bar Associations.

As a member of the Delaware Bar Association, he has served on its Executive Committee and was the Founding Chair of its Torts and Insurance Practice Group. He is a past member of both the Board on Professional Responsibility, which hears and decides claims by the Office of Disciplinary Counsel against Delaware lawyers, and the Board of Bar Examiners of the Supreme Court of the State of Delaware. He is a past member of the Inns of Court, a charter member of the Delaware chapter of The American Board of Trial Advocates, and the Founding President of the Defense Counsel of Delaware. He has been a member of the Federation of Defense and Corporate Counsel (FDCC) since 1985, is a Former Practice Group Chair, and was the Program Chair for its 2000 Winter Meeting.

He has twice won the FDCC’s Hecker Award for his legal writing, has been repeatedly named to Delaware SuperLawyers®, to The Best Lawyers In America®, and was recently named to the National Association of Distinguished Counsel. He has authored the Delaware chapters in The Tort Law Desk Reference and Business Torts: A Fifty-State Guide, the Delaware chapter for the DRI Compendium on Trade Secrets, and is now working on the Delaware Chapter for a DRI Compendium on Rescission. He has served many times as a speaker on Recent Cases at Lorman’s Legal Ethics seminars in Delaware, and spoke on Delaware’s Business Courts at the FDCC’s Corporate Counsel Symposium in Philadelphia. In his spare time, he has served on several community boards and enjoys movies, books, and playing not yet ready for prime time golf and hard ball doubles squash.


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