Hunton Insurance Recovery Blog

A Delaware trial court recently addressed a relatively uncommon insurance coverage dispute—litigated claims under a buyer-side representations and warranties policy—arising from a global surface technology firm’s assertion that the chemical company it acquired breached three representations in the deal documents. The Delaware Superior Court decision, in Surteco North America, Inc. v. AIG Specialty Insurance Co., highlights some common friction points in RWI claims and provides guidance for policyholders navigating future coverage disputes that mature into litigation.

Background

The transaction centered on the target’s wear-layer business and its relationship with a top customer. After closing, the buyer alleged that the target had received but failed to disclose written communications showing that the customer intended to reduce purchases.

The buyer sought coverage under the RWI policy, asserting that the target breached three representations for material adverse events (MAE), ordinary course, and top customers. After investigating, the insurer denied the claim in full, which led to the buyer filing suit for breach of the insurance policy.

The Delaware Court Ruling

The insurer moved to dismiss, arguing that the buyer had not adequately pleaded a covered breach of any insured representation. The court granted the motion as to the MAE and ordinary-course claims, denied as to the top-customer claim, and granted the buyer leave to amend.

The court dismissed the MAE claim because the representation was backward-looking: it required an MAE to have occurred during the representation period and, as a result, according to the court, could not apply to assertions that the target knew of a possible future adverse development. Allegations that a customer might later move production in-house or terminate the relationship were not enough.

The ordinary-course claim also failed because that representation prevented the seller from taking any actions that materially changed the nature or quality of the business that is being purchased, whether or not those changes related to misconduct. The claim at issue focused on the customer’s conduct, not actions by the target that deviated from its normal way of operating the business.

The top-customer claim survived. There, the buyer alleged that the target received written correspondence reflecting the customer’s intent to decrease purchases and failed to disclose it. The court held that, although the allegations were vague, Delaware notice pleading did not require the buyer to plead evidence such as dates, senders, or recipients, so long as the allegations put the insurer on notice of the claim. The court declined to adopt the insurer’s more onerous pleading standard, concluding that “vague” allegations about written correspondence reflecting an intent to decrease purchasing were enough to put the insurer on notice of the claim.

Finally, the policyholder requested, and the court allowed, leave to amend its pleading to cure any deficiencies. Because Delaware courts freely give leave to amend and the insurer was not prejudiced (in fact, the insurer had not even addressed the request to amend), the buyer was allowed to file a new complaint.

Takeaways

Claims under RWI policies are less often disputed than other insurance claims and even more rarely proceed to litigation. This particular dispute highlights the need to frame claims around the precise insured representation at issue. The same alleged loss may look very different depending on whether it is tied to an MAE, ordinary course, or customer-specific representations. The parameters of establishing breached representations are also informed by governing law, which in Delaware can be well developed and guided the court’s analysis of the who, when, and why for the buyer’s RWI claim.

Notwithstanding the need to frame claims carefully, Delaware courts continue to enforce liberal notice pleading standards. A policyholder need not “plead evidence” despite insurer demands for particulars; it need only allege enough to put the insurer on notice of the claim.

The application of Delaware law by a Delaware court presents another question—what led to the policyholder filing suit in Delaware? The buyer is a Delaware corporation with a principal place of business in South Carolina, while the insurer is an Illinois corporation with a principal place of business in New York. The answer is found in the policy’s Delaware forum selection clause, which required resolution of disputes in the Delaware Court of Chancery or, in the event that court lacked jurisdiction, any Delaware state court sitting in New Castle County.

Here, Delaware’s well-developed jurisprudence was a mixed bag as applied to the RWI claim. On the one hand, Delaware law imposed parameters on the ability to establish breach of certain representations; but on the other, Delaware’s minimal pleading standards saved the day with respect to the one claim that survived the insurer’s early motion. We’ve previously discussed perceived trends in Delaware insurance coverage decisions, including the importance of choice-of-law and forum-selection provisions in policies, as well as the advantages policyholders may be able to leverage in pursuing claims under Delaware law. This case shows how claims being steered in or out of particular forums can impact coverage outcomes.

This dispute is far from over. The case will continue as to the top-customer representation. And the court granted the buyer leave to replead the dismissed MAE and ordinary-course claims, so the ruling may be only the first salvo on those issues if the policyholder reasserts those breach claims and the insurer attempts to dismiss them a second time.