Companies and the boards and management who run them need directors and officers liability insurance to protect leaders’ personal assets, defend against a wide range of claims, and attract top talent to leadership roles. But D&O policies are highly-customized, negotiable products that vary materially between insurers and forms, so it is important that companies purchase the right policy for their needs and know how to navigate the often-complex claims process. This article examines how Delaware law treats several common D&O insurance issues.

Why Delaware? Notwithstanding “DExit” reincorporation debates, Delaware continues to be the premier jurisdiction for startups, venture capital, and public companies due to its specialized courts, predictable and modern corporate laws, and investor-friendly environment. And as discussed below, those protections extend to insurance, with the Delaware Supreme Court ruling that Delaware law should govern the interpretation of D&O policies issued to Delaware corporations, regardless of where the events giving rise to the claim occurred. See RSUI Indemnity v. Murdock, 248 A.3d 887, 901 (Del. 2021) (holding that Delaware law applies to the interpretation of directors and officers policies for companies incorporated in Delaware).

Boards and Executives of Delaware Corporations Should Get the Benefit of Delaware Law.

The first inquiry in many insurance coverage cases (and other breach of contract cases, for that matter) is what law applies when interpreting the contract. When the policy includes a choice-of-law clause, the question is easy. But when it does not, a court will apply the governing choice-of-law test. The Delaware Supreme Court has ruled that D&O liability policies issued to Delaware corporations should be governed by Delaware law, even if the company’s principal place of business is in another state.

The Delaware Supreme Court announced this rule in RSUI Indemnity v. Murdock, 248 A.3d 887 (Del. 2021). In that case, a Delaware corporation had a principal place of business in California and purchased a D&O policy negotiated and issued to the company in California. The parties disputed whether California or Delaware law applied to the policy. There was no coverage for the underlying lawsuit under California law, but there was coverage under Delaware law. The Delaware Supreme Court recognized that the company was “an entity formed and existing by virtue of the Delaware Constitution and the Delaware General Corporation Law,” and that its directors and officers acted on behalf of the company as a corporate entity with legal residence in Delaware. The Supreme Court concluded “Seen from this vantage point, the Insureds’ legal ties to Delaware are more significant—and therefore should be afforded greater weight—than their physical location in California.”

This rule, which has been applied in subsequent decisions involving Delaware policyholders, see, e.g., Stillwater Mining v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, 289 A.3d 1274, 1284 (Del. 2023) (recognizing under Murdock that the state of incorporation is the “center of gravity of the typical D&O policy” and finding that Delaware law governed a dispute involving a Delaware corporation headquartered in Montana), ensures that Delaware corporations can receive the protections of Delaware law on many important D&O coverage issues discussed below.

Delaware Imposes Broad Defense and Advancement Obligations on D&O Insurers.

Defense coverage in D&O and other management liability policies typically comes in two forms—duty to defend and duty to advance defense. Under duty-to-defend policies, the insurer selects defense counsel, pays for the defense directly, and generally maintains more control over the defense of claims. In contrast, duty-to-advance policies (sometimes called “duty-to-reimburse policies”) let the policyholder maintain control of the defense, including selection of defense counsel, but require the policyholder to fund the defense and then seek reimbursement from the insurer. There are pros and cons to each.

With their own personal liability and reputation on the line, many executives prefer the security that comes with selecting their own trusted defense counsel. But this extra control comes with a risk—if the insurer disputes coverage for any defense costs, it simply will not reimburse the policyholder, leaving the policyholder to push back on the insurer’s coverage position, look elsewhere for relief (like taking up fee disputes with defense counsel), or simply bear those unreimbursed costs.

An insurer’s defense obligations are only a starting point, as D&O policies also impose a duty to indemnify losses for things like settlements or adverse judgments. The duty to defend is much broader than the duty to indemnify because it turns on the potential for coverage, even if the liability resulting from the lawsuit may not be covered. See Tyson Foods v. Allstate Insurance, No. 09C–07–087 MJB, 2011 WL 3926195, at *5 (Del. Super. Ct. Aug. 31, 2011). In contrast, the duty to indemnify is triggered when a policyholder incurs liability that is actually covered by the policy.

To determine whether an insurer has a duty to defend, Delaware courts “compare the allegations contained in the underlying complaint with the terms of the policy.” See Pangea Equity Partners v. Great American Insurance Group, No. N23C-12-060 MAA CCLD, 2025 WL 786050, at *4 (Del. Super. Ct. Mar. 12, 2025). Defense obligations must be construed “broadly in favor of the policyholder.” See Legion Partners Asset Mganagement v. Underwriters at Lloyd’s London, No. N19C-08-305 AML CCLD, 2020 WL 5757341, at *6 (Del. Super. Ct. Sept. 25, 2020). “If there is a possibility that ‘the underlying complaint, read as a whole, alleges a risk within the coverage of the policy,’ then the insured owes a duty to defend.” See Pangea Equity, 2025 WL 786050, at *4; see also IDT v. U.S. Specialty Insurnace, No. N18C-03-032 PRW CCLD, 2019 WL 413692, at *10 (Del. Super. Ct. Jan. 31, 2019) (“The key is whether the allegations of the complaint, when read as a whole, assert a risk within the coverage of the policy.”). Policyholders therefore get the benefit of a broad duty to defend or advance defense costs.

Delaware Indemnification Rights Are Very Broad.

D&O policies have presumptive indemnification language assuming that companies will indemnify and advance defense costs for its directors and officers unless legally prohibited or financially unable to do so. This is in accord with the broad indemnification rights under DCL Section 145. That statute allows a corporation to indemnify its officers and directors for lawsuits against them, including shareholder derivative lawsuits on behalf of the company. It also permits the company to purchase D&O insurance for its officers and directors.

DCL Section 145 has a very broad scope. The statute permits corporations to buy D&O insurance to protect their executives “even where indemnification is unavailable.” See RSUI Indemnity v. Murdock, 248 A.3d 887, 900 (Del. 2021). This means that a corporation can buy D&O insurance to protect against “any liability.”

A corporation can even indemnify—directly or via insurance—an executive who breached his or her duty of loyalty to the corporation, “as long as the fiduciary acted in good faith and reasonably believed that the decision was not opposed to the best interests of the corporation.” See New Enterprise Associates 14, L.P. v. Rich, 295 A.3d 520, 559 (Del. Chan. 2023).

Delaware’s Shifting Standards for 'Related' Claims.

One unique aspect of “claims-made” coverages like those found in D&O policies is that coverage is triggered based on when a “claim” is first made against the insured, as opposed to when an underlying accident or occurrence happened (a concept present in so-called “occurrence” policies). Because coverage turns on when claims are made against the policyholder, questions arise about how to treat claims that share certain similarities—like parties or alleged wrongdoing—but are asserted during different policy periods. Modern D&O policies address this under a “related” claims provision, which vary in scope but generally state that multiple claims arising from common facts or “interrelated” wrongful acts are treated like a single claim first made at the time of the first such claim.

Predicting questions of “relatedness” is tricky because both insurers and policyholders rely on related claims depending on the facts giving rise to the particular claim (or claims). On one hand, policyholders can use relatedness provisions to group claims together so that they only have to pay one retention. Additionally, if a renewal policy includes a new exclusion, the policyholder may argue that a claim relates back and is covered by an earlier policy that lacked the critical exclusion. On the other hand, insurers might try to deny coverage by arguing that claims relate back to an earlier claim in a previous policy period. This can lead to finger pointing between insurers, especially where coverage in prior policies is exhausted or excluded, or where coverage is unavailable because the insured did not report the prior claim.

In Delaware, like most jurisdictions, whether a claim is related to an earlier one is a fact-intensive analysis that can also depend on the exact language of the policy’s related claim provision. Delaware courts have interpreted the phrase “arises out of” in relatedness clauses to mean “some meaningful linkage.” See In re Alexion Pharmaceuticals Insurance Appeals, 339 A.3d 694, 703 (Del. 2025); see also Immunomedics v. Hudson Insurance, No. N23C-08-179 PRW CCLD, 2024 WL 1235407, at *11 (Del. 2024) (same). Delaware courts will look at “the parties, the relevant time period, the overall theory of liability, sampling of relevant evidence, and the claimed damages.”

This is an area in which the law in Delaware is evolving, and Delaware courts have issued several recent decisions clarifying (and arguably restating) the common law standard used to assess relatedness. However, the Delaware Supreme Court has stated that related claims are assessed by applying a “meaningful linkage” standard. The “objects of comparison for the ‘meaningful linkage’ analysis” is whether the two claims allege the same wrongful conduct.

The Delaware Supreme Court most recently addressed what constitutes a related claim in Forte Biosciences v. Wesco Insurance, No. N24C-10-015 PAW CCLD, 2026 WL 66768 (Del. Jan. 8, 2026). In that case, an activist investor filed two books and record demands in 2022 related to an ATM stock issuance and then a lawsuit for breach of fiduciary duty in 2023 stemming from an alleged dilution of company stock ahead of a contested board of director election. The policy provided that if a claim is “alleging, arising out of, based upon or attributable to such circumstances or alleging any wrongful act which is the same as or is a related wrongful act,” then the claim is covered under the earlier policy that was in effect at the time of the first claim. The Delaware Supreme Court interpreted the phrase “arising out of” to require application of the “meaningful linkage” test. The court found that the 2022 demand and 2023 lawsuit were related because both were related to the board of directors’ attempts to resist the activist investor’s efforts to challenge management. The court cautioned that an insurer cannot “ignore” the circumstances of the two claims and must “broaden the ‘scope of inquiry’ evaluation in determining whether a notice of circumstances is meaningfully linked to a later claim.”

Whether or not it is beneficial to a policyholder for multiple D&O claims to be related depends on many factors in Delaware. Whether two claims are related is a fact specific inquiry, so all policyholders should closely review their policy and identify facts that may support or defeat relatedness under the circumstances.

Punitive Damages Are Insurable Under Delaware Law.

States take different approaches to whether punitive damages can be insured. Some states prohibit it as a matter of public policy, reasoning that allowing such insurance undermines the punishing effect of punitive damages. Others allow punitive damages to be insured in all circumstances. Still others fall in the middle, allowing punitive damages to be insured only sometimes.

Consistent with other areas supporting robust executive protection for directors and officers of Delaware corporations, Delaware falls in the most permissive camp, allowing punitive damages to be insured in all circumstances. See Price v. Continental Insurance, 768 A.2d 975, 976 (Del. Ch. 2000) (“absent a legislative determination to the contrary, this state’s public policy does not prevent insurers and their customers from contracting for insurance covering punitive damage awards.”). Delaware law generally allows insurance to cover anything “in the absence of clear indicia that ... a countervailing public policy exists.” See RSUI Indemnity v. Murdock, 248 A.3d 887, 902 (Del. 2023) (brackets and ellipses in original). Delaware courts will only interfere with a contractual relationship “upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract,” (holding that fraud is insurable under Delaware law).

Aside from insurability as a matter of public policy, whether punitive damages are actually insured depends on the language of the policy. Many policy forms exclude punitive, exemplary, or multiplied damages from the definition of “loss.” But many times coverage can be added back into the policy via endorsement if requested. Prior to purchasing a liability policy of any kind, it is important to understand any exceptions carving out certain damages, including punitive damages, from the definition of “loss.” When the policy is silent on the issue, the Delaware Supreme Court has ruled that it is ambiguous and must be construed in favor of the policyholder by covering punitive damages. See Jones v. State Farm Mutual Automobile Insurance, 610 A.2d 1352, 1354 (Del. 1992) (“The phrase ‘all damages’ reasonably embraces punitive damages.”).

Public Company Coverage for 'Securities Claims.'

The primary purpose of D&O policies is to afford protections to company executives and board members. However, most policies also provide coverage to the company itself. For private companies, coverage for so-called “entity” claims is broader and can sometimes approach the breadth of coverage available for individual insureds. For public companies, however, entity coverage is generally limited to “securities claims.” While the exact scope of coverage depends on the language of the policy, the Delaware Supreme Court has limited coverage to only those claims involving violations of securities laws.

The Supreme Court most addressed what constitutes a “securities claim” in In re FairPoint Insurance Coverage Appeals, 311 A.3d 760 (Del. 2023). The case arose from an asset sale that preceded the buyer filing for Chapter 11 bankruptcy. In bankruptcy, creditors brought a fraudulent transfer claim against the seller, which sought coverage for the lawsuit under its two D&O policies.

Both policies defined “securities claim” as a claim made against any Insured:

(1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is:

(a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization; or

(b) brought by a security holder of an organization with respect to such security holder's interest in securities of such organization; or

(2) brought derivatively on the behalf of an organization by a security holder of such Organization.

The court stated that, based on the policies’ definition, a “securities claim” must be for a violation of a securities law. The court stated “‘the words used in the definition mirror those in a specific area of the law recognized as securities regulation’ and were ‘not of general application to other areas of the law.’ And second, the use of the limiting words ‘regulating securities’ referred to the regulations, rules, or statutes that regulate securities.” 311 A.3d at 770 (citing In re Verizon Insurance Coverage Appeals, 222 A.3d 566, 574 (Del. 2023)). But the fraudulent transfer claim was not under the securities laws, so it was not covered.

Additionally, the Supreme Court held that the requirement that the claim be “brought derivatively” was not satisfied because the fraudulent transfer claim at issue was direct. The test to determine whether a claim is derivative or direct is “(a) who suffered the alleged harm (the corporation or the stockholders, individually); and (b) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Under this test, the court concluded that the claim was direct, barring coverage.

Although public-company D&O policies typically limit coverage for the company to securities claims, it is far from absolute, as many policies can provide valuable extensions and enhancements. Further, there are no such limitations for claims against individuals, which are afforded broader protection similar to private company policies. Nonsecurities claims against public companies may also be covered under other types of policies, such as employment practices liability.

Delaware’s Larger-Settlement Rule Limits Insurers’ Ability to Allocate Settlements.

D&O policies typically contain allocation provisions limiting payment of loss if the insurer establishes that a claim includes both covered and uncovered matters. These clauses can materially limit recovery for costs of defense if insurers refuse to reimburse costs associated with purportedly uncovered causes of action, parties, theories of liability, or relief. When only some aspects of a claim are covered, policyholders are left to negotiate with the insurer to try to arrive at an acceptable allocation between covered and allegedly uncovered loss. Policyholders will benefit from having experienced coverage counsel in these negotiations because insurers often take aggressive positions to minimize reimbursement of defense costs.
Fortunately for policyholders, the Delaware Supreme Court has limited an insurer’s ability to allocate settlement amounts. In Murdock, two of the defendants in the underlying lawsuit faced claims related to their actions as an officer or director (which were covered by the policy) and claims related to their actions outside that capacity (which were not covered). The insurer argued that it was not responsible for the full settlement because portions of the settlement were attributable to those defendants’ actions outside their capacity as officers or directors.

The policy said that allocation required taking into account “the relative legal and financial exposures of the Insureds in connection with the defense and settlement of the claim.” The Supreme Court interpreted this language as applying the “larger settlement rule,” which meant that the “responsibility for any portion of a settlement should be allocated away from the insured party only if the acts of the uninsured party are determined to have increased the settlement,” 248 A.3d at 908–909 (quoting Nordstrom v. Chubb & Son 54 F.3d 1424, 1432 (9th Cir. 1995)). The court found that the insurer had not presented any evidence that the settlement amount was higher because it included uncovered claims, and therefore the insurer was required to pay for the full amount.

The Delaware Supreme Court’s decision gives Delaware policyholders a strong tool to use to push back against insurers’ attempts to avoid paying part of a settlement or defense costs. An insurer cannot allocate costs simply because not all of the claims or parties were covered. Instead, the insurer must show that the settlement (or defense costs) would have been higher had the uncovered portions not been included. In many cases, the insurer will be unable to make this showing.

Insurers Have a High Bar to Enforce Bump Up-Exclusions.

Many D&O policies have a “bump-up” exclusion. These exclusions come into play when the shareholders of the selling company sue after a merger, acquisition, or asset purchase alleging that the purchase price was too low. While policy wording varies, a bump-up exclusion bars coverage for settlements that “bump up” the purchase price of an acquisition. The idea behind the exclusion is to avoid purchasers from intentionally agreeing to pay artificially low prices for a target company, knowing that the cost of additional consideration awarded in shareholder litigation would be paid by the company’s D&O insurers. In practice, however, variations in both M&A deals and policy wording have led to a number of recent bump-up coverage disputes, including in Delaware.

Like any exclusion, the bump up exclusion must be “construed narrowly and any ambiguity in [it] will be interpreted in favor of the insured.” See Harman International Industries v. Illinois National Insurance, No. N22C-05-098 PRW CCLD, 2025 WL 84702, at *6 (Del. Super. Ct. Jan. 7, 2025). In Harman, the bump-up exclusion stated: “In the event of a claim alleging that the price or consideration paid or proposed to be paid for the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, loss with respect to such claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.” The court interpreted this language to mean that, for the exclusion to apply, “inadequate deal price must be a viable remedy that was sought for at least one claim” in the underlying action.

Additionally, the Harman court limited application of the exclusion to “only the amount of the settlement related to curing the deal price.” That means that, even if the bump up exclusion applies, part of the settlement may still be covered. When a settlement covers multiple claims, not all of which are excluded, the parties will have to negotiate allocation, as discussed above.

The upshot is that even if a settlement following a contested M&A deal includes a bump-up of a purchase price, it is still worth it to submit a claim to the insurer. It may be possible to negotiate an allocation where the insurer still must pay part of the settlement.

Delaware Requires Prejudice for Late-Notice Defenses.

Many insurance policies require that the policyholder provide timely notice of any claim. While notice language varies, one of the more common iterations in claims-made policies requires giving notice “as soon as practicable” during the policy period and in no event later than a specific time after the policy period ends (to account for claims first made at the very end of the policy period).

While it is always important to provide notice as soon as possible, failure to do so may not always automatically preclude coverage. First, some policies expressly state that the insurer can only deny coverage if they were prejudiced by late notice. Second, even absent some language (and unlike some states), Delaware law requires a showing of prejudice for an insurer to deny coverage based on late notice. See State Farm Mutual Automobile Insurance v. Johnson, 320 A.2d 345, 347 (Del. 1974) (announcing notice prejudice rule for all insurance policies). In many jurisdictions, the prejudice requirement only applies to “occurrence” policies, and there is no need for the insurer to show prejudice under a claims-made policy. But in Delaware, an insurer is required to show prejudice under both types of policies. See Medical Depot v. RSUI Indemnity, No. N15C-04-133 EMD CCLD, 2016 WL 5539879, *13 (Del. Super. Ct. Sept. 29, 2016) (holding that insurer could not deny coverage under claims-made directors and officers policy due to late notice because there was no prejudice).

The rationale for the rule is that denial of coverage based on late notice involves “a forfeiture, for the carrier seeks, on account of a breach of that provision, to deny the insured the very thing paid for.” State Farm, 320 A.2d at 347. Delaware law “generally disfavors forfeitures.” See Thompson Street Capital Partners IV v. Sonova United States Hearing Instruments, No. 166, 2024, 2025 WL 1213667, at *10 (Del. Apr. 28, 2025). Therefore, Delaware courts will narrowly interpret notice provisions in contracts. “If the language does not clearly provide for a forfeiture, then a court will construe the agreement to avoid causing one. If the language clearly provides for a forfeiture, then a court may consider whether compliance with the condition may be excused.” The concern about avoiding forfeitures is particularly strong in insurance contracts because insurance policies are contracts of adhesion, meaning that the policyholder did not have the opportunity to negotiate the language.

The insurer bears the burden of proof to show prejudice. The most common example of prejudice is when the delay prevents the insurer from adequately investigating the claim or participating in the defense of the underlying lawsuit. See Wilhelm v. Nationwide General Insurance, No. CIV.A. 09C-07-155MJB, 2011 WL 4448061, at *5 (Del. Super. Ct. May 11, 2011). Additionally, in cases of particularly lengthy delay, a court may find that the delay alone was prejudicial. See Northrop Grumman Innovation Systems v. Zurich American Insurance, No. N18C-09-210, 2021 WL 347015, at *15 (Del. Super. Ct. 2021) (“‘an inordinate lapse of time’ may put an insurer ‘in a less favorable position to defend [a] claim than it would have been had the notification been as soon as practicable.’”).

The requirement that insurers show prejudice to deny coverage in the case of late notice helps protect policyholders from unjust coverage denials. An insurer cannot deny coverage when the delay had no effect.

Policyholders Should Be Aware of Delaware’s Limitations Periods.

Delaware has a comparatively short statute of limitations for breach of contract actions—just three years. 10 Del. C. Section 8106. In contrast, many states have statutes of limitations of at least five years. This makes it important for policyholders to keep in mind when their claims will be time-barred and to bring suit before then if a voluntary resolution cannot be reached.

A claim for breach of an insurance contract accrues (and the statute of limitations begins to run) when “the insurer denies coverage and notifies its insured of rejection of any claim for such benefits.” Allstate Ins. Co. v. Spinelli, 443 A.2d 1286, 1287 (Del. 1982). Thus, the policyholder must initiate any litigation within three years of the coverage denial.

The recent decision in General Cable v. Scottsdale Indemnity, No. 1:24-CV-00797-TMH, 2025 WL 2576384 (D. Del. Sept. 5, 2025) is illustrative of the dangers of not filing suit promptly. General Cable purchased D&O insurance from the insurers, with Scottsdale being at the top of the tower. When General Cable was sued, it sought coverage from the tower for the defense. The lower insurers covered General Cable’s claim, but Scottsdale denied coverage. The final underlying lawsuit was settled in 2019, but General Cable did not bring suit against Scottsdale until 2024. The court held that the claim had accrued in 2019 and thus the statute of limitations expired in 2022, so it dismissed the case.

Policyholders should not simply assume that they have three years to bring suit. Some policies contain provisions shortening the length of time that the policyholder has to file suit. Delaware courts will enforce these clauses as long as the set length of time is at least one year. Woodward v. Farm Family Casualty Insurance, 796 A.2d 638, 642–43 (Del. 2002) (one-year limitation clause in property insurance policy was enforceable). Policyholders should therefore carefully review their policy to see if there are any applicable suit limitation clauses.

It is important for policyholders to keep in mind the date that their claim accrues and when the three-year statute of limitations (or shorter policy limitations period) expires. Failure to timely bring suit could result in forfeiture of coverage.

Conclusion

These 10 issues are representative of the ways that Delaware courts balance freedom of contract with protecting D&O policyholders, given that insurance policies are typically contracts of adhesion. Ultimately, policy language controls, but Delaware law sets the guiderails.

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Reprinted with permission from the March 25 issue of The Delaware Business Court Insider. Further duplication without permission is prohibited. All rights reserved.