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G-New, Inc. d/b/a Godiva Chocolatier, Inc. v. Endurance American Insurance Company
Citation: Not availableDocket: N21C-10-100 MMJ CCLD
Court: Superior Court of Delaware; September 12, 2022; Delaware; State Appellate Court
Original Court Document: View Document
G-New, Inc., doing business as Godiva Chocolatier, Inc., filed a legal action against Endurance American Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA, regarding insurance coverage. Godiva, a Delaware corporation, purchased a primary management liability insurance policy from Endurance for the period of June 30, 2018, to June 30, 2019, with a $10 million liability limit. An excess policy from National Union extends coverage up to $20 million for losses exceeding the primary coverage. The dispute arose from a class action lawsuit initiated by Adam Buxbaum and Steven Hesse, who claimed Godiva's use of "Belgium 1926" on its products misled consumers, invoking violations of New York and California consumer protection laws. The lawsuit was consolidated in New York and settled for up to $15 million in monetary relief, $5 million in attorney fees, and additional costs, with the Settlement Agreement pending final approval. Godiva notified both insurance companies of the class action and the settlement but received no coverage response. Consequently, Godiva filed a complaint on October 13, 2022, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking a declaratory judgment to confirm the defendants' obligations to indemnify under the insurance policies. The court's decisions on the defendants’ motions to dismiss and the parties' cross-motions for partial summary judgment were granted in part and denied in part. On December 22, 2021, Defendants filed a motion to dismiss Godiva’s Complaint with prejudice. In response, on February 25, 2022, Godiva submitted a Cross-Motion for Partial Summary Judgment. The central issue is whether Godiva's allegations support coverage under the Endurance and/or Excess Policies for the Settlement Agreement amounts and defense costs related to the Class Action. The Court’s standard for a motion to dismiss under Civil Rule 12(b)(6) requires accepting all well-pleaded factual allegations as true, drawing reasonable inferences in favor of the non-moving party, and only dismissing if no conceivable set of circumstances would allow recovery. Conclusory allegations without specific facts are not sufficient, but Delaware's pleading standard remains minimal and favorable to plaintiffs. For summary judgment under Rule 56, the Court should grant it when there are no material fact disputes and the moving party is entitled to judgment as a matter of law. The trial court must view the factual record in the light most favorable to the non-moving party. To counter a motion for summary judgment, the non-moving party must present specific facts indicating a genuine issue for trial and cannot rely solely on mere allegations. Godiva’s requests for relief in its motion for partial summary judgment include: 1) the applicability of Delaware law to the D&O coverage dispute; 2) a determination that its Settlement and Defense Costs qualify as insured “Loss;” 3) that Exclusion IV.B.6., regarding uninsurable matters under the law, does not apply; 4) that Exclusion IV.A.12.e, concerning anti-competitive conduct, is inapplicable; and 5) that Exclusion IV.B.2., related to fines and penalties, does not apply. Godiva argues that Endurance's choice-of-law analysis is inconsistent with Delaware Supreme Court rulings in Certain Underwriters at Lloyds, London v. Chemtura Corporation and RSUI Indemnity Company v. Murdock, maintaining that Delaware law should apply unless New York has significantly more contacts. Godiva insists that the underlying claims' contacts are irrelevant to the choice-of-law determination and that the facts support applying Delaware law. Furthermore, Godiva asserts that the Settlement Agreement and defense costs are covered losses under the Endurance Policy, emphasizing that insurance policies should be broadly interpreted to meet the insured's reasonable expectations and that exclusions should be narrowly construed to favor coverage. Godiva disputes the applicability of Exclusion IV.B.6, arguing that Delaware law allows coverage for restitution and disgorgement, and claims that the Settlement Agreement does not represent uninsurable disgorgement. It contends that there has been no final judgment declaring its gains as “ill-gotten” and that restitution could not have been awarded had the underlying case proceeded to trial. Regarding Exclusion IV.A.12.e, Godiva argues it does not apply since it pertains to antitrust violations, while the underlying action relates to improper advertising under consumer protection laws. Godiva also challenges Exclusion IV.B.2, asserting that the Settlement is not a penalty, that it did not knowingly violate any law, and that there is no final judgment establishing liability. In response, Defendants Endurance and National Union seek to dismiss Godiva's complaint, asserting that New York law should apply per the Chemtura standard and that Godiva has not met its burden to prove the claim constitutes a "Loss" under the Insuring Agreements. They define “Loss” as amounts legally owed for claims related to wrongful acts, including various damages and costs. Additionally, Endurance argues that the claim is excluded from coverage by Exclusion IV.A.12.e, which pertains to unfair trade practices. Endurance asserts that Exclusion IV.B.2 of the insurance policy excludes coverage for fines or penalties imposed by law, stating that "Loss does not include" such penalties, except for specific civil money penalties. Endurance also argues that Godiva's claims for breach of the covenant of good faith and fair dealing, as well as bad faith, should be dismissed. The breach of good faith claim is deemed duplicative of the breach of contract claim, both stemming from Endurance's denial of coverage for defense costs and settlement in the Underlying Lawsuit. Additionally, the bad faith claim is said to lack a valid cause of action. National Union supports Endurance's motion to dismiss Godiva's claims, citing that Godiva has not incurred covered Loss under National Union’s excess policy and affirming the clarity of policy provisions that limit coverage. They argue that New York law applies, which prohibits insurance for disgorgement or restitution of ill-gotten gains, and maintain that the policy language unambiguously excludes coverage for the Settlement. In Delaware, insurance policies are treated as contracts, with contract interpretation focusing on the mutual intent of the parties at the time of contracting. Courts interpret contract language based on its ordinary meaning, and ambiguity exists if terms can reasonably hold multiple meanings. Insurance policies are considered adhesion contracts, warranting a different interpretative approach. When ambiguity is present, the doctrine of contra proferentem favors the insured, interpreting unclear terms in their favor. The insured must prove coverage exists, after which the insurer must demonstrate any exclusions. The choice of law issue arises, with defendants advocating for New York law based on its significant relationship to the dispute. They reference the Restatement's guidance on determining applicable law for insurance contracts, emphasizing that the law of the state where the insured risk is primarily located should apply. Factors for this determination include the place of contracting, negotiation, performance, subject matter location, and the parties' domiciles and businesses. Defendants assert that key factors establish New York as the place of contracting for the Endurance Policy, including: the negotiation and approval of the policy involved New York representatives; the policy was executed in New York; Godiva’s headquarters are located in New York; and all notices related to the policy are directed to Endurance’s New York offices. Additionally, Godiva seeks a declaratory judgment for coverage under the policy for an Underlying Lawsuit in the Southern District of New York, with both parties having their principal places of business in New York. Contrarily, Godiva argues that Delaware has a more significant relationship to the dispute, contending that the policy lacks a choice of law provision, there is no conflict between Delaware and New York law, and that Delaware contacts are substantial—both companies are incorporated in Delaware, and the Directors and Officers Liability Coverage was issued to Godiva’s Wilmington office. Godiva emphasizes that the Underlying Action originally occurred in California and New York but is now consolidated in New York. The Court finds the reasoning in Mills Limited Partnership v. Liberty Mutual Insurance Company compelling. It suggests that in complex multistate insurance cases, Section 193 is less relevant than Section 188, which considers broader factors. The Court concludes that the litigation could be pursued in multiple jurisdictions, making the significant contacts factor insufficient for a decisive choice of law. It affirms that Delaware law typically governs directors and officers' responsibilities, particularly when their actions are at issue, and indicates that the state of incorporation is pivotal when determining applicable law for Directors and Officers (D&O) coverage. Delaware courts maintain that Delaware law governs insurance coverage disputes related to D&O policies for Delaware corporations, even when the operations span multiple jurisdictions. In the Chemtura case, the court applied a three-part analysis: 1) assessing if the parties had a contractual choice of law; 2) determining if conflicting laws exist between the states involved; and 3) evaluating which state has the most significant relationship to the dispute. Without a clear central location for the dispute, the court considers factors such as the parties' expectations and the insurance contract, referencing Section 188 and Section 6 of the Restatement. The Liggett Group case further illustrates that in nationwide liability claims, the principal place of business of the insured is crucial for conflict of laws analysis. Although the court found North Carolina had a significant relationship to the transaction, no party claimed Delaware law was applicable. Endurance argues that the action does not constitute a traditional D&O insurance dispute, asserting that its policy is a private company management liability policy, distinct from Murdock, which involved claims against directors and officers. The choice-of-law analysis affects issues of disgorgement and bad faith. Disgorgement aims to recover illegally obtained profits to deter misconduct, while restitution seeks to return unjust enrichment. For restitution, the court must establish that the defendants were unjustly enriched. Under Delaware law, disgorgement may be insurable if a statute allows it, with the court refraining from imposing public policy limitations absent legislative direction. No Delaware statutes or case law have been cited regarding the insurability of disgorgement. Conversely, under New York law, disgorgement related to ill-gotten gains is not insurable. In New York, it is established that insurance cannot cover the risk of being ordered to return wrongfully acquired money or property, as such orders do not constitute "damages" under insurance policies. In *Reliance Group Holdings, Inc. v. National Union Fire Insurance Company*, the court clarified that a Directors and Officers (D&O) policy covers indemnification for directors and officers' liabilities, not the corporation's liabilities. The case of *J.P. Morgan Securities Inc. v. Vigilant Insurance Co.* reinforced that indemnity for disgorgement is prohibited to avoid unjust enrichment, as allowing an insured to retain ill-gotten gains by shifting the loss to the insurer is contrary to public policy. This rationale differentiates situations where the SEC orders disgorgement linked to improperly acquired funds. In the matter involving TIAA, there was no finding of ill-gotten gains, and the court upheld that New York's public policy against insuring disgorgement does not apply since TIAA contested the claims and no wrongdoing was established. The Settlement Agreement in this case did not reference “disgorgement” or “restitution,” and Godiva denied any allegations of wrongdoing, settling without admission of liability. The settlement reflects the difference in value between properly and falsely advertised products, with no admission of guilt or unjust enrichment. The Court determines that the Settlement Agreement in the Underlying Action does not involve disgorgement, negating the need to address any choice-of-law conflict between New York and Delaware law. The Court notes significant differences in the laws regarding bad faith claims in both states. Defendants cite Fishberg v. State Farm Fire and Casualty Company, asserting that New York does not recognize an independent cause of action for bad faith denial of insurance coverage. They argue that Godiva's bad faith claim is duplicative of its breach of contract claim, both stemming from Endurance’s denial of coverage related to Defense Costs and the Settlement in the Underlying Lawsuit. Godiva disputes the application of Fishberg, arguing that it actually supports the notion that New York law permits a bad faith claim when an insurer refuses to defend or settle third-party claims. Godiva maintains that its bad faith claim differs from its breach of contract claim, citing specific allegations that Endurance unreasonably denied reimbursement for defense costs, which indicate bad faith. Defendants counter that Delaware law also requires dismissal of the claim, referencing Dunlap v. State Farm Fire and Casualty Company, which emphasizes that the implied covenant of good faith requires parties to avoid arbitrary conduct that undermines the contract's purpose. They argue Godiva's Complaint fails to allege that Endurance controlled the underlying litigation or acted with gross disregard. Godiva claims no conflict exists between Delaware and New York law, advocating for Delaware law’s application, though it provides limited supporting citations. Ultimately, the Court finds that Godiva has not substantiated a distinct cause of action for bad faith, failing to establish a prima facie case for bad faith failure to settle, rendering the choice between New York or Delaware law irrelevant. Additionally, 'Loss' under the Endurance Policy encompasses the total amount the Insureds are legally obligated to pay for claims related to wrongful acts, including various damages. Judgments and awards for prejudgment and post-judgment interest related to covered damages, settlements, Defense Costs, and civil money penalties against an Insured under the Foreign Corrupt Practices Act and other laws are discussed. The Endurance Policy defines “Wrongful Act” as any error, misstatement, or breach of duty by Insured Persons in their official capacity or related positions. Defendants assert that Godiva failed to demonstrate that its actions were not knowing and willful, while Godiva claims the policy covers both intentional and unintentional conduct. Citing *Charter Twp. of Shelby v. Argonaut Insurance Company*, Godiva argues that the policy does not limit “wrongful acts” to negligent or mistaken actions. It also contends that the “knowing or willful” language does not apply in this case, as it does not involve civil money penalties unless there is proof of such violations. The Endurance Policy is interpreted to provide broad coverage, including settlements. The court finds that the Settlement Agreement qualifies as a covered loss. Exclusion IV.A.12.e, regarding unfair trade practices, pertains to violations of specific antitrust laws but does not clarify whether it includes consumer protection and false advertising claims, an area without defined authority in this case. The policy does not explicitly exclude consumer protection actions from coverage. Plaintiff relies on the ruling in James River Insurance Company v. Rawlings Sporting Goods Company, where the court determined that the term “unfair trade practices” did not encompass consumer protection claims, as the Anti-Trust Exclusion primarily pertains to anti-competitive practices. The court noted the absence of terms like “fraud” or “consumer protection” in the exclusion, suggesting it would be unusual for such a component to be included without explicit mention. Defendants argue that the underlying litigation fundamentally involves consumer fraud, citing allegations of “misleading, false, unfair, and fraudulent” trade practices, including mislabeling of products. However, the court questioned whether “unfair trade practices” equate to consumer fraud, noting that defendants did not provide authority to support this equivalence. Godiva contends that the litigation pertains to statutory violations of consumer protection laws, which should not invoke the exclusion. It argues that the Anti-Trust Exclusion is focused solely on anti-competitive statutes and is unrelated to the consumer protection basis of the underlying action. The court found that the Settlement Agreement lacks explicit language indicating that the monetary relief pertains to unfair trade practices. Consequently, the broad definition of “Loss” leads to the conclusion that the Settlement is covered, although some allegations may relate to unfair trade practices, potentially affecting the allocation under Exclusion IV.A.12.e. Regarding Exclusion IV.B.2, which addresses fines or penalties, defendants claim that the Settlement constitutes excluded fines or penalties. However, Endurance acknowledged during oral arguments that there is a genuine issue of material fact regarding whether the entire Settlement qualifies as “penalties,” suggesting that further discovery is necessary to ascertain the portion of the Settlement that may be attributable to penalties. Godiva maintains that the underlying action involves state law violations relevant to the definition of covered Loss, arguing that penalties must be proven by defendants to apply. The Settlement at issue is characterized as a "penalty." Godiva is alleged to have knowingly or willfully violated state law, as established by either a non-appealable judgment in a Class Action or a sworn written admission, aligning with Exclusion IV.A.6. Godiva contends that Exclusion IV.B.2 is inapplicable because the Settlement Agreement is not a penalty, referencing Delaware Bay Surgical Services, P.A. v. Swier's definition of "penalty" as punitive rather than compensatory. The Settlement Agreement refers to "monetary relief" rather than "damages," "penalties," or "restitution," and does not specify that the relief pertains to "civil money penalties." The defendants acknowledged that not all claims in the underlying complaint constituted "penalties." Godiva claims that the Settlement amount represents the difference between the price of the falsely advertised product and its actual value, asserting it is compensatory, not punitive. Exclusion IV.A.6 states that the insurer is not liable for claims related to personal profit or willful violations of law if established by a final judgment or admission. Godiva argues there has been no such final judgment or admission regarding a willful violation of law. Citing Gallup, Incorporated v. Greenwich Insurance Company, Godiva argues that the exclusion does not apply to settlements unless there has been a final adjudication confirming the amount as restitution. The Gallup case indicated that the insurer's policy allowed for coverage of settlements, emphasizing that the policy was drafted to include settlements under "Loss" subject to other exclusions. Intentional dishonest, fraudulent, or criminal acts, along with profits gained by any Insured without legal entitlement, are excluded from coverage as per the Fraud/Ill-Gotten Gains Exclusion. The Court highlighted that since no final adjudication has determined that the Settlement is for restitution, it need not address public policy concerns regarding reimbursement. If the Settlement is deemed not for restitution, it falls under the definition of “Loss” within the Policy. The Court also ruled that the Settlement Agreement does not involve fines or penalties imposed by law, thus Exclusion IV.B.2 does not bar coverage of the entire Settlement. The implied covenant of good faith and fair dealing exists in all contracts to address unforeseen issues, operating only when the contract suggests an obligation but lacks explicit terms. A breach of this covenant cannot be based on conduct already covered by a breach of contract claim. Godiva's claim for breach of this implied covenant, based on the denial of coverage by Endurance, is dismissed as it overlaps with the breach of contract claim. The Court concluded that since the Settlement is not categorized as disgorgement, a choice-of-law analysis between New York and Delaware law is unnecessary. The court determined that the Settlement is insurable under Delaware and New York law, ruling that Exclusion IV.B.6 does not bar coverage. Godiva's claim for bad faith failure to settle was dismissed due to a lack of supporting facts for a distinct cause of action. The Settlement Agreement qualifies as a covered loss, as defined in the Policy. Exclusion IV.A.12.e does not prevent coverage of the entire Settlement. While some allegations may relate to unfair trade practices, the court concluded that the Settlement does not involve “fines or penalties imposed by law,” and noted that any civil money penalties are excluded from Exclusion IV.B.2, which also does not bar coverage. Consequently, the claim for breach of the implied covenant of good faith and fair dealing was dismissed. The court's ruling resulted in partial grants and denials of the Defendants’ motions to dismiss and the parties' cross-motions for partial summary judgment.