In Hemisphere Media Group, Inc. v. Fair American Select Insurance Co., the Delaware Superior Court held that when a D&O policy contains an allocation provision requiring the parties to use “best efforts” to reach a fair allocation but does not expressly mandate a specific allocation methodology in the event of disagreement, Delaware’s policyholder-friendly “larger settlement rule” applies by default. The court rejected the insurer’s argument that references to relative legal exposures and benefits constituted a binding allocation framework, finding instead that the common relative-exposure language governs negotiations only and does not displace applicable law when negotiations fail.

In doing so, the court clarified the distinction between policies that merely identify factors to consider during allocation discussions and those that expressly require a particular allocation method to apply. This decision reinforces the importance of allocation wording at policy placement and highlights how seemingly minor drafting differences can have a significant impact on the amount of settlement proceeds recoverable under D&O insurance. Although the court determined that the larger settlement rule governs, it left unresolved the factual question of whether the uninsured parties’ conduct actually increased the settlement amount, an issue on which the insurer bears the burden of proof.

For more analysis and practical takeaways from this decision, please see Geoffrey Fehling's recent client alert discussing the Hemisphere ruling in more detail.