Since the dawn of time, one of the biggest D&O insurance coverage issues has been allocation – that is, the division of loss between covered and noncovered claims or between covered and noncovered parties. After a series of developments in the mid-90s, including the standardization of policy allocation language, litigated allocation disputes became less frequent (though to be sure, allocation is still very much an issue in many D&O insurance claims.) However, in recent years, there has been a series of Delaware court decisions revisiting both allocation issues and what has become the standard D&O insurance allocation provision.
In the latest example of the reemergence of litigated allocation disputes, a Delaware court has held that the “Larger Settlement Rule” should be used to resolve an allocation dispute, notwithstanding the presence in the applicable allocation provision of relatively standard “relative exposures” language. With this latest decision, and in light of the other recent Delaware allocation decisions, some differentiating principles can be discerned, as discussed below.
A copy of the Delaware Superior Court’s June 18, 2026, decision in the Hemisphere Media Group case can be found here. The July 10, 2026, LinkedIn post of Geoffrey Fehling of the Hunton Andrew Kurth law firm discussing the court’s allocation decision in the Hemisphere case can be found here.
Background Regarding the Underlying Lawsuit
In May 2023, former stockholders of Hemisphere Media Group filed a class action lawsuit in the Delaware Court of Chancery, relating to a transaction in which Hemisphere’s controlling stockholder bought out Hemisphere’s minority stockholders, as well as to a related transaction through which Hemisphere divested itself of part of its business.
In the stockholder action, the plaintiffs asserted fiduciary duty claims against two sets of defendants. The first group was the “Director Defendants,” consisting of seven members of Hemisphere’s board of directors. The plaintiffs alleged that the directors breached their fiduciary duties by agreeing to the transactions, which, the plaintiffs contended, were not fair to stockholders. The second group was the “Controller Defendants,” which included three entities involved in controlling Hemisphere. The plaintiffs alleged that the Controller Defendants breached their fiduciary duties as Hemisphere’s controlling stockholders.
Of key interest to the subsequent insurance coverage dispute, all parties agreed that the Controller Entities are not Insured Persons under Hemisphere’s D&O insurance program.
After the defendants’ motions to dismiss the stockholder action were denied in part, the parties to the stockholder action settled the case for $15 million.
Background Regarding the D&O Insurance Coverage Dispute
At relevant times, Hemisphere maintained a program of D&O insurance consisting of a layer of primary insurance and several layers of excess insurance. Hemisphere submitted the stockholder action to its insurers as a claim under its D&O insurance program. Other insurers in the D&O insurance program have paid toward defense costs and toward the settlement. However, one of the excess insurers declined to contribute toward the settlement amount.
Hemisphere filed a coverage lawsuit against the non-paying excess insurer, alleging that the insurer had breached its contract, and seeking a judicial declaration that settlement and defense costs incurred in the stockholder action were covered under the excess insurer’s policy. Among other issues in dispute in the coverage lawsuit was the question of how the settlement should be allocated between covered and uncovered claims, the dispute arising because there were covered and uncovered defendants in the underlying lawsuit.
Hemisphere filed a motion for summary judgment on the allocation issue. Hemisphere argued that the allocation method to be applied is the “Larger Settlement Rule,” which provides that a settlement is to be allocated to covered claims except to the extent that the insurer shows non-covered conduct or parties increased the settlement amount.
The insurers opposed the motion, arguing in reliance on the allocation provision in the policy that the allocation method to be applied is the “relative exposures” standard, which provides that defense and settlement costs in a D&O lawsuit must be apportioned based on the comparative legal and financial liabilities of the covered parties and uncovered parties, or between the covered and uncovered matters.
The Relevant Policy Language:
The excess policy in dispute in the coverage lawsuit follows form to the primary policy. The primary policy provides with respect to allocation as follows:
(D) If both Loss covered by this Policy and loss not covered by this Policy are incurred, either because a Claim, Interview or Investigation Demand made against the Insured contains both covered and uncovered matters, or because a Claim, Interview or Investigation Demand is made against both the Insured and others (including the Company for Claims other than Securities Claims) not insured under this Policy, the Insured and the Insurer will use their best efforts to determine a fair and appropriate allocation of Loss between that portion of Loss that is covered under this Policy and that portion of loss that is not covered under this Policy. Additionally, the Insured and the Insurer agree that in determining a fair and appropriate allocation of Loss, the parties will take into account the relative legal and financial exposures of, and relative benefits obtained in connection with the defense and/or settlement of the Claim, Interview or Investigation Demand by, the Insured and others.
(E) In the event that an agreement cannot be reached between the Insurer and the Insured as to an allocation of Loss, as described in (D) above, then the Insurer shall advance that portion of Loss which the Insured and the Insurer agree is not in dispute until a final amount is agreed upon or determined pursuant to the provisions of this Policy and applicable law.
Historical Background on the Allocation Issue
Some background on D&O insurance allocation issues is pertinent here, as it provides important context for the parties’ positions on allocation. (This summary is adapted from my February 2020 discussion of the Delaware Superior Court’s decision in the Murdock case, about which more below.)
Back in the day, D&O insurance policies did not have express allocation provisions. Insurers argued then, in reliance in a 1986 Southern District of New York decision in the Pepsico case, that amounts should be allocated between covered and non-covered amounts, based on the “relative exposure” of the defendants to the covered and non-covered matters.
Policyholders urged that a different rule should apply, in reliance on a 1990 7th Circuit decision in the Continental Bank case, which had first articulated what became known as the “larger settlement rule.” Under the “larger settlement rule” as it ultimately was described by subsequent court decisions, allocation is appropriate “only if, and only to the extent that, the defense or settlement costs of the litigation were, by virtue of the wrongful acts of the uninsured parties, higher than they would have been had only the insured parties been defended or settled.”
Insureds and policyholders duked it out for several years, with insurers urging the “relative exposures” allocation standard based on the Pepsico-line of cases, and policyholders urging the “larger settlement rule” allocation standard in reliance on the Continental Bank case.
Then in 1995 there was a trio of federal appellate cases that came down squarely in favor of the “larger settlement rule” – the Nordstrom and Safeway cases in the Ninth Circuit (which can be found here and here), and the Caterpillar case in the Seventh Circuit.
In the wake of the 1995 trio of appellate cases, several things happened in quick succession. First, insurers modified their standard D&O insurance policies to incorporate entity coverage, which eliminated many of the disputes over allocation between covered parties (individual directors and officers) and non-covered parties (before entity coverage, the company itself). Next, insurers modified their policies to expressly include allocation provisions – much like the allocation provision in dispute in the Hemisphere policy – that incorporated the “relative exposures” test. Almost all D&O insurance policies these days contain an allocation provision, and most expressly refer to the “relative exposures” standard.
Background Involving Recent Allocation Disputes in Delaware’s Courts
After the D&O insurers’ adoption of relatively standardized allocation language, litigated allocation disputes became less frequent. Indeed, between 2007 and 2020, I did not have occasion to write on this blog about allocation issues. However, in 2020, Delaware courts published the first of several decisions addressing allocation issues.
The first of these decisions was the January 2020 Delaware Superior Court decision in the long-running Dole Foods insurance coverage (often referred to as the Murdock case). As discussed here, in the Murdock case, Delaware Superior Court Judge Eric Davis held that, notwithstanding the presence in the allocation provision at issue in that case of the now-standard allocation provision reference to the “relative exposures” test, the allocation method to be used in allocating between covered and noncovered loss is the “larger settlement rule.”
Judge Davis said that, in his view, the allocation provision required the parties to use their best efforts to resolve the allocation dispute, and to do so with reference to the “relative exposures” between covered and noncovered matters or parties. The provision, Judge Davis said, “does not address the situation where the parties fail to agree. In the absence of language specifying what is to be done if the parties do not agree, and in light of the policy language, the larger settlement rule applies.”
In a March 2021 decision, discussed here, the Delaware Supreme Court affirmed Judge Davis’s ruling, largely on the same grounds on which Judge Davis had relied. The court said, among other things, that “any type of pro rata or relative exposures analysis seems contrary to the language of the Policies,” and determined that the trial court had “properly applied the Larger Settlement Rule.”
The Murdock courts’ resolution of the allocation issues in that case stands in contrast to the outcome of the allocation issues in the long-running Verizon insurance coverage dispute. In its December 2020 opinion in the Verizon case, the Delaware Superior Court, in reliance on the specific allocation language at issue in that case, held that the larger settlement rule did not apply, but rather the relative exposures test applied. The contrast in outcomes between the Murdock case and the Verizon case is largely due to the differences in policy language at issue in the two disputes.
The language at issue in the Verizon case provided as follows:
In connection with any Claim, other than a Claim that is or includes a Securities Claim, with respect to: (i) Defense Costs jointly incurred by, (ii) any joint settlement entered into by, or (iii) any Judgment of joint and several liability against any Organization and any insured Person, there shall be a fair and equitable allocation as between any such Organization and any such Insured Person, taking into account the relative legal and financial exposures and the relative benefits obtained by any such Insured Person and any such Organization, without any presumption that the coverage afforded to the Insured Person shall in any way reduce the allocation to the Organization which shall not be Insured for such allocation. In the event that a determination as to the amount of Defense Costs to be advanced under the policy cannot be agreed to, then the Insurer shall advance Defense Costs excess of any applicable retention amount which the insurer states to be fair and equitable until a different amount shall be agreed upon or determined pursuant to the provisions of this policy and applicable law.
The Superior Court distinguished this policy language from the language at issue in Murdock, saying that it “unambiguously provides a method that is independent of any agreement and reads as a completely controlling allocation method” – that is, the clause instructed that “there must be a fair and equitable allocation that accounts for the relative legal and financial exposures and the relative benefits obtained by those insured and uninsured.”
The June 18, 2026, Opinion
In a detailed June 18, 2026 opinion, Superior Court Judge Patricia Winston held that the policy at issue in the Hemisphere case “does not direct the parties to apply a specific allocation method,” in which case, the Court said, Delaware law “provides that the appropriate allocation method is ‘the Larger Settlement Rule.’”
In reaching this conclusion, Judge Winston said that in this case, like in Murdock but unlike Verizon, “the Policy lacks language mandating an allocation method.” Rather, as in Murdock, the allocation provision provides only that they will use their best efforts to determine a fair and appropriate allocation. The provision then specifies the considerations the parties will “take into account” in making those efforts to agree – that is “the relative legal and financial exposures of, and relative benefits obtained” by the insured and by other persons.
The provision then specifies if there is a disagreement, then the insurer will advance the portion of loss not in dispute, and a final amount will be “agreed upon or determined pursuant to the provisions of this Policy and applicable law.” And, the Court added, applicable Delaware law “directs that the Larger Settlement Rule shall apply.”
The insurer had tried to rely on the Verizon court’s analysis, which led that court to rely on the relative exposures test rather than the larger settlement rule. But Judge Winston said that in Verizon, “unlike here and Murdock,” the policy contained language instructing that “there must be,” as the Court observed, “a particular allocation regardless of whether there was agreement.” That mandate, Judge Winston said, “is not present here.” Murdock, and not Verizon, controls here, Judge Winston said.
Finally, Judge Winston noted that, “as Delaware courts have recognized,” the Larger Settlement Rule “best upholds the expectations of the insured in purchasing coverage.”
Discussion
I went to some lengths above to review the long history of D&O insurance allocation disputes. While it all may seem to some to be ancient history, and in many ways it is ancient history, it is important to know the history to understand how the “relative exposures” language got in the policy in the first place, and to understand what it was intended to do.
It is no accident that Judge Winston quoted extensively in her opinion from a thirty year old law review article about allocation disputes written by my good friends, the late Joe Monteleone and his then-colleague Nick Conca. From the mere presence of Judge Winston’s references to Joe and Nick’s article, you will understand that the issues involved in this case have an ancient pedigree. Indeed, just talking about them makes me feel hundreds of years old.
One very important thing to understand from that ancient pedigree of the allocation issues is that the whole point of the inclusion of the “relative exposures” language was, from the insurers’ perspective, to provide in the policy that allocation disputes were to be resolved using the “relative exposures” test, and not using the Larger Settlement Rule.
All of that said, I think where we are now given the recent history of allocation decisions in the Delaware courts is that whether or not the “relative exposures” test will in fact be applied to resolve allocation disputes will depend on the specific language used in the allocation provision.
If the language at issue resembles the allocation provisions at issue in Murdock and in Hemisphere, a Delaware court will rule that the provision does not specify a method (because the “relative exposures” language is directed only at the parties’ “best efforts” to agree on an allocation, and does not specify what method a court is to use in determining an allocation dispute), and therefore that by operation of Delaware law, the Larger Settlement Rule applies.
If however the language at issue resembles the allocation provision at issue in Verizon, a Delaware court will hold that the provision does specify an allocation method for courts to use in resolving allocation disputes, and the “relative exposures” are not merely factors for the parties to take into account in using their best efforts to resolve an allocation dispute.
Insurer side advocates seeking to ensure that allocation disputes will be resolved in the courts by application of the “relative exposures” test will want to study the language at issue in Verizon, and how it differed from the language at issue in Murdock and Hemisphere. The key is that the language in Verizon expressly said that “there shall be a fair and equitable allocation … taking into account the relative legal and financial exposures and the relative benefits obtained.” It did not say, as with the language at issue in Murdock and Hemisphere, only that (at least as interpreted by the courts in those cases) the “relative exposures” are merely factors for parties to use as part of their “best efforts” to resolve the dispute.
Policyholder side advocates, by contrast, will prefer the language in Murdock and Hemisphere, as it will, at least according to the view of the Delaware courts, be interpreted not to provide a method for courts to use in resolving allocation disputes, and so the court will apply the Larger Settlement Rule, by operation of law. This, Judge Winston said, will best uphold the expectations of policyholders in purchasing insurance coverage.
In his LinkedIn post discussing the Hemisphere decision, to which I linked above, Geoffrey Fehling noted that Judge Winston’s opinion addressed only the question of whether the Larger Settlement Rule applied, but not how the rule applied to the settlement at issue in the insurance dispute. That question, Fehling notes, is left to another day while the case proceeds under standards required by the Larger Settlement Rule.
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