Hilco Capital, LP v. Federal Insurance Co.

Federal Insurance Company (Federal) (plaintiff) insured the directors and officers of Payless Cashways, Inc. (Payless) against liability in excess of the $10 million coverage provided by Payless’s primary carrier, National Union Fire Insurance Company (National Union). Federal’s claims-made, directors-and-officers policy specified that Federal’s consent would be required for any settlement offer, but that Federal would not unreasonably withhold that consent. Payless wanted to settle a long-running lawsuit filed by Hilco Capital, LP (Hilco) (defendant). National Union participated in the settlement negotiations, but Federal chose to stay out of the talks for tactical reasons. The negotiators finally agreed to arbitrate a single issue. If the arbitrator ruled for Payless, Hilco would recover only low-end damages within the limits of National Union’s policy. However, if the arbitrator ruled against Payless, Hilco’s high-end damages would not only exhaust National Union’s coverage but also would dip deeply into Federal’s excess coverage. National Union approved the settlement. Federal refused to consent to the settlement, believing that Hilco would settle for a relatively low amount and that a single-issue arbitration eliminated other issues that could benefit Payless if the case reached trial. Nevertheless, the arbitration proceeded, resulting in a victory for Hilco. Federal refused to pay the excess damages and sued for a declaratory judgment that Payless had breached the Federal policy’s consent clause. The trial jury ruled for Federal. Hilco appealed to the Delaware Supreme Court, challenging the trial court’s jury instructions to consider the totality of the facts and circumstances known to Federal at the time.