In National Union Fire Ins. Co. of Pittsburgh v. Seagate Technology, Inc., Case No. C 04-01593, the District Court for the Northern District of California ruled that an insurer was not in violation of its duty to defend where it stopped defending its insured following a trial court’s ruling absolving it of its duty to do so, even though the victory was later overturned on appeal. In what was an issue of first impression, the District Court’s decision gives insurers the right to halt defense payments in reliance on a final judgment while an appeal is pending, without fear of claims alleging breach of contract or bad faith.
In 2000, a lawsuit was filed against Seagate which triggered National Union’s duty to defend. In 2004, National Union filed a declaratory action in the Northern District of California seeking a judgment that it had no obligation to defend the action brought against Seagate. After another six years of litigation in both the underlying action and the coverage suit, the District Court held that while the insurers’ duty to defend began on November 1, 2000, it ended on July 18, 2007. Thereafter National Union stopped paying Seagate’s defense costs.
On appeal it was held that National Union’s duty to defend did not in fact terminate in 2007. Seagate then argued that by relying on the trial court’s ruling National Union was in breach of its contractual duty to defend it. Seagate sought fees and prejudgment interest in excess of $20 million.
The District Court noted that the duty to defend typically terminates upon a judicial determination that the insured does not have a potentially-covered claim. The court then acknowledged that a favorable summary judgment order is just such a determination. While acknowledging that the losing party has a right to appeal, the court, citing Maness v. Meyers, 419 U.S. 449, 458 (1975), reasoned that, absent a stay, the losing party must comply with the order pending appeal. Because Seagate did not seek a stay, National Union did not act wrongfully in relying on the District Court’s final judgment. To hold National Union in breach of contract for relying on a Rule 54(b) final judgment would serve to convert that judgment into one that is merely provisional.
