In Screen Actors Guild Inc. v. Federal Insurance Company, et al., 2013 WL 3525273 (C.D. Cal. July 11, 2013), the United States District Court for the Central District of California held that Federal Insurance Company (“Federal”) was not obligated to reimburse an attorneys’ fee award against the Screen Actors Guild Inc. (“SAG”) which was paid as part of a settlement in a breach of contract suit because the breach of contract claim did not involve a “Wrongful Act” as defined by the Federal policy.
The suit against SAG was filed in September 2007, and brought by Ken Osmond, who previously played Eddie Haskell on the popular television show Leave it to Beaver. He sued on behalf of himself and other SAG members, and alleged that SAG had collected over $8 million in royalties that should have been distributed to the SAG members. The suit sought restitution, compensatory and punitive damages, an accounting, a constructive trust, attorneys’ fees and costs, prejudgment interest, and injunctive relief.
SAG tendered the suit to Federal in October 2007. Federal agreed to reimburse SAG’s defense costs in the suit, but denied indemnity coverage. In September 2010, SAG entered into a settlement agreement that required it to use reasonable efforts to allocate and pay 90% of the royalties to the class participants.
In March 2011, the court approved the settlement, and awarded a $15,000 enhancement payment to Osmund, and a $315,000 award for class counsel fees and costs, for a total award of $330,000. SAG tendered the judgment to Federal for reimbursement, which Federal declined. SAG sued Federal for breach of contract and bad faith. The parties eventually brought cross-motions for summary judgment on the issue of whether Federal had a duty to reimburse SAG for the $330,000 judgment.
The court ruled in Federal’s favor. SAG had acknowledged it had a preexisting duty to distribute the royalties. If a party to a contract fails to pay amounts due under the agreement and is sued, it cannot obtain a windfall by having its payments covered by an insurance policy covering only “wrongful acts”.
The SAG decision is relevant to the commonly disputed issue of whether coverage is afforded for attorneys’ fee awards when the underlying causes of action are not covered. As the SAG court explained, if the underlying action does not allege covered wrongful acts, coverage cannot be bootstrapped based solely on a claim for attorneys’ fees.