In Vizio Inc. v. Arch Insurance Co., a case stemming from a class action settlement, the Ninth Circuit Court of Appeals clarified several areas of California law involving the interaction of primary and excess insurance coverage, as well as what constitutes adequate notice to excess carriers.

Beginning in 2014, television producer Vizio started selling televisions that automatically tracked what customers were watching and sent that information back to Vizio. The company then sold this information to advertisers and data aggregators, all without the consent of its customers. At all relevant times, Vizio was covered by a primary policy issued by Navigators Insurance providing $5 million in coverage, and by an excess policy issued by Arch Insurance that “followed form” to the Navigators policy and provided coverage only upon exhaustion of the primary policy.

Alleging violations of several state and federal privacy protection acts, Vizio customers brought suit as part of several class actions that were ultimately aggregated into one Central District of California action. In the litigation that followed, Vizio agreed to settle the aggregated class action for $17 million. Following a negotiated settlement with its general liability insurer, Vizio paid more than $15 million out of pocket for settlement of the underlying litigation, an amount that exhausted the underlying Navigators policy. After several of the lawsuits against Vizio were filed, but before reaching any type of settlement that would have triggered the excess coverage on the Arch policy, Vizio notified Arch of the pending litigation. Arch did not provide Vizio with a coverage determination, and Vizio did not provide any substantive updates about the litigation nor consult with Arch regarding the $17 million settlement.

Arch declined to make any payments to Vizio following the settlement, and Vizio filed suit, alleging Arch failed to provide benefits pursuant to the terms of its excess insurance policy. Following several amended complaints, Arch filed a fifth motion to dismiss, arguing that Vizio failed to provide proper notice to Arch of a claim after the underlying Navigators policy limit was exhausted. The trial court in the Central District of California agreed, granting Arch’s motion to dismiss, and Vizio appealed.

On appeal, the Ninth Circuit affirmed the trial court’s decision but on completely different grounds. Notably, the appellate court overturned the trial court’s holding that notice prior to exhaustion of the underlying policy was inadequate. The court instead focused on whether Vizio obtained Arch’s consent prior to settling the litigation.

Rejecting Vizio’s argument that only coverage portions of the Arch policy “follow form” to the Navigators policy, the court noted that a “following form excess policy has the same terms and conditions as the underlying primary policy,” which, in this instance, contained a clear consent provision. Because Vizio failed to obtain consent from Arch prior to settling, the court found it to be in breach of the policy and held Arch had no duty to indemnify Vizio.

The court also rejected Vizio’s argument that, even if it did not obtain consent from Arch prior to settling, Arch breached the terms of the policy by failing to properly respond to its pre-settlement notification of a potential claim. Differentiating between “notice” of a claim and “proof” of a claim, the court held that Vizio’s initial notification was simply “notice” that did not require a response from Arch, as opposed to actual “proof” that does require a response, defined by California insurance regulations as evidence of a claim that “reasonably supports the magnitude or the amount of the claimed loss.” More importantly, the court held that the burden is on the insured to confirm whether the carrier is providing coverage, regardless of whether the carrier responds to any type of notice. As the court noted, “it is only when the insured has requested and been denied coverage by the insurer that the insured may ignore the provisions forbidding the incurring of defense costs without the insurer’s prior consent.”