Ninth Circuit Reaffirms Policyholder Right to Sue Recalcitrant Excess Insurer

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A new opinion published on March 21, 2017 from the Ninth Circuit (Teleflex Medical Inc. v National Union, Case no 14-56366 ) affirmed a $6+ M judgment against AIG subsidiary National Union, who was excess a primary policy issued by CNA.  This is an excellent result for policyholders, and a warning to recalcitrant excess insurers.

The Insured purchased two insurance policies that covered disparagement claims – a primary policy issued by CNA, and an excess policy issued by National Union.  The Insured was defended by CNA in an underlying lawsuit, and the Insured and primary insurer kept National Union informed throughout the litigation.  The underlying lawsuit finally developed to the point settlement was advisable, and the claimant, Insured, and CNA all agreed to a settlement that would require about $3.75 million from the $14 million National Union excess policy.

National Union not only refused to consent to the settlement – which, of course, the Insured, claimant and CNA all agreed to make—but also refused to undertake the defense of the Insured.  The court found the Insured was entitled to sue National Union for breach of contract and bad faith and was entitled to the rebuttable presumption that the settlement was reasonable because National Union failed to undertake the defense when it refused to consent to the settlement.  Under the decision in Diamond Heights HOA v National Am. Ins. Co. 227 Cal. App. 3d. (1991), the Court held an excess insurer only has three choices in that context: 1) approve the settlement; 2) reject it and take over the defense, or 3) reject it and decline to defend, but face a potential lawsuit by the insured seeking contribution and bad faith damages. The Diamond Heights court also found an excess insurer who rejects a settlement and refuses to defend thereby waives of the “no action” (and “voluntary payments”) clauses in their contracts.

Since National Union refused to undertake the defense—i.e., breached the contract and violated the Insured’s rights under the implied covenant of good faith and fair dealing—it was vulnerable to this later suit brought by the Insureds.  That case went to trial and the jury found the settlement reasonable and National Union liable for breach of contract and bad faith—the ultimate judgment exceeded $6 million.  The Ninth Circuit decision, which affirmed the trial court, contains an excellent discussion of the public policy behind the Diamond Heights decision, and later decisions applying it post-WallerWaller v. Truck Ins. Exchange, 11 Cal 4th 1 (1995) held that an insurance company does not waive coverage defenses it fails to mention in its correspondence with the insured—and in its decision did not address the Diamond Heights decision.

National Union argued the Waller Supreme Court decision – which held that an insurer does not waive coverage defenses if not in their coverage letters – somehow overruled Diamond Heights.  This argument was soundly rejected by the trial court and Ninth Circuit.  Among the arguments National Union made were that the Insured should have had to prove waiver of the “no action” and “voluntary payments” clauses by clear and convincing evidence –not by a preponderance of the evidence!  This argument was also soundly rejected by the Ninth Circuit.  Of course, as all insurers will do, National Union also argued for a “genuine dispute” instruction—which the Ninth Circuit also rejected for good reason –not only because it really does not apply in the context of a liability policy, but also because it is subsumed in the standard CACI instruction.  The jury had to determine the settlement was reasonable as part of that instruction.  The opinion makes for good reading because it lays out the extreme arguments National Union made before a jury (who fortunately did not buy any of them).  The opinion also affirms the insured’s recovery of Brandt fees, and that the trial court reasonably apportioned only 10% of the fees to the bad faith claims thus allowing a 90% recovery!

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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