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Court of Appeal Decides That Some Insurers Need Not Fund Settlements - "Judgment" Required

By: Carl L. Blumenstein
09/26/07

Some California policyholders may risk forfeiting liability insurance coverage if they settle tort cases – instead of fighting all the way to final judgment -- under a recent appellate ruling.

Choosing to compromise rather than litigate, an aerospace contractor entered into a settlement by which it agreed to pay over $170 million to clean up contaminated ground water in the San Gabriel Valley.  Because its excess liability insurers refused to fund the settlement, the policyholder sued for coverage.

On September 13, California’s Third District Court of Appeal held that excess insurers that issued multi-million dollar policies were not obligated to indemnify their policyholder for a settlement, only for a "judgment."  Aerojet-General Corp. v. Commercial Union Ins. Co., 2007 WL 2671279.  The court explained that its decision was "compelled" by an earlier decision of the California Supreme Court that limited the indemnity obligation of primary insurers to "money ordered by a court."  Certain Underwriters at Lloyd’s of London v. Superior Court, 37 Cal. 4th 945 (2001), aka "Powerine I."

The Powerine I Court held that insurers have no duty to indemnify policyholders for amounts paid to satisfy administrative agency "cleanup" orders, which are issued outside the context of a lawsuit and outside of court.  Such sums are not "damages"—i.e., "money ordered by a court." 

The recent Aerojet case, by contrast, did not involve cleanup expenses incurred out of court in an administrative agency proceeding, but, instead involved a settlement of four pending lawsuits.  Applying the "bright-line rule" that the Powerine I Court articulated, the Third District Court of Appeal explained:

The case before us presents the next question to be answered in this ongoing line of opinions:  whether settlement costs negotiated within the context of a court suit are "damages."  Resting our decision as we must on the express language of defendants’ excess policies and on the Supreme Court’s interpretation of the term "damages," we conclude the settlement costs incurred by Aerojet are not damages, and thus are not within the policies’ indemnity obligations.

How broadly the ruling will apply, how many policyholders will be affected, and how many settlements will be scuttled are questions that remain to be answered.  Certainly, some liability policies, both primary and excess, contain terms that are more likely to cover settlements.  Some insurers will honor their obligations to fund settlements, at least in some circumstances.  But policyholders can also expect renewed recalcitrance from their liability insurers:  Insurers will invoke this decision (possibly even in situations where it is not technically applicable) to deny coverage for settlements. 

Policyholders hope that the California Supreme Court will grant review of this decision to clarify, among other things, whether Powerine I was intended to overturn longstanding public policy favoring settlements and whether it was intended to absolve excess insurers of any duty to participate in settlements of underlying cases.

In the meantime, policyholders should take steps to maximize the value of their insurance coverage when settling lawsuits:

·     Check your policy language.  Although standard comprehensive general liability policy language requires insurers to indemnify "damages," some non-standard policies more broadly indemnify for both "damages" and "expenses," which are often defined to include costs of settlement. 

·     If you are defending a lawsuit, redouble your efforts to have all insurers agree, in writing, to the terms of any settlement.

·     Carefully document your efforts to keep insurers apprised of settlement negotiations and, even more importantly, to obtain consent from recalcitrant excess insurers.  This will provide a basis, if necessary, for a bad-faith-refusal-to-settle lawsuit against them—a remedy Justice Kennard identified in her dissent to Powerine I.

·     Consider whether to stipulate to a "judgment" as a condition of settlement or, alternatively, structure settlements to require court approval and a court order requiring payment.

It is to be hoped that the Supreme Court will accept this case for review and recognize the primacy of longstanding public policy in favor of settlements.  Until that happens, policyholders can only be alert and press their positions.

Carl L. Blumenstein, partner at Nossaman, specializes in insurance coverage and complex business litigation disputes.  He can be reached at cblumenstein@nossaman.com.

Deborah E. Beck is a senior associate in the firm’s Litigation practice, specializing in insurance coverage, environmental, and appellate matters.  She can be reached at (415) 438-7254 or dbeck@nossaman.com.

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