National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Evanston, the insured, OEA, Inc., obtained a commercial general liability policy with an effective period of May 1, 1998 through May 1, 1999. The policy provided coverage for “CLAIMS FIRST MADE…DURING THE POLICY PERIOD,” defining a claim as “a notice received by the insured of an intention to hold the insured responsible for an Occurrence involving the policy and shall include service of suit or institution of arbitration proceedings against the insured.” Id. at *4.

In 1996 and 1997, two employees of OEA’s wholly-owned subsidiary, Aerospace, were injured in an accident and filed separate lawsuits against OEA and Aerospace. Their complaints alleged liability under theories of negligence, products liability, premises liability, and strict liability. Aerospace, which was not an insured under the Evanston policy, was served with the first complaint on June 10, 1997, and forwarded the complaint immediately to OEA. OEA was served with the second complaint on November 3, 1997. Upon receipt of both complaints, OEA claimed that it decided that the claims were exclusively workers compensation claims and notified its workers compensation carrier.

OEA settled both suits. Under a full reservation of rights, Evanston paid $1,544,924.32 in defense and settlement costs. Evanston then filed suit against OEA to recover the amounts paid. The U.S. District Court for the Eastern District of California granted Evanston’s motion for partial summary judgment, holding that the claims were not covered because they were first made in 1997, before the Evanston policy period began. The court also granted Evanston’s subsequent summary judgment motion, awarding Evanston reimbursement of the amounts it paid for settlement and defense of the claims plus prejudgment interest.

On appeal, OEA asserted that the district court wrongly decided a disputed fact. OEA asserted that OEA did not have notice of the complaints until the policy period began because it did not realize that the plaintiffs intended to hold OEA liable for their injuries until October 1998. OEA presented evidence that OEA and Aerospace were frequently confused as corporate entities, that the plaintiffs did not seek to serve OEA and Aerospace as separate entities in 1997, and that various individuals at OEA held subjective beliefs that the complaints did not state a cause of action against OEA. Relying on the district court’s statement that the policy’s definition of “claim” as a “notice” “incorporates a reasonable person standard,” OEA argued that the issue of “whether it was reasonable for OEA to read the complaints as not evincing an intent to hold OEA liable for injures” was a disputed fact, making summary judgment improper. Id. at * 8.

Based on the undisputed content of the complaints, along with the undisputed fact that OEA received both complaints before the policy period began, the Ninth Circuit held that there was no genuine dispute as to when OEA received notice of the plaintiffs’ intent to hold OEA responsible for their injuries. The court noted in particular that both OEA and Aerospace were clearly named as defendants and that the products liability claim “alleged that OEA alone sold the gunpowder, storage bins, and trays, protective gear, and other products that contributed to their injuries.” Id. at *10. OEA’s subjective beliefs were unreasonable, and the Ninth Circuit determined that summary judgment on the issue was proper because there was no room for a reasonable difference of opinion on the issue.

The Ninth Circuit also upheld the award of reimbursement of the defense and settlement costs that Evanston paid, stating that because the claims were made prior to the policy period, OEA received more than its bargained-for coverage. The Ninth Circuit rejected OEA’s argument that prejudgment interest should not apply in the insurer-insured context, holding, under Levy-Zentner Co. v. Southern Pac. Trans. Co., 74 Cal. App. 3d 762 (1977), “prejudgment interest is available to every person who is entitled to recover damages that are certain.” Evanston, supra, at * 15.

In affirming Evanston decision, the Ninth Circuit emphasized that “a foolish or overly sophisticated failure or refusal to realize that one is the intended object of suit would be of no assistance to an insured.” Id. at * 9. Conversely, notifications that are vague, confusing, or indefinite to a reasonable insured do not amount to a claim.
 

The WCAB awarded death and workers’ compensation benefits to the claimants covered by Travelers’ policy. Travelers petitioned the WCAB pursuant to Section 3600(b) for a credit in the amount of the settlement against any future benefits Travelers would have to pay. The WCAB denied the petition because Tosco had waived Travelers’ right to the credit under Section 3600(b). Travelers filed a lawsuit alleging Tosco breached the policy by waiving Travelers’ right to the statutory credit without its consent. The district court ruled for Tosco and against Travelers on cross-motions for summary judgment.

Travelers, which had paid $1.4 million in benefits and anticipated paying $2.1 million more in future benefits, argued Tosco breached the policy’s excess payments and voluntary payments clauses. The excess payments clause provided Tosco was “responsible for any payments in excess of the benefits regularly provided by the workers compensation law….” Travelers argued Tosco’s waiver of the credit provided by Section 3600(b) and failure to reimburse Travelers for the amount of the credit was a breach of the excess payments clause because benefits “regularly provided” by the workers compensation law would be offset by the right to a credit under Section 3600(b). Tosco’s waiver forced Travelers to make “excess” payments since the workers’ compensation benefits Travelers was paying and would continue to pay would have been reduced by the amount of the settlement but for Tosco’s waiver.

The Ninth Circuit disagreed, holding Travelers was not making “excess” payments since the payments were “regularly provided” workers’ compensation benefits. The court reasoned that while the amount of the benefits might have been reduced due by the settlement had the credit not been waived, the waiver did not increase the workers’ compensation benefits beyond those “regularly provided” by law. Noting that the WCAB held an employer has the authority to waive a compensation carrier’s right to a credit under Section 3600(b), such credits are not always included when calculating “regular” benefits.

Travelers also argued Tosco’s waiver breached the policy’s “voluntary payments” clause which provided the insured could not “voluntarily make payments, assume obligations or incur expenses, except at [Tosco’s] own cost.” Travelers argued Tosco’s waiver was a voluntary act that assumed an obligation to pay workers’ compensation benefits despite the statutory right to a credit for the settlement. The court disagreed and held the voluntary payments provision did not apply to a “non-monetary requirement simply to refrain from doing something.” Thus, the court found the policy did not require Tosco to refrain from waiving Travelers’ right to a credit under Section 3600(b) and, thus, Tosco’s waiver did not breach the policy.