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 dispute in Vigilant Ins. Co. v. The Bear Stearns Co., No. 25 (N.Y. March 13, 2008) arose out of a joint investigation by the SEC and various states attorney-general (hello, Eliot) of claimed conflicts of interest between in-house research and investment banking at ten major financial service firms on Wall Street.  Following meetings with regulators, Bear Stearns signed a settlement in principle on December 20, 2002 wherein it committed to pay $50 million in retrospective relief, together with $25 million to fund independent research and $5 million for investor education.  The document stated that it was subject to final approval by the SEC and state regulators.  In April 2003, the parties entered into a final consent agreement memorializing these terms.  This agreement was filed with a U.S. District Court in Manhattan which approved it in October 2003.  Under the terms of the final agreement, Bear Stearns paid a $25 million penalty to the SEC; disgorged $25 million in past profits and agreed to fund $25 milion for research and $5 million for investor education.  Bears Stearns agreed as part of the settlement not to seek insurance coverage for the $25 million penalty.

Three days after signing the consent agreement, Bear Stearns had belatedly given notice of the settlement to its excess professional liability insurers:  Vigilant, Gulf and Federal.  Vigilant had written a $10 million layer excess of a $10 million self-insured layer.  Federal and Gulf (now Travelers) underwrote a $40 million following form excess layer over that.

These carriers disclaimed coverage due to the insured's failure to give notice to them before settling.  Additionally, the insurers noted that their policies contained an exclusion for claims arising out of investment banking.  Finally, issues were raised with respect to whether the disgorgement penalty or sums paid for investment research or education were a covered loss.

In the ensuing coverage litigation, a state trial declined to grant summary judgment to the carriers, finding issues of fact with respect to whether the settlement in principle constituted a breach or whether the investment banking exclusion applied.  The Supreme Court also ruled that the insurers could not look beyond the terms of the settlement to determine whether the $25 million payment was for disgorged ill-gotten gains.  The court also rejected the insurers' "loss" argument.

In 2006, the Appellate Division agreed that issues of fact precluded summary resolution of the insured's claimed breach of the policies' consent to settle condition but granted summary judgment against the carriers on their alternative defenses to coverage.  The Appellate Division subsequently agreed to certifiy its ruling to the New York Court of Appeals.

In its analysis, the Court of Appeals focused on the consent to settle clause, which stated that Bear Stearns would not enter into any settlement or confess liability for an amount over a $5 million threshold without first obtaining its insurers' consent, said consent not to be unreasonably withheld.  The court concluded that Bear Stearns clearly breached this condition to coverage when it signed the consent agreement in April 2003 agreeing to pay $80 million to state and federal authorities.  Unlike the lower courts, the Court of Appeals declined to assign any significance to the fact that the consent agreement did not become final until it was approved by a U.S. District Court the following October.  The court noted that even though court approval was required, Bear Stearns was not free to walk away from its committments in the interim, nor was the consent agreement drafted so as to be subject to final approval by the insurers.  In light of its sophistication as a business entity, the court concluded that Bear Stearns could not on the one hand enter into insurance contracts stating that its insurers would not be liable for settlements entered into without their consent and then execute a consent agreement calling for the payment of millions of dollars without informing the insurers of the terms of the settlement.

The Court of Appeals therefore directed that judgment enter for the insurers on the basis of the insured's breach of the consent to settle clause.  As a result, the court did not reach the issue of whether portions of the settlement payment that called for payments into an investor educational fund or for disgorgement of profits would otherwise be a covered loss.

In light of the swirl of political and legal events now going on in New York state concerning conditions to coverage, this opinion is perhaps as surprising for what is not contained in it as for what is stated.  Nowhere in the opinion is there any discussion of whether this was a "material" breach or one that prejudiced the insurers.  Nowhere is there any argument that, given the District Court's holding that the settlement was reasonable, the insurers might have obtained a windfall due to the insured's negligence since they might well have given their assent to the settlement otherwise.  Nor is there any questioning of whether the the insured knew that it had coverage for such claims or whether its E&O carriers, who are all large sophisticated insurers who may well have read press reports at the time of the December 2002 settlement in principle, had actual knowledge of this agreement.  Indeed, none of the arguments that insureds have typically made in late notice cases appears in this opinion, nor does the court make any reference to notice issues beyond the specific condition at issue.

One may well surmise that the court's attitude was hardened by the inexcusable negligence of Bear Stearns in waiting months after signing the settlement in principle to notify its insurers.   The court's willingness to take the case and the absence of any dissents may also reflect the sense that much if not all of the settlement was also not covered by these policies.  Finally, the court may well be sending a signal to the legislature with respect to the fact that it continues to believe that New York businesses should stand by the terms of their written agreements.