We recently wrote about the California Supreme Court’s decision in Fluor Corporation v. Superior Court to limit the enforceability of clauses in third party liability insurance policies that prohibit the policyholder from assigning its interests in the policy without the insurer’s prior consent. The court held that these so-called anti-assignment clauses are not enforceable after a third party has suffered personal injury or property damage covered under the policy and for which the insured may be liable. A New Jersey appellate court has reached the same conclusion in Givaudan Fragrances Corp. v. Aetna Casualty & Surety Co. There, Givaudan Fragrances Corporation sought coverage under a corporate affiliate’s insurance policies for numerous claims brought against Givaudan for environmental contamination. The appellate court concluded that the policies’ anti-assignment clause was no longer enforceable as to the losses that had occurred before the assignment.
The first line of the Seventh Circuit’s opinion says it all: “This case provides a warning for insurance companies who refuse to defend their insureds.” As the court’s admonishment suggests, insurers that improperly refuse to defend an insured do so at their own risk and – if not done through a reservation of rights or a declaratory judgment action – may waive their coverage defenses in the process.
In a unanimous decision handed down by the California Supreme Court yesterday afternoon in Fluor Corporation v. Superior Court, the court removed a significant obstacle facing companies that want to assign their interests in a third party insurance policy to a successor company as part of a corporate restructuring or sale. It held that an anti-assignment clause in liability policies prohibiting an insured from assigning its interests under the policy without the insurer’s consent is not enforceable after a covered loss, that is, after a third party has suffered personal injury or property damage for which the insured may be liable. The decision overturns the court’s earlier decision in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal. 4th 934, in which the state high court held that an anti-assignment clause remains enforceable much longer, until the third party’s claim against the insured has been reduced to a sum of money due, or to become due, under the policy, such as an adverse judgment against the insured in the underlying action. In doing so, the court relied on a California statute first enacted in 1872 that received almost no attention before Fluor and was never considered in Henkel.
As we previously reported here, the U.S. Court of Appeals for the Eleventh Circuit asked the Georgia Supreme Court to weigh in on the coverage dispute in Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Co. concerning consent-to-settle and no-action provisions in an excess insurance policy. The state high court’s answer was a disappointing one for policyholders. According to the court, if a policyholder settles a claim brought against it without first obtaining the insurer’s consent, the policyholder may effectively forfeit coverage for the settlement and is barred from later suing its insurer, even if the policyholder believes the insurer unreasonably withheld consent. Companies holding policies governed by Georgia law should proceed carefully when settling claims against them where those policies include consent-to-settle and no-action provisions. Going forward, companies might be wise to avoid such policies altogether.
As any company facing EPA administrative action under CERCLA knows, the financial risk and defense costs associated with those proceedings can be the same as the risk and costs of an EPA lawsuit under CERCLA. But insurers have argued that administrative actions are very different from suits under standard CGL policies. Those policies, insurers argue, provide defense coverage to costs related to “suits,” not administrative actions. Joining a clear majority of state courts, the Texas Supreme Court recently rejected this narrow interpretation of the duty to defend in McGinnes Indus. Maint. Corp. v. The Phoenix Ins. Co., holding that a CGL insurer must provide a defense in CERCLA administrative actions.
Many corporate executives may be under the impression that the defense costs they incur when sued for actions taken in their role as officers of the company would be covered by a “Management Protection” insurance policy. The name of the insurance policy even suggests this. However, executives are not always covered by such a policy. For example, in Redmond v. Ace American Insurance Company, No. 14-3864, 2015 U.S. App. LEXIS 9392 (3d Cir. June 5, 2015) (unpublished), the Third Circuit held that defense costs incurred in a lawsuit brought against an executive by his former employer were not covered under a Management Protection policy due to an insured versus insured exclusion.
In Babcock & Wilcox Co. v. American Nuclear Insurers, a divided Supreme Court of Pennsylvania, deciding an issue of first impression under Pennsylvania law, recently held that when an insurer defends its insured subject to a reservation of rights, the insured may accept a settlement over the insurer’s refusal where the settlement is fair, reasonable, and non-collusive. This is a significant statement of policyholder rights in an area that regularly generates litigation.
Joining a majority of states that have addressed the issue, the Montana Supreme Court recently held that “an insurer who does not receive timely notice required by the terms of an insurance policy must demonstrate prejudice from the lack of notice in order to avoid the obligation to provide defense and indemnification of the insured.” The case, Atlantic Casualty Insurance Co. v. Greytak, involved a policyholder that provided notice to its insurer over a year after receiving a letter notifying the policyholder of potential claims against it.
Professional liability insurance policyholders often breathe a sigh of relief when their insurer begins funding the costs of defending against a civil claim or government investigation. That is one of the reasons they bought the insurance in the first place! However, as one policyholder recently learned, just because the insurer advances defense costs doesn’t mean that the policyholder can forever close its books on those costs. In Protection Strategies, Inc. v. Starr Indemnity & Liability Co., after several former executives of the insured pled guilty to criminal charges – triggering various exclusions in the policy – the Fourth Circuit allowed the insurer to recover all of the defense costs it had advanced to its insured.
In Kelly v. State Farm Fire & Casualty Co., the Supreme Court of Louisiana recently held that an insurer can be liable for bad faith failure to settle a claim even if it has not received a firm offer to settle the claim. The court also held that the insurer could be liable for misrepresenting any pertinent facts, not only facts relating to coverage. Together, these holdings may cause carriers issuing policies under Louisiana law to consider carefully their claim handling practices.