No Judgment, No Insurance, Says Appeal Court

We received an agitated voice mail Friday from Scott DeVries, attorney for Aerojet-General Corp., the notorious rocket fuel maker and ground water polluter.

The Third District Court of Appeal had just decided the company's latest insurance coverage dispute, and the "the potential ramifications of [the opinion] are absolutely incredible: that no company can settle underlying litigation without losing its rights to insurance coverage!"

At first we chuckled -- no doubt another case of trial lawyer hyperbole. But when we looked at the opinion, we saw the Winston & Strawn partner was not exaggerating at all. Aerojet's excess insurers won't have to reimburse  any of the $175 million paid out in a massive Southern California water pollution case -- because Aerojet settled it, rather than take it to trial. 

"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,'" Justice George Nicholson wrote for a unanimous three-judge panel [pdf]. Under the policy language and the California Supreme Court's recent interpretation of damages, "we conclude the settlement costs incurred by Aerojet are not damages, and thus are not within the policies'€™ indemnity obligations."

Likely adding to DeVries' ire: Sacramento Superior Court Judge Loren McMaster had agreed with him on demurrer. Judge Thomas Cecil went the other way on summary judgment, and the Third District backed Cecil.

Expect a petition for review to the Supreme Court, with lots of policyholder amici curiae.

--€” Scott Graham

Comments

[C Sanai]

This actually isn't groundbreaking at all, but rather the product of a tactical litigation error or bankruptcy. somewhere along the line.

The policies in question were "excess liability" policies. Excess liability policies are tag-along policies which are issues in connection with a "primary policy". Under the universal form of these agreements, the excess carrier does not pay unless the primary carrier is held liable to pay up to its limits.

Here for some reason the obligation of the primary insurers to defend and pay out was never forced on them. The reasons for this are (a) some lawyer goofed, or (b) all the primary insurers went bankrupt.

It is unfortunate that the opinion does not address why the primary insurers were not forced to pay, since there is an interesting question about what should happen where a primary insurer goes bankrupt and cannot defend or pay.