An Insurer Without Prior Notice Had No Liability To Coinsurer, And A Cease-And-Desist Demand Gave Notice Of A Potential Claim Under A Claims-Made Policy

An Insurer Without Prior Notice Had No Liability To Coinsurer, And A Cease-And-Desist Demand Gave Notice Of A Potential Claim Under A Claims-Made Policy

10.11.2006

An Insurer Without Prior Notice Had No Liability To Coinsurer, And A Cease-And-Desist Demand Gave Notice Of A Potential Claim Under A Claims-Made Policy

In American International Specialty Lines Ins. Co. v. Continental Casualty Ins. Co., __ Cal.Rptr.3d __, 2006 WL 2361451 (8/16/2006), the Second Appellate District, Division 2, of the California Court of Appeal, addressed several important concepts applicable to claims between coinsurers and to insurers' obligations to its insureds under both "occurrence" and claims-made policies.

The case arose from a trademark infringement claim and, later, a suit, brought by Goto.com against Disney and Infoseek Corporation. Disney was insured by Continental, American and Lexington. Infoseek was insured by Gulf.

In January 1999, Goto.com wrote to Disney alleging Disney was infringing on its trademark and demanding that Disney cease the use of the mark. Goto.com and Disney engaged in negotiations. On February 18, 1999, Goto.com sued Disney and Infoseek. Later, a judge granted Goto.com's motion for a preliminary injunction. In May 2000, Disney and Infoseek reached a settlement with Goto.com, agreeing to pay $21.5 million to Goto.com in exchange for a dismissal of the suit and a release.

Around this same time period, Infoseek sought a specialty errors and omissions liability policy from Gulf. In its March 31, 1999 application, Infoseek informed Gulf about Goto.com's trademark infringement claim and suit. However, Infoseek denied a question in the application that there were any "actual or alleged fact, circumstance, situation, error or omission which may reasonably be expected to result in a claim being made against you." Gulf issued a claims-made policy, effective February 12, 1999, which required for coverage that a written claim first be made against Infoseek during the policy period and that Infoseek was not aware of any "circumstance that could reasonably be expected to lead to the claim." The policy defined "Wrongful Act" to mean that wrongful acts before the policy period and wrongful acts during the policy period were treated as a single wrongful act, if they were related by common facts or circumstances.

Disney first notified American and Lexington ("the Settling Insurers") of its settlement with Goto.com about two weeks before signing the settlement agreement. Although the Settling Insurers asserted Disney had failed to obtain their consent before entering into the settlement, the Settling Insurers paid the full $21.5 million to fund the settlement as well as $3 million in defense costs. Disney never gave any notice to Continental, although some time after the Disney settlement, the Settling Insurers' counsel notified Continental.

The Settling Insurers sued Continental and Gulf for contribution. The trial court granted summary judgment against the Settling Insurers. The Court of Appeal affirmed.

In sum, the Court of Appeal held that Disney's failure to give notice of suit to Continental and settlement without Continental's consent violated the "no voluntary payments" condition of Continental's policy, barring the Settling Insurers' claims. The Court also concluded there was no coverage under the Gulf policy because Infoseek was aware, before the policy period, of matters which could reasonably be expected to result in the claim.

The Settling Insurers had contended that because Disney believed that Goto.com's damages were not covered under the Continental policy, Disney was relieved from the obligation to give notice to Continental. The Continental policy required notice of any claim in which the estimated defense costs and liability exceeded 50% of the self-insured retention, but also forgave a failure to give notice of an "occurrence," "injury" or "offense" "due solely to your reasonable belief that the injury or damage is not covered under the policy or that it did not appear likely that the 'occurrence', 'injury' or 'offense' would meet or exceed the required notice provisions." The "Conditions" section also prohibited Disney from entering into settlements over the retained limit without Continental's "prior written approval" and further provided that payment would be made only after liability had been established by either a trial court's decision or an agreed settlement which included Continental (called a "no action" clause).

The Court of Appeal disagreed with the Settling Insurers, stating that notice of the Goto.com suit and settlement was required. The Court reasoned that although the Continental policy had the "reasonable belief exception" for reporting occurrences, injuries or offenses, it provided no such corollary exception for the reporting of actual claims asserted by third parties.

The Court further rejected arguments that notice to AON constituted notice to Continental. Reviewing an agency agreement between AON and Continental, which limited the scope of the agency, and testimony that Disney paid AON to be its broker, as well as applicable statutes (California Insurance Code §§31, 33), the Court concluded that AON acted as a "broker" for Disney, not as an agent for Continental.

The Court also followed the decision of the Second Appellate Court, Division 1, in Truck Insurance Exchange v. Unigard Ins. Co., 79 Cal.App.4th 966 (2000), that equitable contribution would not be permitted where notice of settlement was not given to the non-settling insurer before settlement, because "[a]bsent compelling equitable reasons, courts should not impose an obligation on an insurer that contravenes a provision in its insurance policy." Noting the Unigard court's admonition that "courts should consider the nature of the claim, the relation of the insured to the insurers, the particulars of each policy, and any other equitable considerations," the American Court concluded there were no "compelling" equitable reasons to order contribution. The Court emphasized that each equitable contribution case must be decided on its own facts:

""At the outset, the settling insurers must be disabused of the notion that Unigard, or this opinion, establishes a general rule. Equity is flexible and the facts considered in Unigard must be considered on a case-by-case basis. To the settling insurers' attack on the wisdom of applying Unigard as we have, we respond as follows: Insurers on the risk with notice of a claim are in a position to protect their rights, whereas insurers on the risk without notice have no opportunity to protect their rights. Absent compelling equitable considerations to the contrary [Fn.: For example, a court could consider whether an insurer on the risk was actively at fault for not receiving notice], it is unfair and inequitable to saddle insurers on the risk with contribution sans notice of potential liability for contribution. . . .""

As to Infoseek, the Court held there was no coverage under the Gulf policy because through Goto.com's cease and desist letter and subsequent negotiations, Infoseek had notice of a "circumstance that could reasonably be expected to lead to the claim." The Court rejected Infoseek's claim of a subjective belief that an actual claim would not result, as its negotiations and attorneys' activities, among other things, reflected that Infoseek was aware that litigation was possible.

This case instructs insureds and insurers regarding giving notice of potential and actual claims. Insurers facing settlement demands must be wary of settling claims without confirming necessary notices to coinsurers had been given. An insured who receives notice of facts, which creates an objectively reasonable basis for a claim, must consider promptly notifying its claims-made insurer, instead of waiting for an actual claim or suit, even where the insured subjectively believes it could settle the suit on its own or that a suit is unlikely.

We recommend review of this decision's analysis of other coverage issues, which we do not discuss here due to space limitations.