U.S. District Court Holds that Insurer Satisfied its Duty to Defend by Settling All Claims Against the Insured

U.S. District Court Holds that Insurer Satisfied its Duty to Defend by Settling All Claims Against the Insured


 In Haskins v. Employers Insurance of Wausau, 2015 WL 5071946 (N.D.Ca. 2014), a federal District Court held that an insurer had not breached its duty to defend its insured when it negotiated a settlement of all claims against the insured, despite the insured later undoing that settlement.  The Court granted summary judgment in favor of the insurer and denied a cross-motion filed by the insured.

Wausau provided liability insurance to the insured, who owned property in South San Francisco.  A neighboring property owner entered into an agreement with the insured regarding completion of an environmental cleanup.  The insured sued the neighboring property owner for allegedly failing to comply with that agreement.  A counterclaim was then filed against the insured, who tendered to Wausau and requested a defense.  Wausau acknowledged the claim within 15 days and stated that it was investigating under reservation.  Wausau then instructed its coverage counsel to approach the counterclaimant about settling the claim against its insured.  Ultimately, Wausau settled the counterclaim for one half of the past costs (less than $12,000) in exchange for a dismissal of the counterclaim against the insured without prejudice.  The insured objected to the settlement, arguing that it did not take into account exposure for future costs.  Wausau responded by noting that the insured’s consent was not required and that Wausau would proceed with the settlement.  The settlement had no impact on the insured’s direct claims against the neighboring property owner.

The insured refused to sign the settlement agreement.  Wausau finalized the settlement agreement with the counterclaimant, which then filed a motion for leave to dismiss the counterclaim without prejudice.  The insured opposed the motion based on the risk of future costs.

While the motion was pending, the insured and the counterclaimant engaged in a further mediation.  Wausau declined to attend.  At the mediation, a settlement was reached in which judgment was to be entered in favor of the counterclaimant and against the insured in the amount of $1.7 million, executable only against the insured’s insurance assets.  The counterclaimant then withdrew its motion for leave to dismiss its counterclaim and instead filed a stipulation for entry of judgment as outlined in the settlement agreement with the insured.

The insured then sued Wausau seeking to recover the $1.7 million stipulated judgment from Wausau, plus damages for failure to defend and bad faith.  The Court found that Wausau had a duty to defend its insured against the counterclaims.

However, the Court rejected the insured’s argument that because Wausau did not accept or deny his tender within 40 days, it breached California Code of Regulations (“CCR”) § 2695.7(b), which relates to the time to respond to a “Proof of Claim.”  The Court held that a tender for defense is not a “Proof of Claim,” which relates to first-party claims.  The Court also rejected Wausau’s argument that the tender was a notice of “legal action” pursuant to CCR § 2695.2(o).  Instead, the Court held that it was a notice of “claim” under CCR 2695.5(e).  The Court noted that as Wausau had acknowledged the claim within 15 days of tender, it had complied with the regulations related to a notice of claim, rejecting the insured’s argument that Wausau was in per se breach of its duty to provide an immediate defense.

The Court next observed that insurers have a right to conduct a reasonable investigation prior to accepting a tender for defense.  The insured argued that because Wausau never formally stated its coverage position, it never assumed the duty to defend.  The Court disagreed, finding that Wausau’s conduct – advising the insured that Wausau was negotiating a settlement and requesting information regarding the insured’s costs incurred for the defense against the counterclaim – demonstrated that Wausau had accepted its duty to defend.  The Court rejected the insured’s contention that Wausau’s conduct was the equivalent of refusing to defend, entitling the insured to assume control of the defense.  The Court noted that such a transfer of control requires the insurer to actively refuse to defend.  The Court held that the three months Wausau spent investigating between the date of tender and negotiation of the settlement were reasonable and that Wausau did not fail to defend the insured.

The Court then held that Wausau’s negotiation of a settlement of the counterclaim fully satisfied its defense and indemnity obligations to its insured.  Noting that it was only the insured’s own intervention that undermined that settlement, the Court concluded that Wausau provided a complete defense.  The Court went on to grant Wausau’s motion for summary judgment on the grounds that the insured breached the cooperation clause and “no voluntary payments” provision in the policy, which relieved Wausau from liability for the stipulated judgment.  The Court did not dismiss the entire action, because questions remained regarding the exact amount of Wausau’s obligation to reimburse for expenses incurred defending the counterclaim from the date of tender through the dismissal.

Assuming this case survives any appeal and remains good law, it has strong language regarding an insurer’s right to conduct a reasonable investigation before accepting a tender and rejecting any attempt to use CCR sections regarding “Proof of Claim” in the context of defense tenders.  The case also allows for an insurer’s informal acceptance of defense to protect it from claims that it failed to defend.  Finally, the Court appears to have disliked the insured’s fairly transparent attempt to “set up” its insurer.

Stephen L. Cope is a partner with Musick, Peeler & Garrett located in its Los Angeles office.  His full bio and contact information can be found at:  http://musickpeeler.com/professionals/bio.cfm?id=401

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