Excess Insurers Not Obligated To Fund Voluntary Settlement
September 2007
In Aerojet-General
Corp. v. Commercial Union Ins. Co. (Cal. App., 3d Dist., Sept. 13, 2007),
a California appellate court considered whether sums an insured agreed to pay
as settlement of CERCLA claims were required to be paid as "damages" under its
excess policies. The court held that the excess insurers were not required to
pay, as the sums were paid as part of a settlement, and not a court-adjudicated
award of damages.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
Aerojet-General sought coverage from its excess insurers for costs it incurred
to remediate groundwater contamination pursuant to the settlement of an action
alleging the insured's responsibility for response costs under Comprehensive
Environmental Response Compensation and Liability Act (CERCLA). The suit was
settled for $175 million, which exceeded the insured's primary and excess policies
for the relevant time period. The insured demanded payment pursuant to its policies;
however, the excess insurers denied liability, contending that the claims were
merely settled and not adjudicated to an award of damages by a court.
The excess policies provided for indemnification of "all sums which the Assured
shall become legally obligated to pay, or by final judgment be adjudged to pay,
to any person or persons as damages…." The policies did not attach:
until the Primary and Underlying Excess Insurers shall have admitted liability
for the Primary and Underlying Excess Limits or unless and until the Assured
has by final judgment been adjudged to pay an amount which exceeds such
Primary and Underlying Excess Limits and then only after the Primary and
Underlying Excess Insurers have paid or have been held liable to pay the
full amount of the Primary and Underlying Excess Limits.
In addition, the policies had voluntary payments clauses, which required
the insurers' written consent to settle. The court held that the settlement
costs were not damages within the policies' indemnity obligations. Relying on
an earlier California Supreme Court decision, Certain
Underwriters at Lloyd's of London v. Superior Court, 24 Cal. 4th 945
(2001), the court reasoned that the term "damages" means only money ordered
by a court to be paid. Since there was no court order directing the insured
to pay damages, the court concluded the settlement costs were outside the scope
of the policies' indemnity coverage.
The insured argued that the settlement agreement constituted a final judgment
for purposes of the attachment of liability provisions in its excess policies.
On this point, too, the court disagreed. The underlying actions were not dismissed
with prejudice. Thus, the court reasoned, there was no legal bar to further
litigation, and the settlement agreement could not be seen to act as a final
judgment on the claims.
The court also rejected the insured's argument that the excess insurers,
through their silence, were equitably estopped from relying on the terms of
their policies, including the voluntary payments clause. The court concluded
there was no evidence that the excess insurers intended by their silence to
induce the insured to settle, or that the insured could have reasonably relied
thereon. Instead, the evidence demonstrated that the insurers refused to participate
in any of the settlement negotiations, and had reserved their rights to contest
coverage.
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