Insurer Lacked Conclusive Evidence of Insured’s Involvement to Trigger I v. I Exclusion; Insured’s Compromise of Favorable Judgment to Settle Multiple Suits Not a “Loss”

The United States District Court for the Central District of California, applying California law, has held that an insurer lacked adequate information to deny coverage under an insured vs. insured exclusion in a D&O policy.  MJC Supply, LLC v. Scottsdale Ins. Co., 2019 WL 2372279 (C.D. Cal. June 4, 2019).  The court also held that the insureds’ notice under one policy constituted sufficient notice of the claim under two policies issued to a different named insured.  However, the court held that the insureds were not entitled to recover the difference between a judgment entered in their favor and a subsequent settlement of multiple lawsuits because the insureds did not sustain a “Loss.”

The insured humidifier company was owned by two domestic entities and a foreign entity.  The domestic entities sued the foreign entity in federal court due to product quality issues.  The foreign entity then sued the domestic entities and three directors of the humidifier company in state court.  The foreign entity also filed counterclaims in the federal action.

The humidifier company tendered the state action for coverage under its D&O policy.  The insurer defended initially but withdrew coverage based on the insured versus insured (I v. I) exclusion.  The federal action resulted in a $42.5 million verdict in favor of the domestic entities.  Subsequently, the parties settled the federal and state actions.

The insureds sued the insurer alleging that the insurer wrongfully denied coverage under the I v. I exclusion.  The insurer argued that because the CEO of the foreign entity also was a director of the humidifier company, the state court action was necessarily filed at the direction of an insured.  The court found that the insurer made an “inferential leap” by assuming that the state action had been filed at the direction of an insured, noting that the insurer “fail[ed] to cite evidence of [the CEO’s] actual involvement” in the state action.

The insureds also argued that the insurer breached the duty to defend by failing to consider coverage for the state action under separate policies issued to the domestic entities, which afforded coverage for the directors of the humidifier company.  The court agreed, holding that notice of the claim under the humidifier company’s policy put the insurer on constructive notice of the claim under the domestic entities’ policies.

The court disagreed that the insurer had a duty to pay all costs associated with the state and federal actions.  Although the policies contained an allocation provision with a pre-set 100% allocation for defense costs, the court noted that the insurer had no duty to pay for the insureds’ costs of prosecuting affirmative claims.

Finally, the court rejected the insureds’ argument that the insurer was obligated to pay the difference between the $42 million judgment in the insureds’ favor in the federal action and the settlement of both the state and federal actions.  The court reasoned that the insureds were not “legally obligated to pay anything” in the settlement.  The court remarked that “[a]t most Plaintiffs have established that they missed out on an opportunity to hedge their bets by trying the [state action] to possibly win a second judgment in their favor.  This is not a ‘Loss’ as defined by the [p]olicies.”


Wiley Executive Summary

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