Although an insured’s insolvency rendered it unable to pay a self-insured retention, that did not relieve the insurer of a duty to pay the covered portion of a judgment against the insured. ( Phillips v. Noetic Specialty Insurance Company (S.D. Cal. 2013) — F.Supp.2d —-, 2013 WL 244536)
Facts
Electric Mobility Corporation (EMC) sold a motorized scooter to Claud Phillips (Mr. Phillips). Sometime later, Mr. Phillips was traveling on the scooter when it toppled over, injuring him. As a result, Mr. Phillips filed a personal injury lawsuit against EMC in California state court.
EMC tendered the defense of the lawsuit to its products liability insurer, Noetic Specialty Insurance Company (Noetic). The Noetic policy provided EMC with liability limits of $2 million in excess of a $500,000 self-insured retention (SIR). Noetic assigned one of its panel defense attorneys to represent EMC in the personal injury lawsuit.
While the personal injury lawsuit was pending, EMC became insolvent. At that point, Noetic’s panel defense attorney successfully moved to withdraw from representing EMC in the personal injury action. After the defense attorney withdrew, the court struck EMC’s answer and entered a default judgment against EMC for slightly over $1 million.
Mr. Phillips then demanded that EMC’s liability insurer, Noetic, pay the judgment pursuant to the terms of the policy. Noetic denied coverage for the judgment, asserting that the policy had a $500,000 SIR and that Noetic’s liability under the policy was “not triggered until … [EMC] pays the judgment.”
Mr. Phillips died, and his judgment against EMC thus became an asset of his estate. Mr. Phillips’ wife, Billie Phillips (Mrs. Phillips), as executor of Mr. Phillips’ estate, demanded that Noetic pay the judgment “less the unsatisfied amount of EMC’s SIR.” Noetic again denied coverage for the judgment, claiming that coverage was no longer possible because EMC had gone out of business.
Mrs. Phillips as executor of Mr. Phillips’ estate then sued Noetic in federal court based on Noetic’s refusal to pay the portion of the judgment that exceeded EMC’s SIR. Mrs. Phillips included claims for breach of third-party beneficiary contract and breach of the implied covenant of good faith and fair dealing. Noetic moved to dismiss Mrs. Phillips’ complaint, arguing in part that EMC’s payment of the $500,000 SIR was a “condition precedent” to coverage under the Noetic policy.
Holding
The United States District Court, applying California law, denied Noetic’s motion to dismiss. The court rejected Noetic’s argument that EMC’s payment of the $500,000 SIR was a “condition precedent” to Mrs. Phillips’ right to collect any portion of the judgment under the Noetic policy. The Noetic policy’s insuring clause provided that Noetic would pay ” those sums, in excess of the ‘self-insured retention,’ that the insured becomes legally obligated to pay as ‘damages’ because of ‘bodily injury’ … to which this insurance applies.” The policy’s conditions section provided that the insured’s “bankruptcy, insolvency or inability to pay the ‘self-insured retention’ will not increase our obligations under this policy,” but also provided that “[b]ankruptcy or insolvency of the insured or of the insured’s estate will not relieve us of our obligations under this policy .” The district court observed that the policy Noetic had issued to EMC “does not state that payment of the SIR is a condition precedent to coverage,” and indeed “expressly states that the insolvency of the insured will not relieve the insurer of [its] obligations under the policy.” Thus, EMC’s payment of the SIR was not a condition precedent to coverage under the terms of the Noetic policy. Mrs. Phillips could thus proceed with her lawsuit alleging that Noetic was required to pay that portion of the judgment that exceeded the SIR.
Comment
The court observed that an insurer can include terms making the insured’s payment of an SIR a condition precedent to coverage. Here, however, the insurer had failed to include such terms in its policy. Because the policy did not make payment of the SIR a condition precedent to coverage, the court would not read such a requirement into the policy.