Settling Insurers Cannot Obtain Contribution from Other Insurers Who Either Had No Notice or No Coverage

The California Court of Appeal has held that two liability insurers could not obtain equitable contribution from three other liability insurers who either had no notice of the underlying action or no coverage for that action. ( American International Specialty Lines Insurance Co. v. Continental Casualty Co. (2006) 142 Cal.App.4th 1342)

Facts

In December 1998, Goto.Com, Inc. (Goto) sent a letter to Walt Disney Company (Disney) asserting that Disney and its business partner Infoseek Corporation (Infoseek) were infringing on Goto’s trademarks. Goto threatened litigation if the infringement continued. From mid-January through mid-February 1999, Goto personnel met several times with Disney and Infoseek personnel to discuss a possible “business solution” to the dispute. Ultimately, however, the discussions broke down and in late February 1999 Goto sued Disney and Infoseek for trademark infringement.

Disney had a $2 million general liability excess indemnity policy through Continental Casualty Company (Continental) covering advertising injury; a $10 million media wrap up policy through Lexington Insurance Company (Lexington) covering trademark infringement; and a $50 million excess liability policy through American International Specialty Lines Insurance Company (AISLIC) which, as to media professional liability, followed form to the Lexington policy and Continental policy.

Infoseek had a $5 million errors and omissions policy through Gulf Underwriters Insurance Company (Gulf) covering trademark infringement, as well as a $5 million excess policy through Admiral Insurance Company (Admiral) which followed form to the Gulf policy.

Disney assumed the defense of its business partner, Infoseek. Disney then gave notice of the lawsuit to Disney’s insurance broker, AON Risk Services, Inc. (AON). AON did not notify Continental of the suit, but did notify Lexington and AISLIC.

Later, Disney informed Lexington and AISLIC that Disney and Infoseek had tentatively agreed to pay $21.5 million in settlement of Goto’s claims. At that point Lexington and AISLIC sent a letter to Continental putting it on notice of the litigation, but Continental never responded. Lexington and AISLIC objected to Disney’s and Infoseek’s proposed settlement with Goto, but Disney and Infoseek went ahead and finalized the settlement with Goto without obtaining Lexington’s and AISLIC’s consent. Nine months later, despite their earlier objections to the settlement, Lexington and AISLIC reimbursed Disney for the full settlement amount ($21.5 million) and all defense costs incurred by Disney (approximately $3.2 million).

Lexington and AISLIC then filed an indemnity/contribution action against Continental, Gulf and Admiral, seeking to recover the settlement and defense costs Lexington and AISLIC had paid on behalf of Disney in the underlying trademark infringement action. The trial court ruled in favor of Continental, Gulf and Admiral, and Lexington and AISLIC appealed.

Holding

The Court of Appeal affirmed, finding that Lexington and AISLIC could not recover from either Continental, Gulf or Admiral.

As to Continental, the Continental policy required Disney to notify Continental of any claim if estimated defense costs and liability might exceed 50% of the retained limit of $250,000. Disney had failed to comply with that provision. The court acknowledged that the Continental policy contained a “Utah Change Endorsement” which stated that “notice to our authorized representative is notice to us.”  However, according to the court, that endorsement only applied to claims arising in Utah (not California) and, in any event, Disney’s notice to AON was not notice to Continental (because AON was not an “agent” of Continental). Last, Disney’s settlement without Continental’s consent violated the Continental’s policy’s “no-voluntary payment” clause. The court noted that while there might be circumstances where an insurer is not bound by a “no-voluntary” payment clause in a co-insurer’s policy, in this particular case there was no compelling equitable reason why Lexington and AISLIC should be able to avoid that clause in Continental’s policy.

As to Gulf, the Gulf errors and omissions policy excluded coverage for any claim arising out of circumstances known before the policy period that could “reasonably expected to lead to a claim.”  Here, Gulf’s insured, Infoseek, knew about Goto’s “cease and desist” letter and threat of litigation by January 1999, before inception of Gulf’s policy in February 1999. Because Infoseek was aware prior to the Gulf policy period of the possibility of litigation with Goto, the Gulf policy did not apply and Gulf did not owe contribution to Lexington and AISLIC.

Last, as to Admiral, the Admiral policy was excess to the Gulf policy and followed form to that policy. Because there was no coverage under the Gulf policy, there was no coverage under the Admiral policy.

Comment

The court left open the possibility that in an appropriate case, equity might allow one insurer to obtain contribution from a co-insurer who did not receive notice of the underlying suit or settlement. However, “absent compelling equitable considerations to the contrary, it is inequitable and unfair to saddle insurers on the risk with contribution sans notice of potential liability for contribution.”