• Lit Support Staff

Aerojet-General Corp. v. Commercial Union Ins. Co.

155 Cal. App. 4th 132, 65 Cal. Rptr. 3d 803 (2007)

In 2000 and 2001, various water entities in the State of California filed suits alleging that Aerojet was liable for Comprehensive Environmental Response Compensation and Liability Act (CERCLA) response costs arising out of groundwater contamination in the San Gabriel Valley. Aerojet settled the suits, agreeing to pay $175 million. That amount exceeded its primary and excess insurance coverage limits for the period 1958 to 1970.


Aerojet gave notice to each of its excess insurers, but no excess insurer accepted the tender of defense or indemnity. After Aerojet settled the underlying actions, the excess insurers all denied liability on the ground that, under Powerine I, the damages were not awarded against Aerojet by a court.


Aerojet filed this suit for breach of contract and declaratory judgment. The trial court granted the insurers’ summary judgment motion on the “no damages” and “no exhaustion” issues. The trial court reasoned that under Powerine I, the insurers’ obligation “to pay as damages is limited to sums Aerojet was ordered to pay by the court. The monies paid in settlement do not meet this definition.” Aerojet appealed.


The California appellate court held that the Powerine Icase compelled the court to affirm the grant of summary judgment. The appellate court reviewed a number of California decisions, beginning with Foster-Gardner,18 Cal. 4th 857, 959 P.2d 265 (1998), explaining how the courts determine the duty to defend and the narrower duty to indemnify. The court then noted that this case presents the “next question” in the line of ongoing opinions, “whether settlement costs negotiated within the context of a court suit are ‘damages.’”


The appellate court stated that there can be no dispute that the term “damages,” as interpreted in Powerine I and used in the policies, means only money ordered by a court to be paid. The term has a “clear and literal meaning” and cannot be held to be ambiguous. The appellate court stated that the record contained no evidence that the court ordered Aerojet to pay any sum of money. For this reason, the appellate court concluded that the settlement costs were outside the scope of the indemnity coverage of the excess insurers’ policies.


Summary judgment in favor of the insurers was affirmed.


Expert Analysis

by Jill B. Berkeley

A typical commercial general liability (CGL) insurance policy limits the insurer’s obligation to pay those sums that it has agreed to pay or those sums that the insured is found, by judgment, to be legally obligated to pay. When an insured has been sued and is being defended by its insurer, the “consent” of the insurer is not much of an issue at the time of settlement. The insurer has selected defense counsel, is getting regular reports, and does not have a reservation of rights. Therefore, it is gambling with its own money at the time of settlement.


The “consent to settle” clause becomes relevant in those situations in which the insurer either denied coverage or is defending under a reservation of rights and refuses to settle in order to avoid a possible jury verdict or judgment that will leave the insured exposed to uninsured liability.


The Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982), case from Minnesota represents those jurisdictions that allow the insured to settle the case, without the consent of the insurer, and then proceed either directly against the insurer or by giving the plaintiff a judgment or assignment to pursue the insurer if it can prove coverage. The right of an insured to enter into a settlement with an underlying claimant on terms that set up a claim against its insurer is well established under Minnesota law. Minnesota law generally permits agreements in which a defendant admits liability and consents to having a judgment entered against it on the express condition that the claimant will satisfy the judgment only out of proceeds from the defendant’s insurance instead of proceeding against the defendant personally.


In Miller v. Shugart, the plaintiff was injured in an automobile accident, and the owner’s insurer disclaimed coverage based on its assertion that the driver, Shugart, was not the owner’s agent. Shortly after the accident, the insurer commenced a declaratory judgment action to determine its coverage obligations. Judgment was entered declaring that the policy afforded coverage to the vehicle’s owner and driver.


While the insurer’s appeal from the declaratory judgment was pending, the claimant entered into a settlement stipulation collectible only from the insurer. The Minnesota Supreme Court held that the insured had the right to consent to entry of judgment against it in return for plaintiff’s releasing the insured from personal liability. Generally, this type of settlement will not violate the consent provision because the insurer is deemed to have breached its duty to defend or has asserted a reservation of rights that it has raised in refusing to settle. The conditions for application of the Miller-Shugart rule include providing notice to the insurer that it is entering into a settlement, the collection of which is dependent on coverage being proven and the settlement being fair and reasonable.


A claimant seeking to enforce a Miller-Shugart agreement must prove the absence of fraud and collusion and show that the settlement was reasonable. In Koehnen v. Herald Fire Ins. Co., 89 F.3d 525 (8th Cir. 1996), the court displayed a certain hostility toward a liability insurer who conceded a duty to defend and tried to use the Miller-Shugart doctrine to “set up” another insurer who denied coverage.


Another hurdle for collecting settlements entered into without consent occurs at the excess insurance level. The excess insurer will stand behind the lack of exhaustion of the primary layer in refusing to consider making a contribution to settlement. This circumstance is illustrated in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s of London, 161 Cal. App. 4th 184, 73 Cal. Rptr. 4th 184 (2008). The insured settled for less than the primary limit of $20 million and sought indemnity from the follow-form excess insurer for reimbursement in excess of $20 million. Underwriters argued that coverage was not triggered because the insured failed to exhaust the underlying limits by full payment. The court held that Underwriters issued a reimbursement pol-icy that only required it to indemnify Qualcomm for specified losses that was different from the duty to defend. By definition, the duty to indemnify entailed the payment of money to resolve liability.


No discussion of unauthorized settlements would be complete without mentioning the relatively recent California decision, Aerojet-General Corp. v. Commercial Union Ins. Co., 155 Cal. App. 4th 132 (Cal. App. 3d Dist. 2007). Aerojet claimed that it kept its insurers apprised of its settlement strategy and negotiations; it unreasonably relied on the insurer to voice any concerns or objections. The court held that the insurers’ silence could not be deemed acceptance. A claimant seeking to enforce a Miller-Shugartagreement must prove the absence of fraud and collusion and show that the settlement was reasonable.


After Aerojet settled the underlying actions, the excess insurers all denied liability on the ground that the damages were not awarded against Aerojet by a court. The court focused on the issue of whether settlement costs negotiated within the context of a court suit were damages. The appellate court concluded that the settlement costs were outside the scope of the indemnity coverage of the excess insurers’ policies.

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