(Article from Insurance Law Alert, November 2023)
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Holding
The Ninth Circuit ruled that an excess insurer had no duty to indemnify an underlying settlement based on the insured’s failure to seek or obtain the excess insurer’s consent prior to settlement. Vizio, Inc. v. Arch Ins. Co., 2023 U.S. App. LEXIS 28735 (9th Cir. Oct. 30, 2023).
Background
When Vizio was named as a defendant in a class action lawsuit arising out of its television products, it notified Navigators, its primary insurer, and Arch, its excess insurer. Navigators denied coverage and Arch requested more information. Vizio never provided Arch with any substantive updates about the litigation and Arch never conveyed a formal coverage decision, although Arch’s internal records reveal that Arch had decided to deny coverage. Two years later, Vizio settled the underlying suit without notifying Arch.
In ensuing coverage litigation, a California district court dismissed Vizio’s complaint, ruling that it failed to properly notify Arch of a claim following exhaustion of primary policy limits. The Ninth Circuit affirmed on different grounds.
Decision
The Ninth Circuit ruled that the district court erred in holding that Vizio failed to provide proper notice, explaining that the Arch policy did not require notice of a claim following exhaustion of the primary policy limit. Rather, the policy required notice “as soon as practicable after the . . . Company . . . becomes aware of such Claim.” The Ninth Circuit held that Vizio’s original notice of the class action suit to Arch was sufficient under the policy.
However, the Ninth Circuit ruled that Vizio failed to comply with its consent obligation, rejecting Vizio’s assertion that the Arch policy did not incorporate the primary policy’s consent provision. In particular, the court rejected Vizio’s assertion that the follow form provision should be interpreted to mean that “only coverage” follows form, and does not indicate an intent for the consent clause to be incorporated in the excess policy. Similarly, the court held that nothing in Arch’s excess policy conflicted with Navigator’s primary policy such that the Arch policy would “supersede” the consent provision in Navigator’s policy. A clause entitled “Duties In The Event Of A Claim” in Arch’s policy, which did not explicitly mention consent, merely required notification of claims and did not conflict with the underlying consent provision.
Finally, the court rejected Vizio’s argument that it was excused from complying with the consent provision because Arch breached its policy by not issuing a formal coverage denial. The court noted that under California law, an “insurer’s breach of its policy renders a prior written consent provision unenforceable,” but explained that this principle applies only when the policyholder has requested and been denied coverage. Here, however, Vizio never requested or had been denied coverage. Therefore, it was obligated to obtain Arch’s consent prior to settlement.
Comments
The Ninth Circuit’s decision highlights an important limitation on an insurer’s statutory obligation to issue a coverage decision in a timely manner. California statutory law indicates that an insurer’s failure to accept or deny coverage within 40 days of tender constitutes a breach of the policy. 10 C.C.R. § 2695.7(b). The court deemed this statutory provision inapplicable to the present case, noting that it applies only after an insurer receives “proof of claim,” defined as evidence that “reasonably supports the magnitude or the amount of the claimed loss.” 10 C.C.R. § 2695.2(s). Here, Vizio had only provided “notice of claim,” defined by state statutory law as “notification to an insurer . . . that reasonably apprises the insurer that the claimant wished to make a claim against a policy . . . and that a condition giving rise to the insurer’s obligations under that policy or bond may have arisen.” 10 C.C.R. § 2695.2(n). As such, the Ninth Circuit concluded that the statutory 40 day coverage denial did not apply.