Locked Out – Excess Insurer Can’t Break Into Underlying Claims
The plaintiff-insured is a supplier of residential and commercial building materials and was sued many times over for providing Chinese-manufactured drywall to a number of builders and homeowners. Extensive discovery was conducting in the underlying litigation which the plaintiff ultimately resolved via two massive settlements. The plaintiff brought this suit against its primary and excess insurers seeking indemnification for a portion of the settlement costs and its defense costs.
In that litigation, the defendant-insurer sought to investigate each underlying homeowner claim in order to determine whether the homeowner had actually suffered covered damages and disputed that it was limited only to the body of existing discovery from the underlying litigation. The defendant argued that it is entitled to open ended discovery to determine whether it had a duty to indemnify under the policies at issue. The plaintiff maintained that the defendant could only examine the reasonableness of the settlements as detailed in the discovery from the underlying cases and that it was not entitled to additional discovery.
In ruling for the plaintiff, the court adopted the position that:
“Following a settlement as to which the insurer denies coverage, the existence of coverage should depend on what claims were settled; that is, it should depend on why the money was paid. The actual merit of each of the plaintiff’s claims against the insured is not directly relevant. The only question should be how the parties to the settlement viewed the relative merits of the plaintiff’s claims at the time of the settlement and whether, if the insured settled without the carrier’s approval, the settlement amount was reasonable. Neither the insurer nor the insured should be allowed to try the plaintiff’s claim in the coverage suit. The insurer should not, however, be bound by how the settlement is allocated by the insured/claimant or by what the agreement states is the reason the settlement money was paid.”
The forthcoming trial was thereby limited only to the reasonableness of the settlement amounts.