A California Court of Appeal has held that insurance companies are not liable under the terms of standard comprehensive general liability policies to indemnify policyholders for settlement agreements. This commentary discusses the implications of the court’s decision and provides some practice tips for counsel representing policyholder clients contemplating settlement of a claim for which its insurer has denied coverage. The commentary was authored by John E. Heintz, a nationally-recognized leading lawyer in insurance coverage disputes with nearly 30 years of experience in the field of corporate insurance coverage. The article was co-authored by Marla H. Kanemitsu, an attorney whose practice focuses on representing clients in complex commercial litigation matters, with an emphasis on insurance coverage disputes.

 

 

Although Aerojet arose in the context of a coverage dispute for environmental claims, its scope may be much broader. The “damages” language construed by the court exists in almost all CGL policies. If the decision is upheld on appeal, it could potentially affect all types of policyholders, from non-profits to Fortune 500 corporations. The implications of the decision for policyholders are troublesome.

The practical effect of the holding is to force policyholders whose insurers have denied coverage into a catch-22 position. If a policyholder enters into a settlement to resolve the underlying lawsuit against the policyholder, under Aerojet, the insurance company is absolved of its obligation to provide coverage for the settlement.

If, on the other hand, the policyholder decides to litigate the underlying suit to judgment, the judgment could end up being massive, and the policyholder would be still left to litigate with its insurers over whether the judgment is or is not covered. If it turns out not to be covered, the policyholder would be liable for the full amount of the judgment.

In other words, the policyholder is left to choose between a settlement that it will have to fund on its own, or a potentially larger judgment that might or might not be covered by insurance.

 

Access the complete commentary on lexis.com

 

 

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