Insurer Not Liable For All Defense Fees

 National Union Fire Insurance Company of Pittsburgh, PA v. Seagate Technology, Inc.
(U.S.D.C., N.D. CA.), filed January 25, 2013, published January 25, 2013

KEY FACTS

In 2000, Convolve, Inc. and Massachusetts Institute of Technology filed a lawsuit in the Southern District of New York against Seagate Technology, Inc.  Seagate tendered the defense of the lawsuit to its liability insurance carriers, National Union Fire Insurance Company of Pittsburgh, PA, American International Underwriters Insurance Company, and American International Specialty Lines Insurance Company.

In 2004, the insurers filed a declaratory relief action in which they sought an adjudication that they had no duty to defend.  The District Court ruled that the insurers had a duty to defend the action from November 1, 2000, until July 18, 2007.  Although Seagate appealed the ruling, National Union stopped paying for Seagate’s defense.

In January 2012, the Ninth Circuit Court of Appeals reversed.  It found that National Union did have a duty to defend.

Based on the Ninth Circuit’s ruling, Seagate demanded that National Union reimburse it for its legal fees and expenses from 2007 to 2012.  Seagate also demanded that National Union pay prejudgment interest on this sum.

National Union took the position that Civil Code §2860 limits an insurer’s obligation to pay legal defense fees to rates it pays attorneys it retains “in the ordinary course of business . . . in similar actions.”  As such, National Union paid only part of Seagate’s legal bills and paid prejudgment interest on the reduced amount.

Seagate took the position that the appellate decision converted National Union’s reliance on the lower court rulings into a breach of the insurance contract retroactively to 2007.  Seagate also took the position that National Union could not rely on §2860 and must pay the full fees as well as prejudgment interest on the full amount due.

HOLDING & REASONING

In ruling on motions for summary judgment, the District Court agreed with National Union.  It ruled that National Union did not act wrongfully when it chose to rely on the district court’s prior judgment.  The court reasoned that to hold that National Union was committing a breach of contract all along would convert a final judgment under the federal summary judgment rule into a provisional one.

ANALYSIS

Given that this is a District Court opinion, Seagate may appeal to the Ninth Circuit Court of Appeals.

However, some California courts have held that reliance on an erroneous trial court ruling does not necessarily negate “bad faith” liability.

In Filippo Industries, Inc. v. Sun Ins. Co., 74 Cal.App.4th 1429 (1999), the court held that just because a trial court finds that there was no coverage, if that finding is reversed on appeal, it does not preclude a finding, on remand, that the insurer acted unreasonably in denying coverage.

In Kapsimallis v. Allstate Ins. Co., 104 Cal.App.4th 667 (2002), the Court of Appeal rejected the insurer’s argument that even if the trial court’s judgment in its favor was reversed as to the coverage issue, it should be affirmed as to the “bad faith” claim. The insurer argued that two federal district courts and the trial court had reached the same conclusion as it had regarding coverage and that, as a result, this established that it had not been unreasonable. Citing Filippo Industries, the court stated: “That the trial court erred by not applying Prudential-LMI to the instant case cannot shield Allstate from allegations of bad faith at this stage of the litigation.”