A recent decision from the Ninth Circuit Court of Appeals reaffirms that policyholders have leverage to convince excess insurance carriers that they should contribute towards potentially covered settlements.

In a Ninth Circuit decision involving Teleflex Medical, the Ninth Circuit confirmed that Diamond Heights Homeowners Assoc. v. National Am. Ins. Co. is still good law, and that an excess insurer has three options when presented with a proposed settlement of a covered claim that has been approved by the insured and the primary insurer: (1) approve the proposed settlement; (2) reject the settlement and assume the insured’s defense, or (3) refuse the settlement and face litigation from the insured.

The dispute between Teleflex and the excess carrier arose out of an underlying patent and disparagement suit between Teleflex’s predecessor in interest, LMA North America, Inc., and its competitor, Ambu. Teleflex had two policies that covered claims against it in the underlying litigation: a primary policy through Transcontinental Insurance Company, which agreed to defend Teleflex in the action and contribute its $1M policy limits to the eventual settlement of the lawsuit against the insured, and an excess policy through the excess carrier, with limits of $10M x $1M. The excess carrier did not dispute that Teleflex’s claims were ultimately covered by its policy, but played games when asked to contribute toward a settlement with the claimant or assume the defense.

Following a mediation in the underlying case, Teleflex and Ambu agreed to a settlement under which Teleflex would pay Ambu $4.75 million to settle the disparagement claims. The settlement was conditioned on approval from Transcontinental and the excess carrier.

Transcontinental agreed to the settlement and to tender its policy limits, but the excess carrier refused to recognize that Ambu’s claims could invade its coverage layer. Teleflex’s counsel provided the excess carrier with an analysis explaining that liability for claims against Teleflex could reach $10 million and that the proposed settlement was fair and reasonable in light of the litigation risk.

Following repeated requests for prompt approval or disapproval of the settlement, Teleflex informed the excess carrier that the settlement was time sensitive and that Teleflex would agree to the proposed settlement if the excess carrier failed to promptly approve the settlement or take up the defense. When the excess carrier failed to timely accept the settlement or take up the defense, Teleflex accepted the settlement. The excess carrier thereafter told Teleflex that it would accept the defense if Teleflex was able to undo the settlement. Teleflex responded that it could not undo the settlement, and contended that the excess carrier’s belated offer was simply an attempt to invoke the consent to settle provisions of the excess policy in anticipation of Teleflex’s suit against it.

Teleflex’s policy with the excess carrier contained a “no voluntary payments provision stating that “[n]o insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [the excess carrier's] consent.” The policy also contained a “no action” clause stating in relevant part that “[t]here will be no right of action against us under this insurance unless ... [t]he amount you owe has been determined with our consent or by actual trial and final judgment.” The policy also recognized the excess carrier's right to “participate” in the defense of a claim and, following exhaustion of coverage by the primary insurer, a “duty to defend” the claim. Id.

Teleflex sued the excess carrier for breach of contract and bad faith.

In the district court, the excess carrier moved for summary judgment, arguing that it had the right to veto a settlement under its policy’s “no action” and “no voluntary payments” clauses. The district court rejected this argument. The district court ruled that California law applied and that Diamond Heights controlled. Under Diamond Heights, an “excess insurer may waive its rights under [a no action] clause if it rejects a reasonable settlement and at the same time fails to offer to undertake the defense.” Following a jury trial, the jury unanimously found for Teleflex on both the breach of contract and bad faith claims.

On appeal, the excess carrier argued that the district court had improperly applied Diamond Heights because the Supreme Court of California had effectively overruled that case or, alternatively, would not have applied Diamond Heights to the facts of Teleflex. Accordingly, the excess carrier argued that it had the absolute right to veto the settlement under the policy’s “no voluntary payments” and “no action” clauses.

The Ninth Circuit rejected the excess carrier’s argument that it had the absolute right to veto the settlement and held that the district court properly applied the California appellate decision in Diamond Heights.

The Ninth Circuit’s rejection of the excess carrier’s arguments rested on four crucial points. First, the case relied upon by the excess carrier for the proposition that Diamond Heights had been overruled, Waller v. Truck Insurance Exchange, Inc., 11 Cal. 4th 1 (1995), did not specifically address Diamond Heights. Second, California state appellate courts had relied on Diamond Heights since Waller was decided. Third, the Ninth Circuit held that Diamond Heights and Waller were not irreconcilable. According to the Court, “Waller stands for the proposition that a[n] insurer does not waive a right under an insurance policy simply by failing to mention it in a claim letter. Waller, 11 Cal.4th at 33. By contrast, Diamond Heights is about how an insurance policy should be read in order to reconcile an excess insurer’s contractual rights under “no action” and “no voluntary payments” clauses with the insured’s rights under the implied covenant of good faith and fair dealing.” Teleflex, 2017 WL 1055586, at *7. Essentially, the Ninth Circuit viewed Diamond Heights as being less concerned with an excess insurer’s waiver of a contractual right than with preventing that insurer’s potential bad faith and breach of contract. Finally, the Ninth Circuit rejected the excess carrier’s claim that Diamond Heights was distinguishable from the facts of Teleflex; in fact, the Court noted that the facts were similar. Id. at *7-8.

The Ninth Circuit’s opinion confirms that excess insurers must give careful consideration to requests by its insured and underlying insurers to contribute towards settlements that would implicate the excess insurer’s policy. Teleflex is likely to cause excess insurers to be more involved in settlement processes given that the case reiterates that they must either accept a settlement or reject it and assume the defense in order to avoid the risk of breaching its policy with the insured, and subjecting itself to bad faith liability in California.