On February 20, 2009, the California Court of Appeals handed down an opinion considering whether an arbitration award and resulting judgment could be considered a “loss” under the terms of an insurance policy. This action arose out of an insurance agreement issued by Executive Risk Indemnity, Inc. (“ERII”) to STARS Holding Company (“STARS”). A former client (“Jones”) of STARS initiated an arbitration proceeding against the firm for faulty investment advice. Though it was aware of the proceedings, ERII chose not to participate in the arbitration. An award was levied against STARS, and the California Court of Appeals determined that ERII was bound by that decision. This appeal arose out of the ensuing coverage action between Jones (to whom STARS assigned its rights under the underlying insurance policy) and ERII.

The court determined that because ERII was bound by the results of the arbitration proceeding between its insured, STARS, and the injured party, Jones, it could not now contest the validity of STARS’s liability to Jones or the amount of damages established by the judgment. The court concluded that “when an insurer (1) is duly notified of the underlying claim against the insured; and (2) is given a full opportunity to protect its interests, the resulting judgment – if obtained without fraud or collusion – is binding against the insurer in any later coverage litigation on the claim involving its insured.” This rule applied despite the fact that ERII had no contractual duty to defend under the indemnity-only policy at issue. Thus, the court reversed and remanded for further proceedings to determine if ERII was required to indemnify STARS. Executive Risk Indem., Inc. v. Jones, Case No. 05-444352 (Cal. Ct. App. Feb. 20, 2009).