In football as in life, the best defense is often a good offense. But, that adage does not always play well in litigation. In Riddell, Inc. v. Superior Court, No. B275482, 2017 WL 3614305 (Cal. Ct. App. Aug. 23, 2017), the California Court of Appeal blew the whistle on such a tactic, holding that an insurer could not use discovery tools in a coverage dispute with its policyholder in order to prejudice the policyholder’s defense in an underlying lawsuit.
Sports concussion and long-term personal injury lawsuits have been on the rise in recent years. Football helmet manufacturer Riddell, Inc., along with several other manufacturers, are defendants in a number of such lawsuits filed by former professional football players alleging long-term neurological damage from repeated head injuries from their use of Riddell football helmets. Riddell looked to its insurers to provide a defense and indemnity for these lawsuits. While some insurers agreed to defend under a reservation of rights, others refused, and none of them have agreed to indemnify Riddell. Consequently, Riddell filed a separate lawsuit against the insurers seeking a declaratory judgment that the lawsuits are covered, and alleging claims breach of contract, and breach of the implied covenant of good faith and fair dealing.
The insurance coverage action proceeded parallel to the football players’ underlying personal injury lawsuits. In the insurance coverage action, the insurers sought discovery about what Riddell knew about the health risks of playing football while wearing its helmets, and when Riddell became aware of those risks. The insurers sought that information because, if Riddell had such knowledge when it sold the helmets, it could create a bar to insurance coverage for injuries resulting from those risks.
The problem, however, was that this discovery overlapped significantly with discovery being sought in the players’ lawsuits, who likewise sought to prove Riddell’s knowledge. Riddell argued that its insurers could not pursue discovery in the insurance coverage action aimed at proving Riddell knew of the risks, while simultaneously fulfilling its obligation to defend Riddell in the underlying lawsuits against the players’ similar allegations. Indeed, this tactic in insurers’ playbooks has long been condemned by courts in California, given the risk of prejudice that it creates for the insured. These courts have recognized that an insurer cannot, over the insured’s objection, use an insurance coverage action as a forum to litigate factual issues affecting the insured’s liability in an underlying lawsuit. Instead, these courts have called a time-out and stayed discovery in the coverage action pending the adjudication of the underlying liability.
In Riddell’s case, the California Court of Appeal adopted that approach, rejecting the insurers’ arguments that the discovery was not so related that it would justify a stay. Indeed, the Court explained that, if the factual issues to be resolved in the insurance coverage action and in the underlying liability action overlap, then a stay of discovery is mandatory.
Riddell offers some important lessons for policyholders who are simultaneously litigating coverage disputes alongside an underlying liability lawsuit. In that context, insurers can make plays that actually increase their policyholder’s risk of liability in the underlying lawsuit, and those tactics may not always be easy to detect. Policyholders should be vigilant of that potential prejudice and, if appropriate, seek a stay of proceedings or the need to respond to the prejudicial discovery. In addition, policyholders should not be so quick to accept the insurer’s assertion that the issues do not overlap significantly. Just like football, the momentum in coverage disputes can shift quickly, and the resulting prejudice may not be immediately manifest.