Equitable Subrogation Allows Excess Insurer to Recover Settlement Contribution from Later Insurer After Proper Policy Period Is Determined

A California federal court permitted an excess D&O liability insurer to pursue equitable subrogation against a later excess carrier to recover its contribution to a settlement of securities litigation after a finding that the securities litigation was first made during the later carrier’s policy period. Genesis Ins. Co. v. Magma Design Automation, Inc., 2015 WL 4128986  (N.D. Cal. July 8, 2015).

The insured purchased claims-made D&O liability policies from the same primary insurer for the 2003-04 policy period and the 2004-06 policy period. The first excess carrier for each period was different. The insured provided a copy of a patent infringement lawsuit to the 2003-04 carriers as a notice of circumstances. During the 2004-06 policy period, the insureds’ shareholders filed a securities class action against the company. The primary insurer determined that the earlier patent infringement lawsuit served as a notice of circumstances to which the securities litigation related, implicating coverage under the 2003-04 primary policy. The 2003-04 excess insurer disagreed with the primary insurer’s treatment of the patent infringement lawsuit as a notice of circumstances and denied coverage under the 2003-04 excess policy. The 2004-06 excess insurer agreed that the securities litigation and later filed derivative actions were properly treated as claims first made during the 2003-04 policy period and also denied coverage. While coverage litigation was pending, the securities litigation settled. The primary insurer paid its $10 million limit toward settlement and the 2003-04 excess insurer paid $5 million of its limit toward the settlement, subject to its right to recoup.

Prior rulings in this long-running coverage litigation from the United States Court of Appeals for the Ninth Circuit established that the submission of the patent infringement lawsuit to the 2003-04 excess insurer did not constitute adequate notice of circumstances. The Ninth Circuit also found that the primary insurer had invoked its 2003-04 policy and thus the 2004-06 primary policy had not been exhausted, so the 2004-06 excess policy could not be triggered until a judicial determination that the primary insurer’s decision to invoke its 2003-04 policy was incorrect enabled the primary insurer to adjust its records.

On remand, the trial court determined that the Ninth Circuit’s finding regarding the adequacy of the notice of circumstances as to the 2003-04 excess insurer was conclusive as to the adequacy of the notice of circumstances as to the 2003-04 primary insurer, as it involved the same notice under the same policy language. The court therefore concluded that the 2004-06 primary policy had been exhausted because the primary insurer had maintained the position that its payment could be considered covered by either its 2003-04 policy or its 2004-06 policy.

The court rejected the 2004-06 excess insurer’s contrary arguments. It held that the primary insurer did not waive the right to disavow the 2003-04 notice of circumstances because it expressly reserved all rights and expressed a position that it would honor either one of its policies. The court further rejected the “conclusory statement of opinion” provided by the 2004-06 insurer’s industry expert that shifting coverage form one insurer to the other does not comport with standard practices in the insurance industry. Moreover, the court determined that the 2004-06 excess insurer could not assert equitable estoppel because the insurer did not demonstrate that it detrimentally relied on the primary insurer providing coverage under its 2003-04 policy. In addition, the court rejected the 2004-06 excess insurer’s argument that the “known loss’ rule would apply, because California law makes clear that “previous knowledge of a potential future dispute does not preclude it from insurance coverage” where “the insured’s liability in a potential future action [i]s not a certainty.”

Because the 2004-06 policies had been triggered, the court found that the 2004-06 primary policy had been exhausted, and the 2004-06 excess insurer was liable under its policy. The court concluded that that the 2003-04 excess insurer could recover from the 2004-06 excess insurer its $5 million settlement contribution through equitable subrogation. Because the 2003-04 excess insurer had initially denied coverage, its payment was not “voluntary”—a requirement for subrogation. The court also awarded prejudgment interest from the date the 2003-04 excess insurer made its payment at the California statutory rate of 10% applicable to breach of contract.