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Insurance Coverage & Bad Faith Newsletter - Spring 2023

Santa Clara Valley Water District v. Century Indemnity Company

(No Duty to Indemnify Water District Under Excess and Primary Policies for Consent Decree Entered Without Notice to Insurer Under No Voluntary Payments Clauses in Policies)

(June 2023) - In Santa Clara Valley Water District v. Century Indemnity Co., 89 Cal.App.5th 1016 (March 30, 2023), the California Sixth District Court of Appeal affirmed the entry of summary judgment in favor of Century Indemnity Company (“Century”) against Santa Clara Valley Water District (“District”) in connection with a dispute related to a consent decree for the cleanup of a river watershed, wherein the District entered into the Decree without notice to Century. The Court of Appeal found that the “no voluntary payments” clauses in primary and excess policies issued to the District barred coverage of the amounts paid out under the Decree by the District for the cleanup of the watershed.

The parties dispute arose out of the following events transpiring over 19 years:

  • The year 2000 - Notice is given by the District to Century that the District had been advised in writing by the United States Department of the Interior’s Fish & Wildlife Service (“Fish & Wildlife”) of potential claims for natural resource damages resulting from mercury contamination in the Guadalupe River Watershed (the “watershed”) (the “NRD Claim”). Century requested additional information regarding the NRD Claim for a period of two years and advised that it had no duty to defend the District under its primary policies against the NRD Claim as a “suit” had not been filed against it, and there was no indemnity coverage afforded under its excess policies absent exhaustion of the primary policies.
  • July 28, 2005 - The claimants, Fish & Wildlife, and other entities (the “Trustees”) filed a lawsuit in United States District Court against the District (“federal action”). Two months prior to the lawsuit, the District and Trustees had negotiated a settlement of the NRD Claim. A Consent Decree was filed in the federal action memorializing the parties’ settlement. Pursuant to the Consent Decree, the Court entered a judgment on November 16, 2005 permitting it to oversee the enforcement of the Consent Decree. The District did not notify Century of the federal action or entry of the Consent Decree.
  • April 22, 2008 - The District notified Century of the federal action and entry of the Consent Decree and that it had incurred approximately $4 million in costs in complying with the terms of the Decree.
  • July 2008 - Century responded to the District’s notice of the federal action and entry of Consent Decree by reserving rights and advising the District that the “No Voluntary Payments” (“NVP”) clauses in its policies may apply to bar coverage of the NRD claim and amounts incurred in complying with the Consent Decree.
  • 2014 - The District completed the cleanup of the watershed and provided Century with a demand for indemnity for the costs of the cleanup incurred in complying with the Consent Decree.
  • January 14, 2015 - Century reserved its rights and advised the District that the NVP potentially barred coverage of the District’s claims.
  • October 5, 2015 - The District filed a complaint against Century alleging claims for breach of contract and bad faith based on Century’s refusal to pay for $8.4 million in clean-up costs under four primary policies and two excess policies.
  • March 2, 2018 - The trial court entered summary adjudication in favor of Century and held that the NVP clauses in the Century excess policies barred coverage of the District’s claims.
  • February 2019 - The District filed a first amended complaint contending that it was insured under four primary policies and three excess policies issued by Century in connection with the NRD Claim and amounts incurred for the cleanup of the watershed as required by the Consent Decree.
  • June 21, 2019 - The trial court granted summary judgment to Century based on the same grounds as its prior entry of summary adjudication relative to two of the Century excess policies. It also found that the third Century excess policy did not apply as there had been no adjudication of liability triggering indemnity coverage under this policy.

In affirming the trial court’s entry of summary judgment, the Court of Appeal reasoned as follows:

The two excess policies at issue in the summary adjudication motion (XBC 22333 and XBC 22358) contained nearly identical NVP provisions, the key language reading: “The [District] shall not, except at [its] own cost, voluntarily make any payment, assume any obligation or incur any expense … .” The evidence was undisputed that the District, in fact, voluntarily assumed obligations as provided in the Consent Decree and made payments and incurred expenses pursuant to that agreement without the knowledge, involvement, or approval of Century.

. . .

Based upon the undisputed facts presented below, Century established that the District's request for indemnity was barred under the NVP provisions in the excess policies. Applying the principles enunciated in Pitzer College, the District's conduct of negotiating and executing a settlement agreement (the Consent Decree) obligating it to incur substantial funds to settle the NRD Claim usurped the exclusive contractual role of the third party liability insurer, Century, of making the “‘“judgment call”’” concerning the “‘decision to pay any remediation costs outside the civil action context.’” (Pitzer College, supra, 8 Cal.5th at p. 108; see also ibid. [“the insurer's right to control the defense and settlement of claims is paramount in the third party context”].) As was the case with the insured in Jamestown Builders, the District agreed voluntarily to obligate itself to resolve a claim and went forward with making substantial expenditures to resolve a claim prior to notifying the insurer that it was making such an agreement or expending funds to comply with it. (See Jamestown Builders, supra, 77 Cal.App.4th at p. 346 [the import of an NVP provision is that “insureds cannot unilaterally settle a claim before the establishment of the claim against them and the insurer's refusal to defend in a lawsuit to establish liability”].) The Consent Decree to which the District agreed, without Century's consent, was therefore “coverage by fait accompli” (ibid.), precluded by the NVP provisions here.

The Court of Appeal also rejected the District’s argument that the Consent Decree constituted a judgment entitling it to indemnity under the Century policies. The Court of Appeal reasoned as follows:

The fact that the insured's settlement made without the participation or approval of the insurer was in the form of a consent decree does not alter our conclusion that the NVP provisions of the excess policies applied in this case. As the California Supreme Court has explained, “‘ecause their terms are arrived at through mutual agreement of the parties, consent decrees … closely resemble contracts.’ … ‘Indeed, it is the parties’ agreement that serves as the source of the court's authority to enter any judgment at all.’ ‘More importantly, it is the agreement of the parties, rather than the force of the law upon which the complaint was originally based, that creates the obligations embodied in a consent decree.’” (Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 66–67 [70 Cal. Rptr. 2d 118, 948 P.2d 909], fn. omitted (Aerojet-General).) The Consent Decree here was, as described in the document, a “settlement.” It was, by the District's admission, “heavily negotiated by the District's counsel.” Although the settlement by the Trustees and the District took the form of a consent decree, this did not alter the fact that it was an agreement to settle a third party claim without the consent of the insurer. Concluding that this agreement, because it took the form of a consent decree, was not subject to the NVP provisions of the excess policies “would be a triumph of form over substance.” (Grupe Development Co. v. Superior Court (1993) 4 Cal.4th 911, 921 [16 Cal. Rptr. 2d 226, 844 P.2d 545]; cf. AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 840 [274 Cal. Rptr. 820, 799 P.2d 1253] [rejecting interpretation of CGL insurance policy that would “exalt form over substance”].)

. . .

This conclusion is informed by the nature of the Consent Decree here, and by the nature of consent decrees generally. As the California Supreme Court has explained, quoting the United States Supreme Court in Firefighters v. Cleveland (1986) 478 U.S. 501 [92 L. Ed. 2d 405, 106 S. Ct. 3063]: “‘To be sure, consent decrees bear some of the earmarks of judgments entered after litigation. At the same time, because their terms are arrived at through mutual agreement of the parties, consent decrees also closely resemble contracts.’ Their ‘most fundamental characteristic,’ however, is their ‘voluntary nature.’ ‘Indeed, it is the parties’ agreement that serves as the source of the court's authority to enter any judgment at all.’ ‘More importantly, it is the agreement of the parties, rather than the force of the law upon which the complaint was originally based, that creates the obligations embodied in a consent decree.’” (Aerojet-General, supra, 17 Cal.4th at pp. 66–67, fn. omitted.)

The judgment entered here on the Consent Decree was founded upon the parties' agreement—an agreement that the District executed more than two months before the Consent Decree was filed in the federal action. The Consent Decree itself recited that it was a “settlement” that had been “made in good faith after arm’s-length negotiations” to “avoid complicated and potentially costly litigation.” The judgment was not an “adjudication” by the court that gave rise to an “ultimate net loss” under the excess policies that could be paid by the District “to the claimant to effect settlement” with the District thereafter being permitted to require indemnification from Century as to any amount “in excess of the retained limit.”

The Court of Appeal also rejected the District’s argument that it did not have to notify Century of the Consent Decree because it had already placed it on notice of the NRD Claim. The Court of Appeal reasoned as follows:

The District's August 2000 notice to Century of a potential claim by the Trustees against it did not relieve it of the obligation to notify Century in the event the potential claim ripened into a lawsuit or if circumstances known to the insured indicated a likelihood that the underlying liability would be exhausted and that Century's indemnification obligations under the excess policies would be implicated. Under the District's “no second notice” theory, once it had notified Century in August 2000 that the Trustees were asserting the NRD Claim against the District as a PRP, it could, without violating the NVP provisions, take any action without Century's knowledge or consent—including entering into a settlement agreement and settling a lawsuit filed five years later—and Century would nonetheless be required to indemnify the District. This view ignores (and, if accepted, would nullify) the express language of the NVP clauses that prohibited the insured from making voluntary payments without the insurer's consent. Further, it disregards the express requirements of the excess (and primary) policies that the District “immediately forward” any lawsuit to Century.

The District argues further, based upon Century's May 31, 2001 response to the tender of the NRD Claim, that Century “elected not to participate in the defense of the NRD Claim; having done so, it lost any contractual right to control the handling of that claim.” And elsewhere in its brief, it asserts that “Century refused to defend” the District. These contentions misconstrue the meaning and effect of Century's response to the claim notice from the District, are contrary to settled law concerning insurers' obligations under primary and excess third party liability policies, and do not support the District's “no second notice” argument.

Century's May 31, 2001 letter properly set forth its then existing obligations with respect to the NRD Claim under the primary and excess insurance policies. The primary insurance policies obligated Century to “defend any suit against the Insured.” “‘The duty to defend arises when the insured tenders defense of the third party lawsuit to the insurer.’” (Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 886 [77 Cal. Rptr. 2d 107, 959 P.2d 265], italics added (Foster-Gardner).) Century's letter did not constitute a “refus[al] to defend,” as urged by the District.

Further, at the time Century sent its May 31, 2001 letter in response to the District's notice of the NRD Claim, the insurer had no duty of indemnification under the excess policies. At that time, there was no lawsuit, let alone a judgment against the insured, that would trigger indemnification under Century's excess policies. (See Certain Underwriters at Lloyd's of London v. Superior Court (2001) 24 Cal.4th 945, 961 [103 Cal. Rptr. 2d 672, 16 P.3d 94] (Powerine I) [“the duty to indemnify is not broad enough to extend beyond ‘damages,’ i.e., money ordered by a court, but rather is limited thereto”].) As our high court has explained: “‘[T]he duty to indemnify “entails the payment of money”’ ‘has as its purpose “to resolve liability … after liability is established”,’ and ‘can arise only after damages are fixed in their amount’.” (County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 417 [33 Cal. Rptr. 3d 583, 118 P.3d 607], italics omitted.) Moreover, no indemnity duty had arisen when the District notified Century of the NRD Claim because, of course, there was nothing at the time of the tender to indicate that the primary policies had been or would be exhausted by a money judgment. (See Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1304 [77 Cal. Rptr. 2d 296] (Fireman's Fund) [excess policy “provides coverage after other identified insurance is no longer on the risk” and the insurer's “‘liability attaches only after a predetermined amount of primary coverage has been exhausted’”]; see also Aerojet-General Corp. v. Commercial Union Ins. Co. (2007) 155 Cal.App.4th 132, 143 [65 Cal. Rptr. 3d 803] [excess insurer had no duty to indemnify where insured and primary carrier settled lawsuit; indemnity coverage by excess insurer was limited to damages, and “the term ‘damages’ as … used in liability insurance indemnity provisions means only money ordered by a court to be paid”].)

It is true that an insurer's wrongful denial of a defense or coverage is a breach of contract, and in such instance, the insured, if it achieves a reasonable settlement of the third party claim against it may seek reimbursement from the insurer as damages. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791 [244 Cal. Rptr. 655, 750 P.2d 297] (Isaacson); see also Jamestown Builders, supra, 77 Cal.App.4th at pp. 347–348 [“[a]n insured that has been abandoned by its carrier … may protect its own interests by entering into a reasonable settlement without losing its right to recover on the policy”].) But here, there was no wrongful denial of defense or coverage by Century. And—contrary to the District's argument—Century's notification in its May 31, 2001 letter that its obligations for defense and indemnification under the primary and excess policies had not yet ripened did not constitute an “elect[ion] not to participate in the defense of the NRD Claim.”

The August 2000 claim notice did not excuse the District's obligation to notify Century of the federal action, and it did not negate the applicability of the NVP provisions in the policies.

In addition, the Court of Appeal found that the District’s agreement to pay for the cost of cleaning up the watershed pursuant to the Consent Decree was not an involuntary act, as it negotiated a settlement with the Trustees before the Decree was filed.

Lastly, the Court of Appeal rejected the District’s arguments that Century was equitably estopped from denying coverage of the NRD Claim cleanup costs and/or had waived its right to contest coverage of the claim.

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