Breached Policy Provisions Justify Denial Of Coverage
National Union Fire Insurance Company (National) issued a $25 million layer of liability coverage to Motiva Enterprises, LLC (Motiva). National was sued by Motiva when, after a large loss, the insurer refused to reimburse a loss settlement.
Prior to filing its lawsuit, Motiva was faced with a claim by an employee who was injured when an acid storage tank erupted in the company’s refinery. National had offered to defend Motiva against the claim, subject to a reservation of rights. Instead, without the involvement of the insurer, Motiva entered into negotiations with the worker and reached a settlement of $17 million. It then asked National for reimbursement. However, National denied the claim, advising that Motiva breached their policy's consent-to-settle and cooperation provisions. This prompted Motiva’s lawsuit.
Motiva requested a court ruling that the company had not breach the policy. It argued that because National only agreed to defend them with a reservation of rights, it was no longer obligated to comply with other policy provisions. The court found against the manufacturer, which led Motiva to appeal.
The higher court reviewed both parties' arguments. Motiva stated that there was no breach since its insurer did not offer an unqualified legal defense of the claim. Motiva also argued that, according to state law, the insurer could not refuse to pay the claim unless it proved that its rights were prejudiced. National countered that it still had the right to be involved with any settlement discussions. Further, the insurer claimed that Motiva's action was prejudicial and that Motiva failed to cooperate with the insurer.
The records showed that Motiva asked National to send a representative to a mediation between Motiva and the injured employee. However, Motiva later dismissed the representative from the meeting. Afterwards, without the National representative present, Motiva finalized the loss settlement. Prior to the settlement, Motiva also refused to provide National with copies of legal paperwork related to the claim it just agreed to settle.
After reviewing several relevant cases, the court determined that National's reservation of rights did not alter its expectation that the insured seek permission before agreeing to a settlement. The court also upheld that the insurer was justified in demanding the insured's cooperation during the investigation. The appellate court considered Motiva's unauthorized settlement as prejudicing National's rights. The lower court ruling in favor of the insurer was affirmed.
Motiva Enterprises, LLC, Plaintiff-Appellant, v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Defendant-Appellee. U.S. Court of Appeals, 5th Circuit. No 05-20139. Filed March 28, 2006. Affirmed.
http://caselaw.lp.findlaw.com/data2/circs/5th/0520139cv1p.pdf [downloaded 03/31/06]
