Environmental Settlement Not Covered by Excess Insurer Due to Failure to Obtain Prior Consent

 CA appellate court applying MO law finds $55MM settlement not covered.

A California appeals court from the Fourth Appellate District, applying Missouri law, affirmed summary judgment for The Fidelity & Casualty Co. Of New York (“CNA”) in a case brought by its policyholder, Doe Run Resources.  CNA had denied coverage under its excess policy because Doe Run had not received CNA’s consent before settling the underlying environmental class action case against it for $55MM.

Doe Run is a Fluor Corp. subsidiary that was formerly known as St. Joe Minerals Co. It was sued by residents of Herculaneum, Missouri for alleged environmental damage at its mining operation there. The class was certified and proceeding to trial when Doe Run settled the case.  The appellate court found that the policyholder presented CNA with “a fait accompli in the form of a done-deal settlement of a case in contravention of an insurance policy’s consent clause.  Doing so forecloses the liability insurer from the ‘opportunity’ of disputing the amount of damages. That is, under Missouri law, sufficient prejudice by itself.” The appellate court thus affirmed the trial court’s grant of summary judgment for CNA.

In a letter from coverage counsel, Doe Run gave notice to CNA five days before a 2011 mediation session that had resulted in a settlement at 20 minutes past midnight.  The appellate court opinion described the letter as “decidedly equivocal” about the prospects for settlement and whether it might impact CNA’s limits.  It did not advise the time and place of the mediation and provided the letter gave no “figures, probabilities, or theories” which would have allowed CNA to gauge its possible exposure.

The handwritten settlement was subject to approval within five days by Doe Run’s CEO and the class. It was not conditioned on CNA’s approval. Thereafter, Doe Run did not notify CNA of the settlement for another month.  There were no contacts from Doe Run, despite the promise of one, for another four months when Doe Run initiated the coverage action.

The court found it significant that the requirement that the policyholder obtain the insurer’s “written consent” was contained in the Insuring Agreement.  Thus, it was part of the policyholder’s burden of proving coverage.  In discussing a seminal Missouri consent case, Johnston v. Sweany, the court found significant that the Missouri court in that case did not require a showing of prejudice to the insurer.  Nonetheless, even if Missouri required prejudice, the California appellate court found it was “apparent that Doe Run’s midnight (literally midnight) settlement with the Doyle plaintiffs, made without any consultation with [CNA], was sufficient prejudice under Missouri law.”

The court rejected Doe Run’s argument that it did not need to obtain CNA’s consent because the primary carrier disputed coverage and was not yet exhausted as of the date of settlement.  The court rejected this because it ignored the clear “written consent” requirement of the excess policy.

Doe Run’s second argument was that its failure to seek and obtain consent should be excused because CNA had the opportunity in the present action to challenge the settlement as prejudicial because it was unreasonably high.  The court held that there was prejudice simply because CNA had lost the opportunity to gauge the reasonableness of the settlement as it was being made.

Doe Run’s final argument was that it did not actually prevent CNA from attending the mediation.  The court rejected this primarily based on the failure of the notice letter to advise of the place, time and location of the mediation as well as the likelihood a settlement might actually be reached. The Doe Run Resources Corp. v. The Fid. & Cas. Co. of New York, No. G050689 (Cal. Ct. App. Feb. 1, 2016).

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