9th Circuit Requires Excess Insurer to Contribute to Deal Reached by Insured and Primary Insurer

A new federal 9th Circuit appellate decision has ruled for the insured in its suit against its excess insurer that refused to contribute to a settlement. The district court denied the excess insurer’s motion for summary judgment that said the insured failed to secure its consent to the settlement as required by the excess policy. The federal 9th Circuit appellate court affirmed, agreeing with the lower court’s application of a 1991 California case. That decision held that an excess insurer must do one of three things with a proposed settlement of an underlying claim agreed by the insured and the primary insurer: (1) approve the deal, (2) reject the deal and assume the defense of the insured, or (3) say no to the deal and any defense with the possibility of being sued by the insured. The excess insurer did not do any of these things. The 9th Circuit found that “the insured is entitled to reimbursement if the excess insurer was given a reasonable opportunity to evaluate the proposed settlement, and the settlement was reasonable and not the product of collusion.” Although the excess insurer’s policy has consent language, the court stated that there is “no absolute right to veto a reasonable settlement.” The court stressed the public policy interests in the “implied covenant of good faith and fair dealing” between an insured and its insurers and in encouraging “fair and reasonable settlement of lawsuits.” Finally, the court reminded the excess insurer that it had options to challenge a proposed settlement or to nix it while still protecting its insured.