Potential Coverage Garners Total Defense: “Other Insurance” Provision Does Not Relieve Insurer’s Duty to Defend
The Central District of California recently rejected an attempt by Federal Insurance Company, a Chubb company, to avoid its duty to defend its insureds in an $8.5 million lawsuit with a former employee.
TriPacific Capital Advisors, LLC acquired Directors and Officers (D&O) coverage from Federal and Employment Practices Liability (EPL) coverage from Travelers Insurance Company. While those policies were in effect, a former TriPacific employee sued the company and its president, Geoffrey Fearns, for a variety of employment-related causes of action concerning his termination and compensation. TriPacific and Fearns tendered notice to both insurers, seeking indemnification and defense costs. Both policies contained a duty to defend. While Travelers agreed to defend under a reservation of rights, Federal denied coverage based on multiple grounds, including its policy’s “other insurance” provision, contending that the provision rendered its policy “excess” to the Travelers policy. Federal also argued that TriPacific had not satisfied the D&O policy’s $150,000 self-insured retention and, thus, coverage had not been implicated, in any event. TriPacific maintained that neither the SIR nor the “other insurance” provision pertained to Federal’s duty to defend and brought suit to enforce the duty to defend.
The court ruled that the duty to defend triggered at the moment TriPacific tendered notice, and it ordered Federal to provide a defense. U.S. District Judge James V. Selna reasoned that “other insurance” provisions apply when multiple carriers insure against the same risk; here, the D&O and EPL coverages were distinct for purposes of determining the duty to defend. In fact, the court deferred interpretation of the “other insurance” provision and any refund of defense costs until the conclusion of the underlying case. At that point, Federal would need to seek reimbursement for costs solely allocable to claims that would not be even “potentially covered” under the policy. Until then, California law requires insurers to provide a complete defense for mixed cases involving both potentially covered and uncovered causes of action. Judge Selna likewise rejected Federal’s argument that TriPacific first must exhaust the policy’s SIR, ruling that California law clearly provides that, while a retention may impact the amount of coverage, “it does not impact the immediacy of the duty to defend.”
TriPacific also prevailed against Federal’s arguments concerning control over the defense strategy and billable rates. As the court explained, by wrongfully refusing to defend, Federal surrendered any ability to control the defense or impose any cap on the billing rates charged for the defense. Rather, any challenge by Federal to the manner or cost of the defense would be limited to the reasonableness of any legal bills accumulated in defending against potentially covered claims.
The TriPacific decision is a reminder to policyholders that coverage for a particular loss or event often may be available under multiple insurance policies, and policyholders should therefore consider all potentially available insurance when faced with a loss. The decision also reiterates the breadth of an insurer’s defense obligation and should serve as a reminder that insurers must defend their policyholders against all claims, even where some appear unlikely to merit coverage. Only where the insurer ultimately proves that a portion of a claim is not covered may the insurer seek recoupment of the fractional portion of the defense for that non-covered claim.
The case is styled TriPacific Capital Advisors LLC v. Federal Insurance Co., No. 8:21-cv-00919, 2021 WL 5316407 (C.D. Cal. Nov. 15, 2021).