Publications

Alert: Liability Insurance Policies Don’t Cover Settlements, Only Judgments, Court Rules

1/30/2008 Articles

The California Supreme Court has denied review of a California Court of Appeal decision that creates a significant trap for the unwary under most standard general liability policies.  The opinion held that a standard form excess insurance policy, which obligated the carrier to indemnify for "damages," did not cover amounts the insured agreed to pay in a settlement. 

In Aerojet-General Corp. v. Commercial Union Ins. Co., 155 Cal.App.4th 132 (September 13, 2007, review denied December 19, 2007), the Court of Appeal interpreted excess insurance policies that obligated carriers to indemnify Aerojet for "all sums which the Assured shall become legally obligated to pay, or by final judgment be adjudged to pay, to any person or persons as damages."  Relying on Certain Underwriters at Lloyd's of London v. Superior Court, 24 Cal.4th 945 (2001) ("Powerine I"), the Court of Appeal held that "the term ‘damages' as interpreted in Powerine I and as used in a liability insurance policy means only money ordered by a court to be paid."  It thus does not include settlement amounts paid by the insured.  The California Supreme Court also declined to depublish the opinion.

The decision contains a significant trap for the unwary.  Previously, when a carrier denied coverage, insureds were free to settle the claim without the carrier's consent and pursue coverage later.  That course of action now could eliminate coverage.  Even when the carrier is defending under a reservation of rights, the Aerojet decision creates an additional impediment to settlement and has the potential to increase litigation costs.

Implications of Aerojet-General for Policyholders

Although Aerojet-General was decided in the context of coverage for environmental claims under excess policies, the decision turned on the "as damages" language in the insuring agreement.  This language is standard in primary general liability policies, and common in excess, umbrella and errors and omissions policies.  Insureds therefore should consider the following steps:

  • Verify the wording in your policies, or ask your coverage counsel to do so. Some policies, especially umbrella and errors and omissions policies, cover "loss" or "ultimate net loss," terms often defined to include settlements.
  • Do not settle potentially covered claims without first obtaining the carrier's consent and waiver of any Aerojet defense - even if the carrier has denied coverage.
  • If the carrier is defending, seek an "Aerojet waiver" well in advance of beginning settlement negotiations.
  • Address the issue prospectively, at least at the time of policy renewal, if not sooner. Insurers may be willing to add an Aerojet waiver to the policy by endorsement. Risk managers should consider requesting such a waiver when placing or renewing coverage to avoid this trap for the unwary.

If the carrier refuses to waive Aerojet-General and consent to a settlement, the insured must weigh its alternatives, which may include: (1) entering into a settlement that is documented as a court judgment, (2) reducing the claim to judgment by means of an uncontested trial or a stipulated judgment with a covenant not to execute, or (3) choosing not to settle, and permitting the case to proceed to judgment, thereby triggering the duty to indemnify if damages are proven.  Evaluating these alternatives requires consideration of a number of factors, including whether the carrier is defending, whether the carrier has asserted a reservation of rights, the precise terms and conditions of the policy, the strength of the coverage argument, and the risk of excess exposure.  No simple answer exists how to handle this situation, and a case-by-case evaluation is required. 

The California Supreme Court may clarify the issues raised in Aerojet-General in the relatively near future in a case now pending before it, Ameron Int'l Corp. v. Insurance Co. of the State of PA.  That case held that there is a duty to defend and indemnify an insured in administrative proceedings, including a duty to pay amounts paid in settlement, under similar but arguably broader policy language than that at issue in Powerine I and Aerojet-General.

Firm Highlights

Publication

How to Navigate California Wage Statement Penalties After Naranjo v. Spectrum

On May 6, 2024, the California Supreme Court, in Naranjo v. Spectrum Security Services Inc. , clarified that an employer is not liable for statutory penalties for inaccurate wage statements when it had a...

Read More
News

Chambers USA 2024 Recognizes Farella Braun + Martel Lawyers, Practices

Farella Braun + Martel is pleased to announce that Chambers USA has recognized 16 lawyers and six practice areas in the legal directory’s 2024 edition. Individual California and Western U.S. Rankings: Sarah Bell &ndash...

Read More
Publication

Nonprofit Book Review: ABA Guidebook for Directors of Nonprofit Corporations

Welcome to  EO Radio Show - Your Nonprofit Legal Resource . In today’s episode, Cynthia Rowland’s guest is Bill Boyd, one of the editors, along with Lisa Rundquist, of the newly published fourth edition of...

Read More
News

Farella Braun + Martel Named Among 2024 Bay Area Best Places to Work

Read More
News

City of San Mateo Sued by Nonprofit Over New Housing Plan

Tom Mayhew spoke to CBS News about the lawsuit filed by Housing Action Coalition (HAC) and Farella against the City of San Mateo. The lawsuit challenges the city's recently adopted Housing Element in order to...

Read More
News

Farella Advises TILT Holdings Inc. on $10.5M Loan Transaction

Northern California legal powerhouse Farella Braun + Martel advised TILT Holdings Inc. , a global provider of cannabis business solutions, and its Pennsylvania subsidiary, grower and processor Standard Farms, on a $10.5 million loan transaction...

Read More
Publication

Advice for Nonprofit Investment Committees From an Investment Advisor

Welcome to  EO Radio Show - Your Nonprofit Legal Resource . In episode 82, we revisit the duties of directors in managing investment assets. Joining Cynthia Rowland today is Jennifer Nelson, Senior Wealth Manager...

Read More
News

Ex-DraftKings Exec Seeks Fast Trial To Test Noncompete Law

Holly Sutton, chair of Farella's Employment Law Group, provided expert commentary to Law360 for the article "Ex-DraftKings Exec Seeks Fast Trial To Test Noncompete Law." Read the article here (subscription required).

Read More
Publication

Nonprofit Quick Tip: State Filings in Oklahoma and Texas

Welcome to  EO Radio Show - Your Nonprofit Legal Resource . This is the 12th in a series of “Quick Tip” episodes focusing on the details of state registration of nonprofit corporations. In previous episodes, we...

Read More
Publication

7 Ways Companies and Content Creators Can Navigate Copyright Law for a Successful Partnership

In recent years, the advent of the social media “influencer” has revolutionized advertising. Companies often partner with influencers to market their products, hoping to tap into the influencer’s devoted audience. Likewise, influencers create certain content...

Read More