Greed & Hope of Punitive Damages Results in Nothing
Underlying this insurance dispute is a lawsuit between Marvin W. Durment (Durment) and several policyholders of Burlington and Endurance over alleged breaches of a joint venture agreement and an intellectual property agreement. The insurers failed to defend the policyholders against an amended complaint tendered to the insurers on the eve of trial. The policyholders then settled with Durment, assigning their claims against the insurers to him in exchange for a covenant not to execute against the policyholders.
In Marvin W. Durment; et al. v. The Burlington Insurance Company, a North Carolina corporation v. Endurance American Specialty Insurance Company, a Delaware corporation, No. 19-55353, United States Court Of Appeals For The Ninth Circuit (July 22, 2020) Marvin Durment appealed the grant of summary judgment in favor of Burlington Insurance Company and Endurance American Specialty Insurance Company.
Durment and several policyholders of Burlington and Endurance sued over alleged breaches of a joint venture agreement and an intellectual property agreement. The insurers failed to defend the policyholders against an amended complaint tendered to the insurers on the eve of trial. The policyholders, members of the joint venture, then effected a settlement with Durment for no money but assigning their claims against the insurers to Durment in exchange for a covenant not to execute.
Durment, hoping to collect the agreed amount of the settlement plus tort damages for bad faith, sued Burlington and Endurance, seeking reimbursement and bad faith tort damages.
The district court granted summary judgment to both insurers on the reimbursement claim and to Endurance and Burlington on the bad faith claim.
Durment argued that the district court erred by concluding that an insurer that breaches the duty to defend is not liable for settlement costs outside the scope of the insurer’s indemnification duty. Well-settled law establishes that a breaching insurer is generally liable for a post-breach judgment only to the extent of coverage.
Where the insured settles the underlying claim, the court must also consider the issue of the duty to indemnify, because if it turns out the policy covered the claim, the amount of reasonable, good faith settlement payments made by the insured are recoverable. The plaintiff’s ultimate recovery against breaching insurers after settling the underlying claim will depend upon it being established that there was coverage and that the insurers were obligated to indemnify the insured.
By definition, the duty to indemnify entails the payment of money in order to resolve liability. Settlement costs cannot be defense costs because, instead, they resolve liability. Therefore, the Ninth Circuit concluded that the district court correctly applied California law to reject Durment’s argument that he could recover for settlement amounts from the insurers without establishing coverage.
However, the two bases Durment relies upon to establish economic loss—the insureds’ settlement costs that they assigned to him and his attorney’s fees in this action—were unconvincing.
Although an assignee can show economic loss based on costs incurred by an assignor, this presupposes that the assignor has incurred actual costs. Because Durment’s covenant not to execute against the insureds insulated the insureds from actual losses, the settlement did not involve the sort of concrete interference with property rights that California courts consider a threshold requirement of economic loss.
Likewise, the attorney’s fees Durment has incurred in this litigation cannot satisfy the economic loss requirement because California law entitles a plaintiff in an insurance coverage dispute to recover attorney’s fees only to the extent those fees were incurred to obtain the policy benefits.
Because Durment failed to recover policy benefits, he is not entitled to attorney’s fees and he cannot use his fees to show economic loss.
Durment was snookered. If the policyholders with whom he settled had any assets to pay the settlement he should have taken that money. If not, he took a chance hoping to force two insurers to settle. Since they had no coverage for the indemnity portion of the claim and had paid up to the moment of settlement to defend the policyholders, Durment was unable to obtain an assignment of any claim had by the policyholders and there was no coverage for the claim of indemnity, he got nothing. The covenant not to execute did away with any rights he could have obtained from the insurers.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts