Appellate Update – March 2020

February 10, 2019, through April 6, 2020

The following published decisions may be of interest to attorneys practicing insurance law:

CALIFORNIA SUPREME COURT

California Adopts “Vertical Exhaustion” Rule for Access to Excess Insurance Policies.  Montrose Chemical Corp. of California v. Superior Court (2020) __ Cal.5th. __

In this coverage litigation arising out of environmental contamination, Montrose Chemical Company had established in an earlier stage of litigation that it was entitled to coverage for continuing, progressive environmental claims under primary and excess policies over many decades.  Having exhausted all of the primary policies dating from 1961 through 1985, Montrose argued it was entitled to “stack” coverage and obtain benefits under any excess policy once it exhausted a directly underlying excess policy for the same policy period (“vertical exhaustion”).  The insurers disagreed and argued that Montrose had to exhaust all of its lower layer excess coverage across all relevant policy periods (“horizontal exhaustion”) before accessing any of its higher layer coverage.  The Court of Appeal (Second Dist., Div. Three) held that the sequence in which the policies could be accessed had to be decided on a policy-by-policy basis, taking into account the relevant provisions of each policy, and that at least some of the policies required horizontal exhaustion before Montrose could access any higher-level policies.

The Supreme Court held in favor of Montrose, adopting the “vertical exhaustion” rule.  An insured is “entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period.”  However, an insurer who provides coverage may “seek reimbursement from other insurers that would have been liable to provide coverage under excess policies issued for any period in which the injury occurred.”

CALIFORNIA COURT OF APPEAL

California does not necessarily have specific personal jurisdiction over the parties to a contract for indemnity simply because the claim to be indemnified arose in California.     
Halyard Health, Inc. v. Kimberly-Clark Corporation (2020) __ Cal.App.5th __

Consumer goods manufacturer Kimberly-Clark spun off its healthcare equipment product lines, creating a separate company called Halyard Health.  Halyard Health agreed to indemnify Kimberly-Clark against certain claims, including an ongoing California class action concerning medical gowns.  When the class action resulted in a punitive damages judgment against Kimberly-Clark, a Delaware corporation with its principal place of business in Texas,  Halyard Health, a Delaware corporation with its principal place of business in Georgia, filed suit in California seeking a declaration it did not owe indemnity for the punitive damages award.  Kimberly-Clark moved to quash the suit on the ground that the parties agreed Kimberly-Clark is not subject to general personal jurisdiction in California and that the requirements for specific personal jurisdiction were lacking here.  The trial court agreed, concluding that although the underlying action involved the sale of gowns in California, the indemnity dispute had no connection to California.

A majority of the Court of Appeal (Second Dist., Div. Five) affirmed.  While Kimberly-Clark purposefully availed itself of the California market by selling gowns here, and the parties’ indemnity agreement specifically contemplated indemnity for the California class action, the declaratory relief action concerning the meaning of the parties’ agreement raised legal issues distinct from the underlying products liability lawsuit.  Thus, the declaratory relief action lacked a sufficient nexus to Kimberly-Clark’s California activities to require it to litigate that action in California.  A dissenting justice argued, however, that the indemnity suit concerning litigation in California had a sufficient nexus to California permit California to assert jurisdiction over Kimberly-Clark.

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Choice of law ruling from prior coverage litigation did not have res judicata effect on later coverage litigation.  Textron, Inc. v. Travelers Casualty and Surety Co. (2020) __ Cal.App.5th __Click here for opinion.

In 1991, when faced with various governmental and private lawsuits related to environmental contamination and personal injury, Textron, Inc. brought a successful declaratory judgment action in Rhode Island to declare that Rhode Island law applied to the over 250 liability insurance policies, including some issued by Travelers, that Textron believed provided coverage for the lawsuits. In 2011, Textron settled an asbestos personal injury lawsuit involving a California resident.  Textron sought insurance coverage from Travelers for the settlement.  Travelers argued that under the earlier choice of law ruling, Rhode Island law applied to the policies and accordingly, Rhode Island’s “manifestation trigger” rule applied to determine whether the injury arose during the policy period—and under that rule, the injury did not arise within the policy period.   Textron responded that the prior choice of law ruling did not have binding effect on the California action, and that under California choice of law rules, California’s “continuous trigger” rule applied to the asbestos claim.  Under that rule, because the asbestos-related injury began to occur during the Travelers policy period, there would be coverage.  The trial court found for Travelers and Textron appealed.

The Court of Appeal (Second Dist., Div. Four) reversed.  The prior Rhode Island choice of law ruling did not have collateral estoppel or judicial estoppel effect because the issue litigated there—whether Rhode Island law should apply to determine coverage for the underlying environmental and personal injury claims—was not the same issue being litigated in this case—whether California law should apply to determine coverage in the California asbestos personal injury action.  Notably, the Rhode Island decision was rendered before California adopted the “continuous trigger” rule, so there was not even a clear conflict in law at the time the earlier decision was rendered.  Thus, Textron was not estopped to seek application of California law and coverage for the asbestos injury.

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Coverage for malicious prosecution claims does not include coverage for Walker Process claims.  Travelers Property Casualty Company of America v. KLA-Tencor Corporation (2020) __ Cal.App.5th __Click here for opinion.

Travelers issued commercial general liability policies to KLA covering “personal injury” arising out of the insured’s commission of “offenses” including “malicious prosecution.”  KLA was sued in a federal antitrust action alleging a claim under Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp (1965) 382 U.S. 172, which allows for an antitrust claim based on allegations that the defendant used a fraudulently procured patent to monopolize and destroy competition.  KLA sought coverage from Travelers under the coverage for malicious prosecution claims. Travelers declined to defend.  In the subsequent coverage action, the trial court granted summary judgment for Travelers, ruling that KLA had no reasonable expectation of coverage for Walker Process claims under the malicious prosecution coverage provision.

The Court of Appeal (Sixth Dist.) affirmed.  No reasonable insured could understand the term “malicious prosecution” to cover Walker Process claims, which arise out of fraud on the Patent and Trademark office and use of that fraud to harm market competition, not fraud in connection with a legal proceeding.  

NINTH CIRCUIT

Third party judgment creditors bringing a direct action against an insurer “stand in the shoes” of the insured and are therefore bound by an enforceable forum selection clause in the policy.  Lewis v. Liberty Mutual Insurance Company (9th Cir. 2020) __ F.3d __Click here for opinion.

The plaintiffs obtained a $45 million products liability judgment against EcoSmart, a supplier of a lighter fluid container that lacked a “flame arrester” safety device that would have prevented the accident that injured plaintiffs.  EcoSmart tendered the claim to its insurer, but the insurer denied coverage on the ground that the policy in effect at the time of the accident excluded coverage for accidents related to fuel containers lacking a “flame arrester.”  EcoSmart declared bankruptcy.  The plaintiffs then filed a direct action against the insurer in California state court, arguing that their claims were in fact covered by the prior policy that did not contain the fuel container exclusion.  Their theory was that under California Insurance Code section 678.1, the insurer had not provided sufficient notice of the change in coverage, resulting in the prior policy’s coverage remaining in effect for 60 additional days—including when the accident occurred.  The insurer removed the case and then immediately moved to dismiss for forum non conveniens based on a forum-selection clause in the policy that provided for all claims to be brought in Australia, which was where EcoSmart’s corporate parent was located and where the policy was issued.  The district court granted the motion.

The Ninth Circuit affirmed.    Under California law, a third party judgment creditor is bound by the provisions of the policy that bind the insured, so the forum-selection clause was binding on plaintiffs in the coverage action so long as it was enforceable.  It was.  Although Australia did not have provisions similar to California Insurance Code sections 11580 [permitting a judgment creditor to bring a direct action against an insurer] and 678.1—meaning plaintiffs’ claims would not likely succeed in Australia—nothing about those statutes indicated they reflected a fundamental California public policy that would override an otherwise valid forum-selection clause.  Further, the policy contained an Australia choice of law provision, so it was not clear that section 678.1 would apply even if the case remained in California.  

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This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.