United States: Teleflex Medical Incorporated v. National Union Fire Insurance Company Of Pittsburgh, PA

In Teleflex Medical Incorporated v. National Union Fire Insurance Company of Pittsburgh, PA, 851 F.3d 976 (March 21, 2017), the United States Court of Appeals for the Ninth Circuit affirmed a judgment entered against National Union Fire Insurance Company of Pittsburgh, PA ("National Union") based on its breach of the implied covenant of good faith and fair dealing due to its refusal to take over the defense of an underlying disparagement counterclaim or, alternatively, to contribute to a settlement negotiated between the insured, Teleflex Medical Incorporated ("Teleflex"), its primary insurer, Transcontinental Insurance Company ("CNA") and a third party, Ambu. In reaching its decision, the Court of Appeals relied on Diamond Heights Homeowners Association v. National American Insurance Company, 227 Cal.App.3d 563 (1991) ("Diamond Heights decision"). In the Diamond Heights decision, the California Court of Appeal ruled that an excess liability insurer has three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and primary insurer: The excess insurer can (1) approve the proposed settlement, (2) reject it and take over the defense, or (3) reject it, decline to take over the defense and face a potential lawsuit by the insured seeking contribution toward the settlement. Under the Diamond Heights decision, the insured is entitled to reimbursement if the excess insurer was given a reasonable opportunity to evaluate the proposed settlement, the settlement was covered and the settlement was reasonable and not the product of collusion.

In Teleflex the parties' dispute arose out of the settlement of a patent lawsuit filed by the insured, LMA North America, Inc. ("LMA"), against a competing company, Ambu, which manufactures laryngeal mask airway products. In response to LMA's lawsuit for product liability, Ambu filed a counterclaim for disparagement and false advertising. LMA was insured under a primary policy issued by CNA with limits of $1 Million and an excess policy issued by National Union with limits of $14 Million excess of the CNA policy. LMA and CNA negotiated a conditional settlement, wherein, Ambu would pay LMA $8.75 Million for its patent claims while LMA would pay Ambu $4.75 Million for the disparagement. The settlement was conditioned on LMA's ability to obtain approval and funding from CNA and National Union to resolve Ambu's counterclaim. In that regard, CNA committed its full $1 Million limit to the settlement. However, while National Union acknowledged that Ambu's claims were covered under its excess policy, it questioned whether the amount of the settlement was reasonable. After several rounds of information requests and responses from LMA's counsel concluding that LMA's liability ranged up to $10 Million, excluding potential treble damages, LMA demanded that National Union either agree to defend the Ambu counterclaim for disparagement or contribute to the settlement of such counterclaim. Ultimately, after three months of demands and exchanges of information, LMA finalized the settlement with Ambu and demanded that National Union contribute to such settlement. In response, National Union advised that it would assume the defense of the underlying suit if LMA could "undo" the settlement. LMA promptly responded that the executed settlement could not be undone.

Subsequently, LMA sued National Union for bad faith based on its failure to contribute to the settlement of the Ambu counterclaim. In rejecting a motion for summary judgment filed by National Union, the district court relied on the Diamond Heights decision and held that a jury could conclude that National Union acted unreasonably in delaying its response to LMA's request that National Union fund the contingent settlement or take over the defense of the Ambu counterclaims. Thereafter, the LMA case proceeded to trial and the jury unanimously found for LMA, on both the breach of contract and bad faith claims, but decided not to award punitive damages. Subsequently, the district court entered judgment in LMA's favor for $6,080,568.43, including $3,750,000.00 in contract damages; $1,216,580.99 in attorneys' fees, experts' fees and costs, and pre-judgment interest of $1,113,987.44.

National Union appealed the district court's judgment arguing that the Diamond Heights decision did not apply to the underlying Ambu counterclaim. Rather, National Union was entitled to judgment based on LMA's breach of the voluntary payments and no action clauses in the National Union excess policy. In rejecting National Union's arguments, the Court of Appeals held as follows:

The wisdom of the Diamond Heights rule may not be beyond reasonable debate. But for the implied covenant of good faith and fair dealing, the rule would be contrary to the language of the "no action" and "no voluntary payments" provisions. The rule thus arguably gives the insured and primary insurers more than was bargained for, at least if excess insurers have not raised their rates to accommodate for additional costs imposed by the rule. National Union notes that primary insurers charge a premium for the duty to defend, while excess insurers do not, as they generally may rely on defense funded by primary insurers.

However, as noted, the rule is fairly supported by other insurance principles and policy considerations. Indeed, the underlying notion that "no action" and "no voluntary payment" clauses do not create absolute rights to veto settlements is long established. Many courts have held that "when a primary insurer wrongfully denies coverage, unreasonably delays processing a claim, or refuses to defend an action against the insured as required by the policy, the insured is entitled to make a reasonable settlement of the claim in good faith and then sue for reimbursement, even though the policy prohibits settlements without the consent of the insurer." Diamond Heights, 227 Cal. App. 3d at 581 (collecting cases).

We hold that National Union has failed to show that the district court erred in "follow[ing] the state's intermediate appellate court decision," because National Union has not proffered "convincing evidence that the state's supreme court likely would not follow it." See Ryman, 505 F.3d at 994.2

The Court of Appeals also held that National Union's contention that the district court should have applied the "genuine dispute doctrine" to bar LMA's claim for bad faith failed. The Court of Appeals held as follows:

National Union challenges the judgment on the bad faith claim on two related grounds. National Union first argues that the judgment should be vacated because the district court did not instruct the jury on the genuine dispute doctrine. National Union contends that, under this doctrine, it did not act in bad faith because "a genuine dispute as to its coverage liability exist[ed]" due to uncertainty regarding "the applicability and viability of Diamond Heights."     

Even assuming that the genuine dispute doctrine applies to this case, National Union's argument fails. The district court correctly concluded that the doctrine is subsumed within the standard Judicial Council of California Civil Jury Instructions (CACI) for breach of good faith and fair dealing, which the district court gave to the jury. See Judicial Council of California Civil Jury Instructions No. 2331, Direction for Use (2016). Indeed, a California appellate court has affirmed a trial court's refusal to give special instructions on the genuine dispute doctrine beyond CACI 2331. McCoy v. Progressive W. Ins. Co., 171 Cal. App. 4th 785, 794 (2009). The court agreed with the trial court that "the genuine dispute doctrine was subsumed within the concept of what is reasonable and unreasonable as set forth in CACI 2331." Id. at 792. In other words, if a genuine dispute "as to the insurer's liability under the policy" exists, the insurer did not withhold its payment unreasonably, which is "[t]he linchpin of a bad faith claim." Id. at 793. Accordingly, the district court did not err in denying National Union's proposed instruction on the genuine dispute doctrine.

Lastly, the Court of Appeals held that the district court did not exceed its discretion in awarding attorneys' fees and expenses pursuant to the California Supreme Court's decision in Brandt v. Superior Court, 37 Cal.3d 813, 817 (1985).

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