AXIS Reinsurance Co. v. Northrop Grumman Corp., 091420 FED9, 19-55135

Docket Nº:19-55135
Opinion Judge:CALLAHAN, Circuit Judge:
Party Name:AXIS Reinsurance Company, a corporation, Plaintiff-Appellee, v. Northrop Grumman Corporation, a corporation, Defendant-Appellant.
Attorney:Kevin M. Fong (argued), Shaw Pittman LLP, San Francisco, California; Barry J. Fleishma, Shaw Pittman LLP, Washington, D.C.; for Defendant-Appellant. Kim W. West (argued) and Alec H. Boyd, Clyde & Co. U.S. LLP, San Francisco, California, for Plaintiff-Appellee.
Judge Panel:Before: Richard A. Paez, Consuelo M. Callahan, and Patrick J. Bumatay, Circuit Judges.
Case Date:September 14, 2020
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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AXIS Reinsurance Company, a corporation, Plaintiff-Appellee,

v.

Northrop Grumman Corporation, a corporation, Defendant-Appellant.

No. 19-55135

United States Court of Appeals, Ninth Circuit

September 14, 2020

Argued and Submitted March 30, 2020 Pasadena, California

Appeal from the United States District Court for the Central District of California André Birotte, Jr., District Judge, Presiding D.C. No. 2:17-cv-08660-AB-JC

Kevin M. Fong (argued), Shaw Pittman LLP, San Francisco, California; Barry J. Fleishma, Shaw Pittman LLP, Washington, D.C.; for Defendant-Appellant.

Kim W. West (argued) and Alec H. Boyd, Clyde & Co. U.S. LLP, San Francisco, California, for Plaintiff-Appellee.

Before: Richard A. Paez, Consuelo M. Callahan, and Patrick J. Bumatay, Circuit Judges.

SUMMARY[*]

Diversity/Insurance

The panel reversed the district court's summary judgment in favor of plaintiff, AXIS Reinsurance, and remanded, in AXIS's action seeking reimbursement of an insurance payment that it made, as a secondary excess insurer, to Northrop Grumman Corporation.

AXIS argued that Northrop's underlying insurers paid an uncovered claim arising from Northrop's settlement of alleged ERISA violations, thereby "improperly eroding" their policies' liability limits and prematurely triggering AXIS's excess coverage. The district court agreed and held that AXIS was entitled to seek reimbursement of the payment amount from Northrop against a later, valid claim.

The panel held that, consistent with the limited caselaw and secondary sources that have addressed excess insurer claims of "improper erosion," "improper exhaustion," "wrongful exhaustion," and similar challenges to the payment decisions of underlying insurers, an excess insurer may not challenge those decisions in order to argue that the underlying liability limits were not (or should not have been) exhausted absent a showing of fraud or bad faith, or the specific reservation of such a right in its contract with the insured.

The panel concluded that no reasonable insured in Northrop's position would understand that it might have to justify its underlying insurers' payment decisions as a prerequisite to obtaining excess coverage from AXIS. Therefore, consistent with the general rule favoring the objectively reasonable expectations of the insured, the panel reversed the district court's summary judgment order and remanded for further proceedings consistent with its opinion.

OPINION

CALLAHAN, Circuit Judge:

This case raises an issue of first impression in our circuit: when, if ever, may an excess insurer challenge an underlying insurer's payment decision as outside the scope of coverage? AXIS Reinsurance Company ("AXIS"), a secondary excess insurer to Northrop Grumman Corporation ("Northrop"), argues that underlying insurers paid an uncovered claim arising from Northrop's settlement of alleged ERISA violations, thereby "improperly eroding" their policies' liability limits and prematurely triggering AXIS's excess coverage. The district court agreed and held that AXIS was entitled to seek reimbursement of the payment amount from Northrop against a later, valid claim. We find that no authority supports AXIS's theory of "improper erosion." Nor did AXIS clearly reserve its right to challenge the underlying insurers' coverage decision. Therefore, consistent with the general rule favoring the objectively reasonable expectations of the insured, we reverse.

I

Two separate lawsuits were brought against Northrop alleging violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. Northrop settled both lawsuits out of court, in each case referring its settlement payment to its insurers for coverage.

The first lawsuit was brought by the Department of Labor ("DOL") following a broad investigation into the administration of the Northrop Grumman Savings Plan ("Plan") and several related employee savings and pension plans. The DOL investigation resulted in assertions of wrongful activity by a number of Northrop-related entities and individuals. In December 2016, Northrop settled the alleged violations, consenting to pay certain amounts1 to the Plan and to the DOL in exchange for a full release from further liability ("DOL Settlement"). Although Northrop agreed to the payments, it did not admit or deny the DOL's allegations. Because the parties settled out of court, there were no judicial findings or factual stipulations regarding the proportion of the settlement payments, if any, that constituted disgorgement.2

The second lawsuit was brought on behalf of the Plan and another Northrop savings program. Northrop settled this second lawsuit in June 2017 for the sum of $16, 750, 000 ("Grabek Settlement").

At the time, Northrop carried a multi-layered program of Employee Benefit Plan Fiduciary Liability Insurance, including (1) a $15 million primary insurance policy with National Union Fire Insurance Company of Pittsburgh, PA ("National Union"); (2) a $15 million excess insurance policy with Continental Casualty Company ("CNA"); and (3) a $15 million secondary excess insurance policy with AXIS. As the secondary excess insurer, AXIS was required to "drop down" to provide coverage only when the combined $30 million liability limit of the underlying insurance policies was exhausted for "covered loss" under those policies.

National Union determined that the DOL Settlement fell under its primary insurance policy, which covered loss resulting from actual or alleged wrongful acts by Northrop or its employees, including violations of ERISA. The policy defined "loss" to include damages, judgments, settlements, and defense costs, but not "matters which may be deemed uninsurable under [applicable state] law" or "civil or criminal fines or penalties imposed by law, except . . . the 20 percent or less penalty imposed upon an Insured under Section 502(1) of ERISA, with respect to covered settlements or judgments."3 National Union paid a portion of the DOL Settlement amount, exhausting its $15 million liability limit. CNA agreed that the DOL Settlement fell within the scope of coverage and dropped down to pay the remainder of the settlement amount. Because CNA's partial payment did not fully exhaust its $15 million liability limit, AXIS was not required to cover any portion of the DOL Settlement.

Because the DOL Settlement exhausted National Union's primary coverage, CNA covered the subsequent Grabek Settlement as primary insurer. CNA determined that this settlement, like the DOL Settlement, fell within its scope of coverage and it contributed $7, 043, 762.08 of the total settlement cost, exhausting the remainder of its $15 million liability limit. AXIS was then called upon to pay the remainder of the settlement, $9, 706, 237.92. AXIS did not contest the validity of the Grabek Settlement under the terms of its excess policy and covered its portion of the settlement. However, it notified Northrop that it intended to seek reimbursement of the DOL Settlement amount on the ground that this earlier payment by National Union and CNA was "not for covered loss." AXIS argued that the underlying insurers' improper payment of the DOL Settlement prematurely triggered AXIS's excess liability once the Grabek Settlement was filed.

AXIS accordingly filed a complaint for declaratory relief and damages against Northrop, alleging that "the collective payment of [the DOL Settlement] by National Union and [CNA] . . . was not for covered loss and therefore resulted in improper erosion of the Limits of Liability of" the underlying policies, which "caus[ed] AXIS to 'drop down' by [the settlement amount, ] . . . unjustly enriching Northrop by the same amount." Specifically, AXIS argued that the DOL Settlement payment constituted disgorgement, rendering it "uninsurable under [California] law" and, therefore, an "uncovered loss" under the terms of the primary and excess policies. The district court agreed and granted AXIS's motion for summary judgment. It held that, "[a]s a matter of law, AXIS's payment of . . . the DOL Settlement [amount] was not covered by its excess coverage policy" and therefore "AXIS is entitled to reimbursement of [the settlement amount] for its excess coverage."

Northrop timely appealed. We have jurisdiction under 28 U.S.C. § 1291.

II

We review de novo a district court's grant of summary judgment. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). Summary judgment is appropriate where there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Id. (citing Fed.R.Civ.P. 56(a)). In making this determination, we view the evidence in the light most favorable to the non-moving party, drawing all justifiable inferences in that party's favor. Id.

III

We begin our analysis by noting that no circuit precedent adopts the "improper erosion" theory of recovery asserted by AXIS and relied upon by the district court in its summary judgment order. Under that theory, when an entity purchases multiple layers of insurance, the insured entity (in this case, Northrop) bears the risk that an excess insurer might disagree with payment decisions made by underlying insurers, and might withhold payment of valid claims it would otherwise cover to compensate itself for the exposure caused by those allegedly improper payments. Northrop argues that this theory is unsupported and wrong, and that AXIS, not Northrop, assumed the risk that Northrop's primary and first level excess insurers might adjust claims in a manner that would trigger AXIS's secondary excess coverage.

We agree with Northrop's perspective, which is consistent with the limited caselaw that has addressed this issue. Those...

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