Scholle Corp. v. Agricultural Ins. Co., G037847 (Cal. App. 4/9/2008)
| Decision Date | 09 April 2008 |
| Docket Number | G037847 |
| Court | California Court of Appeals Court of Appeals |
| Parties | SCHOLLE CORPORATION et al., Plaintiffs and Appellants, v. AGRICULTURAL INSURANCE COMPANY et al., Defendants and Respondents. |
Appeal from orders of the Superior Court of Orange County, No. 04CC08964, Steven L. Perk, Judge. Reversed.
Prenovost, Normandin, Bergh & Dawe, Michael G. Dawe and Paula M. Harrelson for Plaintiffs and Appellants.
Murchison & Cumming, Jean M. Lawler and Bryan M. Weiss for Defendants and Respondents.
This case illustrates a classic "Catch-22." The excess insurer refused to pay the claim because the primary insurer had not paid its share. The primary insurer refused to pay its share because the insured had not settled with the claimant. The insured could not settle with the claimant because the excess insurer threatened to deny coverage for the claim if the insured did so.
Plaintiffs Scholle Corporation and Scholle Industries PTY, Ltd. (collectively Scholle) appeal a judgment the trial court entered after sustaining demurrers of defendants Agricultural Insurance Company and Great American Assurance Company (collectively AIC) to Scholle's third amended complaint without leave to amend. Scholle contends the trial court erred because it determined that AIC, as excess insurer, had no duty to investigate, defend, or indemnify Scholle until after the primary insurer had exhausted its policy limits through payment.
We conclude the complaint states a cause of action for breach of contract because it alleges AIC unreasonably refused to consent to a settlement of a claim made by one of Scholle's customers, despite an independent adjuster having determined Scholle's liability, and AIC having no basis on which to object. We agree with the trial court, however, that Scholle may not bring causes of action for tortious breach of contract or breach of fiduciary duty. Finally, we conclude that the complaint adequately alleges a cause of action under Illinois Insurance Code, 215 ILCS 5/155. Accordingly, we reverse the judgment.
Scholle is the producer of a "bag-in-a-box" product used by an Australian winemaker BRL Hardy (BRL), one of Scholle's best clients, to export wine to Europe for retail sale. The plastic taps on the bags—provided by a third-party supplier — leaked, forcing BRL to issue a recall throughout Europe. In January 2002, BRL made a claim against Scholle for approximately AU $10 million, or roughly US $6 million. Scholle, in turn, tendered the claim to Royal Indemnity Company, successor in interest to Royal Insurance Company of America (Royal),1 its primary liability insurer, and AIC, its umbrella liability insurer.
The Royal insurance policy had limits of $900,000 per occurrence, with a self-insured retention of $100,000 per occurrence, and $500,000 aggregate. The AIC policy provided primary coverage for claims covered under it, but not covered under the Royal policy. For claims covered under the Royal policy, the AIC policy provided only excess coverage. The limits of the AIC policy, whether primary or excess, were $50,000,000.
Because neither insurer investigated the BRL claim, Scholle hired an independent adjuster, who issued a report in November 2002 concluding Scholle was liable for the amount claimed. Scholle repeatedly advised both insurers liability to BRL was a "substantial certainty," and any failure to promptly compensate BRL would irreparably harm and potentially jeopardize Scholle's lucrative business relationship with BRL.
In January 2003, Royal conceded that Scholle was liable to BRL and acknowledged its obligation to pay its single "occurrence" policy limit of $900,000 based on the findings of the adjustor's report. Nonetheless, Royal refused to provide any funds, arguing that Scholle must settle the entire BRL claim to trigger coverage under its policy.
When Scholle attempted to settle the BRL claim, however, AIC refused to consent to the settlement, arguing that Scholle was not liable to BRL. AIC warned Scholle it would deem any settlement payment voluntary and deny coverage under the AIC policy if Scholle settled without AIC's consent.
In November 2003, Royal paid the $900,000 single occurrence limit, but refused to indemnify Scholle for the investigation costs it had incurred. In March 2004, Scholle sued the tap manufacturers in Australia, and funded the litigation until AIC agreed to do so in December 2004.
Scholle sued Royal and AIC for indemnification of the BRL claim, consequential damages due to the insurers' delay, and unreimbursed expenses for, among other things, the independent adjustor. Scholle alleged it could have reached a reasonable settlement with BRL had AIC not repeatedly threatened to withhold coverage if Scholle settled without its consent.
Despite AIC's threats, Scholle settled with BRL in October 2004. Scholle agreed to pay BRL AU $9.17 million over a six-year period, with interest to be determined later. Using borrowed funds, Scholle made a down payment of AU $4.5 million, and agreed to pay the balance in five equal annual installments.
In February 2005, after meeting with Scholle representatives, AIC withdrew its contention that Scholle's settlement with BRL constituted an uncovered voluntary payment, and authorized Scholle to settle BRL's claim for interest on the settlement amount. About a week later, AIC offered to partially indemnify Scholle and encouraged Scholle to release its claims against AIC. AIC explained its failure to tender full indemnification as a desire to keep some of Scholle's "skin in the game." When Scholle rejected AIC's partial indemnification offer, AIC finally agreed to pay the full amount of the BRL claim. AIC paid Scholle US $2,185,000 in June 2005, and directly paid BRL US $4,809,577 in December 2005.
After Royal agreed to cover the BRL claim, the parties could not agree whether the claim was a single occurrence under the Royal policy, or constituted multiple occurrences. AIC argued the claim arose from multiple occurrences, and Royal's liability should have been either the aggregate limits of a single policy, $1.5 million, or the aggregate limits of policies covering two years, totaling $3 million. Although Scholle shared AIC's views, it was uncertain and included alternative allegations in its complaint against Royal and AIC.
The three parties settled this dispute in January 2006. Under the LIMITED SETTLEMENT AND RELEASE AGREEMENT (Limited Settlement), Royal paid an additional $425,000 in January 2006. Although the parties agreed that Royal's payment would finally satisfy its indemnification obligation to Scholle, the Limited Settlement provided that the parties did not agree whether there was more than one occurrence under the Royal policy, deferring the unresolved issue for the present lawsuit.
Scholle's third amended complaint alleged causes of action against AIC for declaratory relief, breach of contract, tortious breach of contract, and breach of fiduciary duty. Scholle sought damages that included injury to reputation, loss of business opportunity, litigation fees and costs, and loss of productivity. In particular, Scholle contended that its inability to timely settle the BRL claim caused it to lose an opportunity to supply more wine bags to BRL's successor, which had sent out a request for proposal in September 2003.
The trial court sustained AIC's demurrer to each of Scholle's claims without leave to amend. In connection with a motion for reconsideration, Scholle submitted a proposed fourth amended complaint, which contained amendments to certain allegations, and added causes of action for fraud and violations of Illinois' Consumer Fraud and Deceptive Business Practices Act. The trial court denied the reconsideration motion and entered judgment in AIC's favor.
In its breach of contract claim, Scholle alleges AIC breached its insurance contract by failing to timely investigate, defend, and indemnify. In considering this claim, we analyze AIC's duty to investigate and defend separately from its duty to indemnify.
Because we apply Illinois law,2 we begin our review of the policy by noting the Illinois Supreme Court's discussion on the interpretation of insurance contracts under Illinois law: (Central Illinois Light Co. v. Home Ins. Co. (2004) 213 Ill. 2d 141, 153-154 (Central Illinois).)
AIC's duties of investigation and indemnification are...
To continue reading
Request your trial