The California Supreme Court ruled that a federal adjudicative proceeding before an administrative law judge qualifies as a "suit," activating an insurance company's duty to defend their policy holders.
In a previous case, the California Supreme Court held that a pollution-cleanup order from an environmental agency was not a "suit" and therefore, the company's insurer was not required to cover the cost of the company's cleanup obligations under the order.
However, the Court recently clarified the meaning of "suit" for insurance purposes. It held that a quasi-judicial adjudicative proceeding requiring more than three weeks of trial is a "suit." Accordingly, in such instances, an insurance company must defend the suit and provide coverage under its liability insurance policy.
The Issue: Does a "Hearing" Qualify as a "Suit" To Trigger Duty to Defend?
The issue arose when a manufacturer's inadequate work was discovered in a construction project overseen by an agency of the U.S. Department of the Interior. The agency's contracting officer found the manufacturer responsible for $40 million in damages, and the manufacturer appealed the decision to the former Interior Department Board of Contract Appeals.
The Board of Contract Appeals proceedings involved a 22-day hearing with testimony from numerous witnesses. The parties later agreed to a settlement by which the manufacturer paid the U.S. government $10 million.
The manufacturer was insured under several comprehensive liability insurance policies, and it asked its insurers to pay for the cost of its defense in the proceedings as well as the $10 million settlement. Many insurers refused to pay. The manufacturer then filed a lawsuit against the insurers that did not pay, claiming bad faith and breach of contract.
The trial court sided with the insurers, finding that the Board of Contract Appeals proceedings were not a "suit" as defined in their insurance policies or the previous cleanup-order case. The manufacturer appealed. The state appeals court ruled that defense and coverage costs were due under certain policies that defined a "suit" as a "civil proceeding." But, for policies that did not specifically define "suit," no coverage was required because the Board of Contract Appeals litigation was not a court proceeding-the definition provided in the previous cleanup-order decision.
California Supreme Court Overturns Lower Court, Finds "Proceedings" Same as a "Suit"
The California Supreme Court granted review of the case to determine whether the Board of Contract Appeals proceedings were a "suit" that triggered a duty to defend and provide coverage. The Court reasoned that, because the proceedings involved the filing of a complaint and testimony from sworn witnesses before an administrative law judge, a reasonable insured party would perceive the proceedings as a "suit" and expect coverage by its insurer.
Therefore, defense and settlement coverage is required when an insurance policy defines a suit as "civil proceedings" and also when federal adjudicative proceedings are held before an administrative law judge. If an insurance company denies coverage for such proceedings, an insured may be able to sue the insurance company for bad faith.
If you have questions about the often-confusing and complex process of determining the scope of an insurance policy, contact a knowledgeable insurance lawyer in your area.