Seventh Circuit Court of Appeals Decision Stresses Insurers Denying Coverage for Class-Action Liability Cases Should Intervene Early

By Christopher R Dunsing on August 03, 2015 | Posted in Blog

A recent Seventh Circuit Court of Appeals decision emphasizes that an insurer who denies coverage to its insured should take every step to protect its own interests in the liability action as soon as possible, otherwise it may be subjected to a collaborative settlement between the insured and the plaintiff.  In C.E. Design, Ltd. and Paldo Sign and Display Co. v. King Supply Co., LLC, et al., Seventh Circuit Court of Appeals Case No. 12-2930, Judge Posner, writing for the majority, affirmed the district court’s denial of two insurers’ untimely motion to intervene in a class-action Telephone Consumer Protection Act (“TCPA”) case.  A copy of the decision can be found here.  For a more in-depth discussion of the case and its impact, please read Langhenry, Gillen, Lundquist & Johnson, LLC counsel, Chris Dunsing’s discussion of the case with the Bloomberg Bureau of National Affairs, located here.1

The insurers in C.E. Design denied defense and indemnity coverage to their insured under a provision of the policy expressly excluding TCPA claims, and filed a declaratory judgment action.  Almost three years from the filing of the suit, the insured, King Supply Co., LLC, sought the district court’s approval of a collaborative settlement with the plaintiff class for $20 million dollars, representing the full combined limits of the insurer’s policies.  The insurers moved to intervene and challenge the settlement because the declaratory action was still proceeding, their coverage position had not yet been ruled upon and they were at risk of being responsible for said settlement amount.

In affirming the district court’s denial of the insurer’s motion to intervene, Judge Posner noted that “[t]he insurers in this case were right to worry that class counsel in the Telephone Consumer Protection Act class action suit and the defendant in that suit, King Supply, might collude to mulct the insurance company for an excessive recovery, favorable to the class and to class counsel and harmless to the class action defendant.   But they should have begun worrying when the suit was filed rather than almost three years later.”  “The insurers should have foreseen the danger of such a settlement from the outset; had they wished to challenge it on the ground that class counsel and King Supply were conspiring to overcompensate the class, they should have moved to intervene at the outset of the litigation, not nearly three years later, when the settlement had been negotiated and was about to be presented to the district court for approval.”  “At argument their lawyer said they’d decided not to take over the defense because that would have required them to incur legal fees. Yet expending a few hundred thousand dollars on legal fees to defend against a possible loss of $20 million would have been a reasonable investment.”

In the end, Judge Posner’s decision stresses that an insurer denying coverage to its insured should be mindful that the insured has no duty to act in its best interests.  An insurer should move quickly to provide a defense to the insured under a reservation of rights while the declaratory judgment coverage action is being resolved.  Most notably, while Judge Posner’s decision suggests that an insurer can alternatively move to intervene in the liability action and seek to stay those proceedings while the declaratory action is being determined, Judge Hamilton’s concurrence found that an insurer does not have standing for such intervention.  “The district court here correctly rejected that premise. Insurers gain an interest in an underlying tort suit—and require protection from a settlement in that case—if and only if they lose the coverage issue (typically in a separate suit) and are therefore on the hook to indemnify the insured.”

1. Chris Dunsing’s commentary in Bloomberg BNA reproduced with permission from Class Litigation Report, 16 CLASS 811 (July 24, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>