A Recent Ruling by the Ninth Circuit Vindicates Excess Carriers’ Rights

In an unpublished opinion issued on October 30, 2023, the Ninth Circuit ruled in favor of excess insurer Arch Insurance Company on various claims asserted by insured Vizio, Inc. arising from a settlement of class-action litigation regarding its Smart TV products (“Smart TV Litigation”) effected without Arch’s consent after Arch failed to provide a definitive acceptance or denial of Vizio’s “notice of claim”. The court rejected Vizio’s bad faith claim, reasoning that under California law there can be no valid bad faith claim in the absence of a predicate breach of contract. In addition, the court rejected Vizio’s equitable contribution claim, which it asserted as an assignee from a primary carrier. The court held that a primary carrier has no right to contribution from an excess carrier under California law.

Most of the court’s opinion deals with the rejection of Vizio’s breach of contract claim. That part of the court’s ruling had three prongs. First, it held that the consent provision in the underlying policy was applicable to the Arch excess policy via the latter’s “follows form” language. Second, the court held that the “Duties in the Event of a Claim” section of the Arch policy did not supplant the consent provision in the underlying policy. Third, the court rejected the argument that compliance with the consent provision was excused by Arch’s failure to respond to a “notice of claim” from Vizio with a definitive acceptance or denial. Vizio had sent an email with a “notice of claim” before the exhaustion of the underlying coverage. Arch responded to the email within less than a week, indicating that it was investigating the matter and requesting updates. Internally, Arch decided to deny coverage, but it never communicated that decision to Vizio. In the meantime, Vizio never sent Arch the requested updates about the Smart TV Litigation. While the court rejected the argument that the pre-exhaustion notice of claim was improper, it agreed with Arch that the failure to respond to the email with a definitive acceptance or denial was not a breach of Arch’s policy. While a state statutory provision, incorporated into California insurance policies, does require that an insurer accept or deny a claim within 40 days of tender of a “proof of claim,” that provision was not applicable. The email “notice of claim” was not a “proof of claim” starting the statutory 40-day clock. A “proof of claim” contains “evidence of a claim that ‘reasonably supports the magnitude or the amount of the loss,’” which the “notice of claim” did not contain. Because Vizio failed to adhere to the consent provision, “Arch was denied the opportunity to participate in the settlement negotiation, which the insurance contract established as a prerequisite to Arch’s duty to pay.”

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