Doe Run Resources V. Fidelity Case Study

No Contribution Required Of Excess Insurer Where It Did Not Consent To Settlement

In February, the California Court of Appeal ruled in Doe Run Resources Corp v. Fidelity & Casualty Co. of New York that an excess insurer did not have to contribute to the settlement where the insured failed to obtain its consent before signing the settlement agreement.

The case involved a complaint filed in 2001 by residents of Herculaneum, Missouri alleging that the defendant mining-company, Doe Run’s, lead and cadium smelting operations caused environmental damages.

Doe Run’s primary insurer, Zurich Insurance Co., defended Doe Run under a reservation of rights.
Fidelity & Casualty
A three-judge panel of the 4th District California Court of Appeal affirmed a judgment against the mining company, saying the excess insurer was not invited to a mediation session or asked to approve the resulting class-action settlement.
Doe Run's primary insurer, Zurich Insurance Co., defended the Doe Run under a reservation of rights. Excess insurer Fidelity & Casualty Co. of New York, did not join in the defense of Doe Run. In the course of litigation, Doe Run’s attorneys notified Fidelity of a scheduled mediation, but did not invite Fidelity to attend the mediation. During mediation, the parties reached a settlement for $55
million; Fidelity was not informed of the settlement until approximately one month after the agreement was reached and only after Fidelity asked for a case update.

Following settlement Doe Run sued Zurich in a coverage dispute, including Fidelity in the complaint. Fidelity brought a motion for relief of coverage stating that Doe Run failed to obtain its written consent to the settlement as required per the terms of the policy. The trial judge granted Fidelity’s motion. Doe Run appealed.

On appealed, Doe Run alleged that Fidelity’s consent was not required because Fidelity had no obligation until the primary insurance was exhausted. This did not occur until after the settlement. It also contended that Fidelity chose not to attend the mediation, which it could have.

On appeal, the Court followed the opinion of the Missouri Supreme Court in Johnston v.
Sweeney (2002) 68 S.W. 3rd, in which it was held that an policyholder who settles without first seeking consent of the insurer forfeits coverage. By entering into a settlement without the insurer’s consent, the insurer is foreclosed “from the 'opportunity' of disputing the amount of the damages.” The Court further held that the letter sent to Fidelity notifying of the mediation was insufficient warning to the insurer that it may need to approve a settlement because it offered “no estimate of the probabilities of settlement”, and more so, failed to provide the location of the
mediation.

This decision means that all insurers, in cases where there is an excess insurance policy, must be careful to ensure excess insurers are kept abreast of case developments and included in settlement negotiations, even if it does not appear the excess policy will be utilized. If you are an insurer and are seeking coverage from an excess policy or if you would like to review your practices to ensure excess coverage is protected, please contact Marc Zimet or Alan Jampol of Jampol Zimet LLP at [phone] or at [e-mail] or [e-mail]. They would be more than happy to help you.

By: Alan Jampol