Articles & Updates

Court Finds Insurer Too Late To Litigate After Setting Up A “Hostage Situation”

Nov 19, 2020 | Articles & Updates

A federal district court recently concluded that an insurer which had denied defense and indemnification obligations to its insured was too late to litigate its duty to indemnify. The court found that because the underlying lawsuit for which the insured sought coverage involved multiple claims and multiple parties, a global settlement of those claims, and there were no factual findings in the underlying lawsuit to consider in determining whether indemnification was owed, “the duty to indemnify must follow the duty to defend.” See Liberty Mut. Ins. Co. v. Penn Nat’l Mut. Cas. Ins. Co., 2020 WL 6536615 (W.D. Pa. Nov. 6, 2020). The court concluded that the insurer was required to defend and indemnify the insured.

In Liberty Mutual, a laborer working on a construction project was killed when a concrete panel manufactured by Flexicore, Penn National’s insured, collapsed on top of him. Liberty Mutual’s insured, Cost Company (“Cost”), was a subcontractor on the project who had subcontracted with Flexicore and was named as an additional insured on Flexicore’s insurance policy with Penn National.  The laborer’s estate brought wrongful death claims against both Cost and Flexicore (“Underlying Action”).  When Liberty Mutual requested that Penn National defend and indemnify Cost in the Underlying Action, Penn National refused.  The parties subsequently entered into a global settlement of the Underlying Action.  Liberty Mutual then brought a declaratory judgment action against Penn National seeking a declaration that Penn National had a duty to defend and indemnify Cost and that Liberty Mutual was entitled to reimbursement from Penn National for Liberty Mutual’s costs to defend and settle the Underlying Action, plus interest, attorneys’ fees, and costs.

The court noted that in a prior opinion, it had resolved the question of Penn National’s duty to defend Cost, holding that Penn National did have such a duty.  The court then addressed the indemnification issue.  The court found that ordinarily, the duty to indemnify arises only when the insured is found liable for damages which fall within the coverage provided by the policy.  However, the court held that a duty to indemnify may arise in a case i) with multiple parties, multiple theories of liability, and a settlement making liability among competing parties impossible to determine, when ii) there is a concern that an insurer could foreclose indemnification by its conduct relative to the underlying lawsuit. The court found that when those factors converge, “the indemnity obligation follows the duty to defend.”

The court concluded that the case clearly involved multiple parties, multiple theories of liability, and a settlement that made liability impossible to determine. With respect to the second element, the court found that Penn National settled the case for its insured, Flexicore, but did not contribute on behalf of its additional insured, Cost, and then sought to foreclose indemnification and litigate the issue of the insured’s liability and any coverage defenses before the court.  The court concluded that the refusal to defend and participate on behalf of Cost set up a “hostage situation” for the benefit of Penn National by forcing Cost to make a settlement decision while facing the risks attendant to a jury trial with a sympathetic plaintiff, while the insurer reserved the dispute regarding its coverage obligations to Cost for a later bench trial. The court stated that it would not reward the insurer’s “inequitable” conduct.