Insurers Denied Intervention - Unable To Contest $20 Million Settlement

By: Terrence Guolee 

A recent decision of the U.S. District Court for the Northern District of Illinois should give insurance carriers pause. In the case, CE Design Ltd. v. King Supply Co., LLC, No. 12-2930 (June 29, 2015) N.D. Ill., E. Div. Affirmed, the Seventh Circuit affirmed the District Court Magistrate's denial of three insurers' motion to intervene and contest its insured's settlement with plaintiff in a TCPA "junk fax" class action. This, even though the settlement would limit the insured's exposure to $200,000 of a total $20 Million that, based on the terms of the settlement, was only to be collected from the insurance carriers.


The litigation began in 2009, when CE Design filed a class action suit under the Telephone Consumer Protection Act, 47 U.S.C. § 227, against King Supply, alleging receipt of a junk advertising fax. King Supply had been issued commercial general liability and commercial umbrella policies by three insurance companies The carriers declined King Supply’s tenders of defense and indemnification, primarily based on provisions in the insurance policies that appeared to exempt liability under the Telephone Consumer Protection Act from the policies’ coverage.


The district court certified the class of recipients of advertising faxes from King Supply and designated CE Design as class representative. Following extended litigation and an appeal of the class certification, CE Design and its co-plaintiff agreed with King Supply to settle the case for $20 million, the limit of the insurance policies.


The settlement agreement, made in September 2011 and approved by the district court in July 2012, provided that only 1 percent of the judgment ($200,000) could be executed against King Supply. The rest would have to come from the insurance policies.


In January 2012, after learning of the settlement agreement, the insurers moved to intervene in the case under Federal Rules of Civil Procedure 24(a) and (b). They hoped to persuade the district court to delay approval of the settlement until there was a state-court determination of whether they owed King Supply coverage. They also sought to show the settlement was collusive and unreasonable and should be rejected - even if it was determined the insurance policies covered the TCPA claims.


The district court eventually denied the carriers’ motion to intervene as untimely. Per the District Court Magistrate, the insurers should have moved to intervene in 2009, when they first disclaimed coverage, as the insurers knew or should have known by then that the parties to the TCPA suit were likely to negotiate a settlement that would place liability on the insurers.


In so doing, the court rejected the carriers’ arguments that, until they learned the terms of the settlement, “they had assumed their denial of coverage had taken them off the hook.” Indeed, they pointed to a successful coverage rulings in a related declaratory judgment action in Illinois state court (on appeal as of the time of the magistrate's ruling) and that their focus on seeking intervention was to challenge the settlement as improper because the $20 million settlement so greatly exceeded King Supply’s ability to compensate the class and class counsel and overstated the value of the plaintiffs’ claims.


The court also rejected the carrier’s argument that King Supply “sold them down the river” by failing to defend against class counsel’s $20 million "money grab." In support of this claim, the carriers noted that King Supply had fought the class action suit at first and, as a result, they had no incentive to intervene.


On this, the Seventh Circuit rejected the idea that an insured would have a duty to its carrier to defend a suit or mitigate an insurance carrier’s risks in litigation, as follows:


A person or firm takes out insurance in order to shift liability for losses incurred if the insured risk materializes; the insurer is compensated for taking the risk off the insured’s shoulders by the premiums that the insured pays to shift the risk. The insured might therefore be thought to have no duty to mitigate the risk assumed by the insurer (in this case, by incurring potentially heavy litigation costs to defend against being held liable to the involuntary recipients of its faxed solicitations, alleged to violate the Telephone Consumer Protection Act). But as well explained in Don R. Sampen & Alec M. Barinholtz, “Enforcement of Settlements between Insureds and Claimants,” 35 Insurance Litigation Reporter 409 (2013), “a growing phenomenon in insurance coverage-related litigation is the incidence of settlements reached between insureds and claimants without the participation of insurers. The settlements typically involve a stipulated judgment entered against the insured accompanied by a covenant not to execute against the insured given … by the claimant, and an agreement that the judgment is enforceable only against insurance proceeds. Such settlements give rise to several concerns by insurers, a major one being the lack of any real adversarial relationship between the insured and claimant after reaching the decision that the insurer will bear the full financial loss. The lack of adversity may lead to the negotiation of ‘sweetheart’ deals where the only effective checks on the amount of the settlement are: (a) the insurer’s policy limits, if not disregarded by a finding of bad faith against the insurer, and (b) a court’s determination that the settlement amount is reasonable.” The result may be arbitrary redistributions of wealth from insurers to the plaintiffs who sued the insured, often with weak claims. The 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.


The Court then noted that the carriers should have expected the potential for a collusive settlement, stating:


[The carriers] should have begun worrying when the suit was filed rather than almost three years later. Almost all class actions are settled, and as we’ve noted in recent cases a class action settlement may be the product of tacit collusion between class counsel and defendant. See, e.g., Pearson v. NBTY, Inc., 772 F.3d 778, 786–87 (7th Cir. 2014); Redman v. RadioShack Corp., 768 F.3d 622, 629 (7th Cir. 2014); Eubank v. Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014).


The court reviewed the interests of the insured in agreeing to a settlement that transferred the risks to its recalcitrant insurance carriers, noting that the Supreme Court of Illinois has found in such cases the insurer’s argument “that, in settlement agreements such as the one at issue … the insured’s own money is never at risk and, therefore, the insured has no incentive to contest liability or damages with the injured plaintiff” should be rejected as, in such situations, “with respect to the insured’s decision to settle, the litmus test must be whether, considering the totality of the circumstances, the insured’s decision ‘conformed to the standard of a prudent uninsured.’” citing, Guillen ex rel. Guillen v. Potomac Ins. Co. of Illinois, 785 N.E.2d 1, 13-14 (Ill. 2003).


As a result, the court concluded that:


“[t]he 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 that late stage the only object of the intervention could be to block the settlement and put the class action suit back to where it had been in 2009. So gratuitous an extension of a multi-year litigation should not be encouraged.”


The court reviewed the general requirements that motions to intervene be timely, and that that “[a] prospective intervenor must move to intervene as soon as it “knows or has reason to know that its interests might be adversely affected by the outcome of the litigation.” Citing, Sokaogon Chippewa Community v. Babbitt, 214 F.3d 941, 949 (7th Cir. 2000).


Of note, there is no reference in the decision to any notification by King Supply or other parties to the litigation to the carriers that a $20 Million settlement was being considered or discussed. Likewise, there is no reference that the carriers’ were advised that the settlement had been agreed to - or that $19,800,000 of that settlement would only be collectible from the carriers - until such time the settlement had been signed and approved by the Magistrate. As such, it appears the decision may stand for a requirement that carriers intervene in class action claims to protect their interests - before there is any notice its insured may seek to settle the class action claims by transferring the vast majority of its risk to its carriers. This, leaving the only alternative of betting all of its insurance coverage limits on the rulings of the courts in a declaratory judgment action.


Indeed, the Seventh Circuit was very dismissive of the insurance carriers’ interests in avoiding legal fees in defending class action claims with questionable coverage, rejecting such arguments as follows:


Rather than intervene belatedly, the insurers might have been expected to exercise from the outset of the class action their right under the insurance policies to control and conduct the insured’s (King Supply’s) defense. Then they could have refused to agree to a settlement that cost them $20 million (minus $200,000). 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. 


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Querrey & Harrow has extensive experience in the defense of and coverage litigation connected to TCPA and other class action claims. If you have any questions regarding this case or Q&H’s class action and insurance coverage practices, please contact shareholder Terrence Guolee.



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