A default judgment against the insured should not deprive the injured party from pursuing the coverage litigation according to the Ninth Circuit's decision in Westchester Fire Ins. Co. v. Northwest Airlines, Inc., No. 07-17383, 2009 U.S. App. LEXIS 23718 (9th Cir. Oct. 28, 2009).
The insured provided maintenance services for Northwest Airlines at the McCarran International Airport in Las Vegas. The insured's liability policy required prompt notice of any possible claim be given the insurer.
In February 2002, an aircraft owned by Northwest was damaged when it rolled down an embankment. An employee of the insured was in the cockpit at the time of the incident. The insured did not report the incident to Westchester. A few months later, Northwest wrote and notifiedthe insured of Northwest's claim and requesting that the insured forward the correspondence to Westchester. The insured still did not notify Westchester.
In November 2003, Northwest directly notified Westchester of the accident and the claim against the insured. This was Westchester's first notice of the claim. Westchester commenced efforts to contact the insured and remind it of obligations under the policy. When the insured was finally contacted, it promised to send to Westchester documents related to the claim, but the documents were never provided.
Northwest filed suit in Minnesota and secured an default judgment against the insured for $10.6 million. Westchester issued a denial of coverage letter to the insured based on failure to cooperate and failure to notify Westchester of the Minnesota lawsuit.
Westchester then filed an action for declaratory judgment that the insured had breached its duties under the policy and the insurer had no duty to defend or indemnify. Northwest was allowed to intervene. Westchester made repeated attempts to depose the insured, but the insured never attended the scheduled depositions. Westchester moved to strike the insured's answer or compel the deposition. The court granted the motion to compel, but denied the motion to strike. When the insured still failed to attend scheduled depositions, however, the court granted the motion to strike and entered a default judgment against the insured under Rule 37 (d) for failure to respond to discovery. Subsequently, an order entered judgment in favor of Westchester and against all defendants, including Northwest.
Northwest appealed. Northwest argued it was entitled to defend against Westchester's declaratory judgment action in its own right and that the district court should not have entered a default judgment against all defendants based on the insured's failure to appear for a deposition.
In an opinion by Judge Clifton (of Hawai`i), the Ninth Circuit agreed. A default entered against an insured should not prevent an injured third party from proceeding on its own behalf. Northwest was not responsible for the insured's failure to appear for the deposition.
Westchester argued that Northwest could not prevail because the insured failed to give proper notice of the claim as required under the policy. Although this argument might eventually prevail, the default and subsequent judgment did not result from a determination that the insured's failure to notify the insurer about a potential claim relieved the insurer from liability. Northwest was entitled to present arguments to establish coverage and have them adjudicated on the merits.
