The court found that the excess carrier had grounds to challenge the primary carrier's allocation of a settlement payment. Scottsdale Ins. Co. v. Certain Underwriters at Lloyds, London, 2020 U.S. App. LEXIS 39771 (9th Cir Dec. 18, 2020).
in the underlying case, Underwriters settled on behalf of the insured law firm under a professional liability policy. Scottsdale sued Underwriters for a declaratory judgment that the settlement did not erode the limits. Underwriters counterclaimed seeking equitable contribution. On cross motions for summary judgment, the district court concluded that: (1) Scottsdale could not challenge Underwriters' settlement payment and the corresponding erosion of policy limits, and (2) Underwriters was not entitled to equitable contribution from Scottsdale.
The Ninth Circuit first found that Scottsdale had the right the challenge the settlement payment. The settlement addressed two types of claims: (1) claims against a former partner of the law firm for malpractice; and (2) claims against Underwriters for bad faith and failing to defend against the malpractice claim. Underwriters paid $11.74 million out of the primary policy, $4.5 million out of the excess policy, and $1.26 million paid by Underwriters for the extra-contractual liability.
The allocation appeared to be the product of collusion. Underwriters may have eroded policy limits based on their payment to settle the bad faith and failure to defend claims. Nothing in the policy gave Underwriters authority to do this. The policy paid on behalf the insured damages for which the insured was liable. The bad faith and failure to defend claims were not claims "arising out of any act, error or omission of the Assured." Instead, by denying coverage in the malpractice action, Underwriters took on that risk and should be liable for the consequences. Scottsdale was not involved in the denial of coverage and was not even aware of the malpractice claim until after Underwriters denied coverage.
Therefore, to the extent to which the settlement eroded the policy limits, the case was remanded so the district court could address the issue.
Regarding Underwriters claim for equitable contribution, the Ninth Circuit found that equity favoued Scottsdale.
