Ninth Circuit Rules that Insurers Had No Duty to Defend Claim that Insured Violated Statutory Privacy Rights

January 1, 2016 | Insurance Coverage

An appellate court in Ohio has ruled that an insurance company was entitled to recover defense costs it had paid on behalf of its insured after a trial court ruled that it had a duty to defend where that decision was later overturned on appeal.

The Case

Numerous tort claims were filed against Chiquita Brands International, Inc., essentially alleging that the plaintiffs had been injured by Chiquita’s financing of terrorist groups in Colombia from 1989 through 2004. National Union Fire Insurance Company of Pittsburgh, PA, which had insured Chiquita under a series of one-year policies from July 1992 to July 2000, initially did not defend these claims.

Coverage litigation ensued and the trial court found that National Union owed Chiquita a duty to defend. After the trial court’s ruling, National Union began funding the defense.

In Chiquita I, an appellate court reversed the trial court’s declaratory judgment order, deciding that National Union did not have a duty to defend Chiquita in the underlying lawsuits because the suits did not allege conduct that constituted an “occurrence” in the “coverage territory” as defined by the policies.

By the time of the appellate ruling in Chiquita I, National Union had made 16 defense-cost payments to Chiquita and also had made one interest payment. The appellate court remanded the case to the trial court to determine whether National Union was entitled to recoup these payments. The insurer’s policies with Chiquita were silent on the issue of recoupment of costs in the event of a judicial determination that it had no duty to defend a claim.

On remand, the trial court determined that National Union was entitled to recover $11,744,014.87 in defense costs, and Chiquita appealed.

The Appellate Court’s Decision

The appellate court affirmed, holding that National Union was entitled to restitution.

In its decision, the appellate court first explained that restitution “is appropriate where one party to a contract demands from the other a performance that is not in fact due by the terms of that contract under circumstances where it is reasonable to accede to that demand, and where the party on whom the demand is made renders such performance under a reservation of rights, thereby preserving a claim in restitution to recover the value of the benefit conferred in excess of the recipient’s contractual entitlement.”

The appellate court then found that “performance” – that is, payment of defense costs – was never due under the policies. The appellate court rejected Chiquita’s contention that National Union had a contractual duty to defend the underlying lawsuits that was extinguished only after the appellate court’s decision in Chiquita I. The appellate court observed that an insurance company “is under no obligation to its insured, or to others harmed by the actions of an insured, unless the conduct alleged of the insured falls within the coverage of the policy.”

It pointed out that it had determined in Chiquita I that the claims against Chiquita “indisputably fell outside of the policies’ coverage, and National Union was never under a duty to defend.”

Next, the appellate court found that Chiquita had demanded performance and that in light of the trial court’s order, it was reasonable for National Union to have acceded to that demand. Indeed, the appellate court added, the “practical reality” was that National Union “had little choice but to begin funding Chiquita’s defense until the court’s order became final and National Union was able to appeal it.”

Finally, the appellate court decided that theletters that accompanied National Union’s payments were sufficient to reserve National Union’s right to seek restitution of defense costs should a court determine that there was no duty to defend.

The appellate court summarized its holding as follows:

  1. Where an insurer does not provide a defense until after a court has entered judgment declaring that the insurer has a duty to defend; and
  2. The insured demands that the insurer provide a defense; and
  3. The insurer provides the defense under a reservation-of-rights stating that it may seek to be reimbursed; and
  4. An appellate court later determines that a duty-to-defend never existed; then
  5. The insurer is entitled to be reimbursed for its defense-cost expenditures under a theory of restitution.

The case is Chiquita Brands Int’l, Inc. v. National Union Fire Ins. Co. of Pittsburgh PA, No. C-140492 (Ohio Ct. App. Dec. 30, 2015).

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  • Robert Tugander





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