INSURANCE: Insurer had no duty to indemnify $210,000 sex discrimination stipulated judgment prior to exhaustion of $25,000 retention, but under NY law “exhausted” is ambiguous, construed against insurer to include settlement by compromise… retention was exhausted and insurer’s duty to indemnify was triggered upon entry of the stipulated judgment… further briefing ordered on reasonableness of stipulated judgment as required by NY, but summary judgment for nonmovant Plaintiff likely on claim that insurer breached duty to indemnify but not duty to defend… Molloy.
Samantha Lasorte filed a sex discrimination/retaliation suit against Real Estate Client Referrals in litigation before Judges Deschamps and Townsend. RECR was insured under a Lloyds Employment Practices policy which contained a $25,000 Self Insured Retention. RECR notified Lloyds and retained Malin Johnson. Lloyds acknowledged that the claim was covered and expressed approval of the choice of counsel, then advised that the $25,000 retention had to be satisfied before it would be on the hook for any loss or defense cost payments. RECR entered into a stipulated judgment for $210,000, assignment of claims, and covenant not to execute. It agreed to pay Lasorte $2,000, but it is not clear whether it actually paid those amounts; according to Johnson it did not pay anything toward defense counsel’s fees. Lloyds refuses to indemnify RECR for the judgment, claiming its duty to pay any loss was never triggered because RECR, by failing to pay $25,000 toward the judgment or for defense costs, failed to exhaust the retention. Prior to execution of the stipulated judgment Johnson gave Lloyds the opportunity to exercise its right to assume defense of the discrimination claim but it chose not to do so. Lasorte then sued Lloyds in State Court asserting breach of contract. Lloyds removed to this Court and moved for summary judgment that its duties to defend or indemnify were not triggered because RECR failed to pay the entire retention. Lasorte insists that because Lloyds refused to defend RECR in the discrimination suit it is estopped from denying coverage and is liable for the judgment. Almost as an afterthought she concludes her response brief by arguing that the Court should grant summary judgment for the requested amount as the undisputed material facts demonstrate that Lloyds violated its duty to defend. Lloyds retorts that she has not moved for dispositive relief and that even if summary judgment is granted for her a trial is still necessary to quantify reasonableness of the stipulated judgment.
Both parties based their initial arguments on the assumption that Montana law governs. However, the policy states that NY law shall govern policy interpretation. Supplemental briefing was ordered as to application of NY law. A secondary issue was RECR’s solvency. Under NY law, an insurer must defend & indemnify an insolvent insured even if the insured has not exhausted any retention. According to Johnson, RECR told him that it was “selling off all its assets” and it would not compensate Lasorte for time & expenses. This created the appearance that it was insolvent, triggering the request for supplemental briefing on the issue. Lasorte claims RECR was insolvent, but offers only emails indicating that it was unwilling or unable to pay defense costs to support the claim. Lloyds argues that it was not insolvent, relying on the affidavit of its GM that as of 3/10 it was solvent and able to pay several $25,000 retentions. It is clear that it was not insolvent.
Lloyds’ motion for summary judgment is denied because the policy language requires it to indemnify once the retention is exhausted, and the retention was exhausted by the underlying judgments. Under NY law, “exhausted” — as used in analogous policies — is ambiguous and therefore construed against the insurer to include settlement by compromise. Thus the $25,000 retention was exhausted when Lasorte agreed to the $210,000 judgment after tendering to Lloyds the right to defend and control disposition of the case.
On the other hand, Lasorte’s argument that Lloyds breached its duty to defend fails. Under NY law, unless the insured is bankrupt, the insurer has no duty to defend before the retention was exhausted. RECR was not insolvent. Consequently, Lloyds had no duty to defend, nor is it liable for defense costs incurred prior to the stipulated judgment.
By refusing to indemnify the claims, Lloyds breached the policy. However, NY law requires insurers to pay only reasonable amounts entered into by an insured after an insurer breaches its duties. Lasorte is not entitled to summary judgment on damages because determining reasonableness of the stipulated judgment involves disputed material facts. There is very little evidence in the record on which a fact-finder could determine reasonableness. It is not clear what other evidence the parties shared in discovery that would address reasonableness. Prudential (SD NY 1994) allowed further discovery so the insurer could determine the reasonable value of the plaintiff’s claims. The parties shall brief the question of summary judgment, but based on the existing record, they are given notice that summary judgment for Lasorte is likely under Rule 56(f)(1) (after notice and reasonable time to respond, summary judgment may be granted for a nonmovant) on the claim that Lloyds breached its duty to indemnify but not its duty to defend.
Lasorte v. Lloyds, 41 MFR 309, 2/5/14.
Torrance Coburn (Tipp & Buley), Missoula, for Lasorte; Benjamin Cory & Peter Habein (Crowley Fleck), Billings, and Matthew Baldassin (Crowley Fleck), Missoula, for Lloyds.
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