361_c017

Breached Policy Provisions Justify Denial of Coverage

Specialty Lines	Commercial Umbrella/Excess
Conditions	Bodily Injury

National Union Fire Insurance Company (National) provided Motiva Enterprises, LLC (Motiva) with a $25 million layer of liability coverage. National was sued by Motiva when, after a large loss, the insurer refused to provide coverage.

Motiva, after it negotiated independently without National, settled a loss with a couple who sued for injuries the husband suffered in a Motiva refinery explosion (an acid storage tank erupted). Before that settlement, National had offered to defend Motiva under a reservation of rights. Motiva paid nearly $17 million to settle the case and later sought reimbursement from National. When National denied the claim due to a breach of its policy's consent-to-settle and cooperation clauses, Motiva filed a lawsuit against the insurer.

Motiva requested a court to rule that the company did not breach the policy. It claimed that because National only agreed to defend them under a reservation of rights, it was not obligated to comply with other policy provisions. The court ruled against the manufacturer, prompting Motiva to appeal.

The higher court examined the arguments from both parties. Motiva claimed there was no breach because its insurer did not offer an unqualified legal defense for the claim. It also argued that, under state law, the insurer could only refuse to pay if it demonstrated prejudice to its rights. National responded that it retained the right to participate in settlement negotiations. Additionally, it contended that Motiva's actions were prejudicial and that Motiva failed to cooperate with the insurer.

The records showed that Motiva asked National to send a representative for mediation with the injured party. However, Motiva later asked the representative to leave the meeting. Afterward, without the National representative present, Motiva finalized the loss settlement. Before settlement, Motiva also declined to give National copies of legal documents related to the claim it agreed to settle.

After examining several related cases, the court determined that National's decision to reserve its rights did not alter the obligation for the insured to obtain permission before settling. The court also agreed that the insurer was reasonable in expecting the insured to assist with the claim investigation. The higher court concluded that Motiva's unauthorized settlement harmed National's rights, and it upheld the lower court's decision in favor of the insurer.

Motiva Enterprises, LLC, Appellant v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Defendant-Appellee. U.S. Court of Appeals for the Fifth Circuit, No. 05-20139, filed March 28, 2006. Affirmed.

http://caselaw.lp.findlaw.com/data2/circs/5th/0520139cv1p.pdf, 03/31/06