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Jury award against AIG for bad faith, breach of contract upheld

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A federal appeals court has upheld a $7.1 million breach of contract and bad-faith verdict issued by a jury against an American International Group Inc. unit in a dispute concerning acceptance of a settlement agreement.

National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of New York-based AIG, had issued a $14 million general liability excess policy to San Diego-based LMA North America Inc., a unit of Teleflex Medical Inc. that produces laryngeal mask airway products, according to Tuesday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Teleflex Medical Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa. 

Transcontinental Insurance Co., a unit of Chicago-based CNA Financial Corp., which was not a party in the litigation, provided a $1 million primary policy.

In 2007, LMA filed a patent infringement suit against a competitor, Copenhagen, Denmark-based Ambu A/S, for patent infringement, and Ambu countersued, charging trade disparagement and false advertising. 

Eventually, the two sides held a mediation — in which National Union did not participate — and it was agreed Ambu would pay LMA $8.75 million for the patent claims and LMA would pay Ambu $4.75 million for the disparagement claims. The settlement was conditioned on CNA’s and National Union’s approval.

While CNA committed its full $1 million limit, National Union delayed consenting to the settlement. One of the options presented to it was to reject the settlement and take over the defense.

The settlement was finalized without National Union’s approval. National Union then said it would assume the defense if LMA could “undo” the settlement, and LMA said it could not do so.

LMA then filed suit against National Union in U.S. District Court in Pasadena, California, charging breach of contract and bad faith. A jury found for LMA on both claims, awarding it $6.1 million — which included $3.75 million in contract damages and $1.2 million in attorneys fees, expert fees and costs — plus $1.1 million in prejudgment interest.

The District Court denied National Union’s motion for a new trial and/or for a judgment to be entered in its favor. National Union then appealed to the 9th Circuit.

A three-judge panel unanimously upheld the jury verdict and court ruling.

A key factor in the case was a 1991 ruling by a California appellate court in Diamond Heights Homeowners Association v. National American Insurance Co., which held an excess insurer has three options when presented with a proposed settlement of a covered claim that has met the insured and the primary insurer’s approval: approve the proposed settlement; reject it and take over the defense; or reject it, decline the defense and face an insured’s potential lawsuit.

National Union’s arguments included that the Diamond Heights settlement was inapplicable in this case, but the appeals court disagreed. 

National Union has not presented convincing evidence supporting its argument that the California Supreme Court would not follow the Diamond Heights ruling, said the decision.

The panel also disagreed that the District Court had wrongly extended the Diamond Heights ruling to apply to the case’s different facts and that it had applied the wrong standard of proof to LMA’s claim.

In addition, the ruling supported the bad-faith judgment. National Union argues a “genuine dispute existed about the application and viability of Diamond Heights,” said the ruling. But, “The jury unanimously disagreed, and their verdict is supported by substantial evidence.

“In fact, National Union waited until two days after the settlement, when it knew that the case had already been settled, to state any willingness to take on the defense,” said the panel, in affirming the lower court’s judgment.