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Excess insurer cannot recover $8 million in Costco EPL settlement

Legal ruling

An excess insurer cannot recover almost $8 million it paid to settle employment practices liability litigation filed against Costco Wholesale Corp., but it is entitled to reimbursement of more than half a million dollars in post-settlement arbitration costs, says a federal court.

The U.S. District Court in Seattle issued its ruling Monday in Costco Wholesale Corp. v. Arrowood Indemnity Co.

Issaquah, Washington-based Costco was sued in a class action alleging gender discrimination in its promotion decisions in August 2004, according to the ruling. Charlotte, North Carolina-based Arrowood provided the third excess layer in Costco’s EPL insurance tower.

A settlement agreement in the case was given final approval in May 2014, and Costco’s coverage’s underlying policy limits were exhausted in April 2018, according to the ruling

Arrowood began reimbursing Costco for its arbitration-related expenses, totaling $565,898.54. When the final arbitration award was entered, Costco requested, and Arrowood also paid, the $7,945,000 balance of the settlement amount subject to a reservation of rights.

Costco filed suit against Arrowood in July 2017 charging breach of contract and bad faith, among other charges.

“Arrowood is essentially arguing that its policy should never have been triggered because the underlying insurers should have refused to pay some or all of the invoices submitted to them, and that if its consent had been sought, it could have kept payments below its $35 million level,” said the ruling.

“Arrowood may not, however, second-guess the coverage determination of the underlying insurers, and it had no contractual right to interfere in their adjustment processes,” said the ruling.

“Arrowood concedes that the settlement amount of $8 million was a covered ‘loss’ under the policy,” the decision concludes. “It paid the remaining balance when it came due and has shown no basis on which that amount should be reimbursed.”

The ruling adds, however, that Arrowood’s post-settlement arbitration costs, including mediator expenses, expert fees and attorneys’ fees, are recoverable, “as long as they are reasonable, and the record does not support a finding that any particular invoice or portion of an invoice was unreasonable.”

Costco’s attorney had no comment, while Arrowood’s attorney could not immediately be reached.

Costco‘s captive insurer will pay $3.6 million in unpaid premium taxes, penalties and a fine to settle a dispute with the Washington state insurance department, said Insurance Commissioner Mike Kreidler earlier this month. 


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