Insurer’s Interpleader Violated Duty to Defend Where Funds Interpleaded Were in Excess of those Subject to Competing Claims
Doublevision Entm’t, LLC v. Navigators Specialty Ins. Co., 2015 U.S. Dist. LEXIS 136523 (N.D. Cal. Oct. 6, 2015)
In Doublevision, the insurer’s attempts to overturn a grant of judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50 were denied, as the court reaffirmed its determination that the insurer’s decision to stop defending its insureds and interplead the remaining balance of its policy limits constituted a breach of the duty to defend.
The insureds, an escrow service corporation and its principal, purchased an errors and omissions insurance policy from Navigators Specialty Insurance Company (“Navigators”) to insure and defend against liability arising out of the insureds’ escrow business. The policy was a “wasting-limits” policy under which the $1 million policy limit was reduced by payments for defense costs, settlements and judgments.
Between 2010 and 2012, the insureds tendered lawsuits from several customers (including Doublevision Entertainment, LLC (“Doublevision”)) to Navigators, who initially provided a defense. While these litigations were pending, other customers filed administrative complaints against the insureds with the California Department of Corporations (“CDC”). The CDC investigated the complaints and, finding a shortage of approximately $195,000, had a receiver appointed to wind up the insureds’ business.
Believing that the various claims might exhaust the remaining policy limit, Navigators filed a complaint for interpleader in Contra Costa County Superior Court and deposited the entire remaining amount of the policy with that court. Navigators immediately stopped paying the law firm providing a defense to the insureds, leaving the insured without counsel only a few weeks before trial in the lawsuit brought by Doublevision. Doublevision won a judgment for $1.5 million plus interest against the insureds, and took the insured’s assignment against Navigators.
The Doublevision court explained that Navigators violated its duty to defend because the only sum alleged by Navigators to be subject to competing claims in the interpleader action was $195,000, the amount demanded by the receiver appointed by the CDC. Thus, because only $195,000 was in contest among those parties, Navigators was required to keep the remaining available policy limits to continue to pay for the defense of the insureds. The court found that Navigators “cut off the supply of oxygen to the defense” in the insured’s lawsuit against Doublevision, and, in doing so, breached its contract with the insureds.
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