No Coverage for Policyholder for a Plaintiff’s Attorneys’ Fees Where the Lawsuit Did Not Allege a “Wrongful Act”
Screen Actors Guild Inc. v. Federal Ins. Co., 2013 U.S. Dist. LEXIS 100638 (C.D. Cal. July 11, 2013)
In Screen Actors Guild v. Federal Insurance Co., the district court held that the D&O insurer for the Screen Actors Guild (“SAG”) was not obligated to reimburse an attorneys’ fee award and class plaintiff’s enhancement award because the amounts owed by SAG in the underlying litigation resulted from SAG’s preexisting duty to pay the class plaintiffs and not from a “Wrongful Act” as defined in the policy.
The suit against SAG was brought by Ken Osmond, on behalf of himself and other SAG members, and alleged that SAG had collected over $8 million in foreign royalties that should have been distributed to SAG members. The suit sought restitution, compensatory and punitive damages, an accounting, a constructive trust, attorneys’ fees and costs, prejudgment interest, and injunctive relief. The insurer agreed to reimburse SAG’s defense costs in the suit, but denied indemnity coverage.
SAG entered into a settlement agreement that required it to use reasonable efforts to allocate and pay 90% of the royalties to the class participants. The court approved the settlement, and awarded a $15,000 enhancement payment to Osmond, and a $315,000 award for plaintiffs’ counsel’s fees and costs. Although SAG acknowledged it had a preexisting duty to distribute the royalties, it sought indemnity coverage for the attorneys’ fees award and enhancement payment, but the carrier denied coverage. SAG sued the insurer for breach of contract and bad faith.
On summary judgment, the district court, relying heavily on Health Net, Inc. v. RLI Insurance Co., 206 Cal. App. 4th 232 (2012), ruled in the carrier’s favor and found that because the underlying action did not allege a “Wrongful Act,” coverage could not be bootstrapped for the lawsuit based solely on a claim for attorneys’ fees.
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