Disavowals of Liability Do Not Disembowel Coverage: Liability Settlements and Insurance Coverage

Perhaps the most pointed illustration concerns Dow Corning, which denied that its breast implants caused injury but entered into a major settlement. In its coverage case, its insurers turned around and argued that, because the policies apply to “injury” and because Dow Corning denied there was “injury,” the insurers had no obligation (or technically that their policies had not been triggered). The court made short work of this argument:

[I]f an underlying plaintiff alleges that she suffered injuries caused by a Dow Corning breast implant … [and] Dow Corning settles claims on the basis of those allegations, defendants must indemnify Dow Corning based on those allegations. This conclusion is not based on a theory of res judicata or collateral estoppel, or law of the case. Rather, it is based on a plain reading of the policy language. Dow Corning Corp. v. Continental Cas. Co., 1999 WL 33435067 at *5 (Mich. App. Oct. 12, 1999).

As the court aptly put it, “the question in this insurance dispute is not 'what really happened?' Instead, the question is … 'what did Dow Corning fear a judge or jury might believe happened?'” Id. at *5 n.8.

Insurers may not take the policyholder's denial of wrongdoing and injury and offer it as a fact or some form of estoppel. See generally United Servs. Auto. Ass'n. v. Morris, 154 Ariz. 113, 120, 741 P.2d 246, 253 (1987) (finding that to establish coverage “the indemnitee need not establish that he would have lost the case; he need only establish that given the circumstances affecting liability, defense and coverage, the settlement was reasonable.”). Settlement agreements usually contain a clause stating that the defendant does not admit liability, but such disavowals of liability are not germane to proving whether coverage should apply. Instead, what governs in these circumstances, effectively, are the allegations ' or, more accurately, the risk of adverse fact-finding. See St. Paul Fire & Marine Ins. Co. v. American Int'l Specialty Lines Ins. Co., 365 F.3d 263, 274 (4th Cir. 2004) (“AISLIC contends that the lack of any judicial determination that Merritt's injuries resulted only from ordinary negligence prevents any classification of the settlement liability for indemnification purposes. But AISLIC cites no authority for this proposition, and our independent review indicates that the weight of authorities would allow an indemnification claim to rely on a settled liability. Moreover, courts have relied on the type of fault asserted in the claims against the indemnitee in order to determine whether the relevant acts or omissions fall within the scope of restrictive language of fault contained in the indemnification agreement.”); American Motorists Ins. Co. v. General Host Corp., 946 F.2d 1482, 1489 (10th Cir. 1991) (determining duty to indemnify based on allegations in underlying complaint where no evidence settlement encompassed claims beyond those alleged in complaint); Northland Cas. Co. v. HBE Corp., 160 F. Supp. 2d 1348, 1360 (M.D. Fla. 2001) (“the duty to indemnify is measured by the facts as they unfold at trial or are inherent in the settlement agreement”); McNally & Nimergood v. Neumann-Kiewit Constructors, Inc., 648 N.W.2d 564, 578 (Iowa 2002) (crediting allegations in denying indemnity where settlement of claim was limited to such allegations, holding “an indemnitee cannot transform the underlying claim by the injured party into a different lawsuit by making [different] allegations”); Hyatt Corp. v. Occidental Fire & Cas. Co., 801 S.W.2d 382, 388 (Mo. App. 1991) (“In negotiating a settlement an insured need only be able to: 'take into consideration the likelihood of success or failure, the cost, uncertainty, delay, and inconvenience of trial as compared with the advantages of settlement.'”) (quoting Berke Moore Co. v. Lumbermens Mut. Cas. Co., 185 N.E.2d 637, 639 (Mass. 1962)); United States Gypsum Co., v. Admiral Ins. Co., 643 N.E.2d 1226, 1244 (Ill. App. 1994) (“[I]n order to recover a settlement, the insured need not establish actual liability to the party with whom it has settled so long as a potential liability on the facts known to the [insured is] shown to exist”) (internal quotations omitted); Luria Bros. & Co. Inc. v. Alliance Assur. Co., 780 F.2d 1082, 1091 (2d Cir. 1986); Uniroyal Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1378-79 (E.D.N.Y. 1988) (“A reasonable settlement binds the insurer to indemnify … [and] a settlement is reasonable when it reflects the probability of loss and the probable size of that loss”); Nordstrom, Inc. v. Chubb & Son, Inc., 820 F. Supp. 530, 535 (W.D. Wash. 1992), aff'd, 54 F.3d 1424 (9th Cir. 1995).