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Court Grants Summary Judgment for Insurer on Late-Asserted Exclusion; Rejects Waiver As a Matter of Law

Blogs, Insurance Coverage

RSUI Indemnity Company recently was awarded summary judgment as to an insured’s waiver defense, as well as to liability under a directors and officers liability insurance policy (the “Policy”). See California Dairies, Inc. v. RSUI Indemnity Co., No. 1:080CV000790, 2010 WL 2598376 (E.D. Cal. Jun. 25, 2010).

The underlying lawsuit, for which the insured, California Dairies (“CDI”), claimed coverage, was a class action concerning employment-related issues, including failure to pay minimum wage, failure to pay regular and overtime wages, failure to provide mandated meal periods and mandated rest periods, and failure to reimburse employees for costs incurred to acquire company uniforms.

The court concluded that the following exclusion 7 under the Policy, was sufficient to bar coverage:

The Policy provides that the Insurer shall not be liable to make any payment for “Loss” in connection with any “Claim” made against the “Insured”:

* * *

Brought by or on behalf of any Insured, except . . . (b) an Employment Practices Claim brought by an Insured Person. . . 

Id. at *3. “Loss” under the Policy expressly did not include “5. any amounts owed as wages to any Employee, other than front pay or back pay; 6. Civil or criminal fines or penalties.” Id.See also id. at *17 (“Exclusion 7 is effective and sufficient to bar coverage in this case.”).

Much of the court’s analysis in California Dairies, Inc. v. RSUI Indemnity Co. focused on CDI’s defense of waiver, and whether RSUI’s failure to reference exclusion 7 in its final denial of coverage letter should result in a waiver of that exclusion.

CDI asserted that RSUI violated the California Fair Claims Practices Regulations (“CFCPRs”) “by failing to articulate all bases for denial of coverage in the final letter.” Id. at *5. RSUI moved for judgment on the pleadings, arguing that, “as a matter of flaw, a waiver theory cannot create coverage ‘where none exists.’” Id. at *8.

The court ultimately applied the reasoning of Waller v. Truck Insurance Exchange, Inc., 11 Cal. 4th 1, 44 Cal. Rptr.2d 370 (Cal. 1995), in which the California Supreme Court defined the doctrine of waiver as applied to a CGL policy. The court in Waller v. Truck Insurance Exchange held that an “insurer waives defenses to coverage not asserted in its denial only if the insured can show misconduct by the insurer or detrimental reliance by the insured.” California Dairies, Inc. v. RSUI Indemnity Co. at *9 (summarizing Waller v. Truck Insurance Exchange).

Incidentally, the court in California Dairies, Inc. v. RSUI Indemnity Co. rejected RSUI’s reliance on anti-waiver language in its denial letter, finding that “the use of anti-waiver language was not dispositive” and, as the court in Waller v. Truck Insurance Exchange found, that such language “does not affect the insured’s right to assert waiver of defenses in a denial letter.” Id. at *12.

However, after considering the type of misconduct CDI was alleging (consisting of RSUI’s failure to advance Exclusion 7 in its denial letter and violation of the CFCPRs), the court concluded that RSUI’s failure to assert Exclusion 7 in its initial denial letter was not the type of “misconduct” contemplated by the California Supreme Court in Waller v. Truck Insurance Exchange.

Accordingly, the court granted summary judgment to RSUI on the waiver defense, holding that CDI’s “misconduct argument is unsupported by the law or the record.” Id. at *14.