Untimely Intervention Sinks Insurer Challenge To Allegedly Collusive $20MM Settlement

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In CE Design Ltd. v. King Supply Co., LLC, No. 12-2930, 2015 U.S. App. LEXIS 11117 (7th Cir. June 29, 2015), the Seventh Circuit denied as untimely the attempted intervention of three insurers (all CNA companies) into the underlying lawsuit. The insurers were, in turn, unable to challenge the approval of a $20 million settlement between the policyholder, King Supply Co., LLC, and Plaintiff CE Design Ltd. (and its co-plaintiff).

The underlying case involved a junk fax lawsuit filed by CE Design against King Supply alleging that King Supply had sent unsolicited fax advertisements in violation of the Telephone Consumer Protection Act. The class action complaint in the underlying lawsuit was filed in 2009. Shortly thereafter, King Supply requested coverage under its commercial general liability and commercial umbrella policies. The insurers disclaimed coverage. Three years later, King Supply agreed to a settlement with CE Design for $20 million, the limit of the insurance policies.

Upon learning of the proposed settlement, the insurers filed a declaratory judgment action in Texas state court seeking a declaration of no coverage. The Texas action was dismissed for lack of jurisdiction. CE Design filed a similar suit in Illinois state court. The circuit court sided with the insurers. CE Design has appealed that decision.

Before the settlement was approved by the district court in the underlying lawsuit, the insurers moved to intervene with the goal of persuading the district court to delay approval of the settlement until after the state court determination on coverage and, in the alternative, to argue that the settlement was collusive and unreasonable. The district denied the motion to intervene as untimely.

On appeal, the Seventh Circuit affirmed the district court. The Seventh Circuit opined that the insurers should have attempted to intervene in 2009 when they disclaimed coverage because they knew or should have known at that time that the litigants in the underlying lawsuit were likely to negotiate a settlement and seek to foist liability upon the insurers. In addition, instead of disclaiming coverage, the Court suggested that the insurers could have undertaken the defense of King Supply from the beginning and avoided the $20 million settlement. To further complicate matters, notwithstanding the untimeliness of the motion to intervene, the Court expressed reservations as to whether the insurers had a significant enough interest in the lawsuit to justify intervention since the insurers had already disclaimed coverage.

This decision warrants close attention because, as the Court pointed out, situations where the insured and plaintiff agree to a consent judgment are increasingly commonplace. Therefore, when confronted with a claim that might need to be litigated in the Seventh Circuit, insurers should give due consideration to promptly filing a declaratory judgment action. This would avoid the unenviable scenario of an insurer having to litigating coverage against the specter of indemnifying the insured for a colossal consent judgment.