Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Seagate Tech. Inc.
U.S.Dist. Ct.,N.D.Cal.
A California federal judge recently held that an insurer did not breach its contract when it stopped defending a policyholder based on a trial court declaratory judgment ruling that was later overturned.
The court explained that in the ordinary case, the duty to defend terminates upon a judicial determination that the insured does not have a potentially-covered claim. The decision granting summary judgment became such a judicial determination when judgment was entered under Rule 54(b). The entry of judgment created a final order with res judicata effect.
It is a “basic proposition that all orders and judgments of courts must be complied with promptly. If a defendant believes that order is incorrect the remedy is to appeal, but, absent a stay, he must comply promptly with the order pending appeal.” These general principles compel the conclusion that the insurer did not act wrongfully when it chose to rely on the district court’s final judgment.
The insured appealed but did not seek a stay of the adverse district court ruling at issue. As a result, the insurer was entitled to the benefit of the (erroneous) ruling that there was no longer a duty to defend. To hold that the insurer was committing a breach of contract all along would convert a final judgment under Rule 54(b) into a provisional one and directly conflict with the principle that absent a stay, a party must comply with a judgment pending appeal. “The initial decision in the insurer’s favor does provide insulation against a further claim of breach of contract.” Accordingly, this order holds that the insurer did not breach its insurance contract with the insured when it decided to stop defending its insured in reliance on a district court declaratory judgment in its favor.