On October 6, 2015, the United States District Court, Northern District of California held that an insurer breached its duty to defend by interpleading remaining policy limits and ceasing its defense of its insured. Doublevision Entertainment, LLC v. Navigators Specialty Insurance Company, N.D. Cal., No. C 14-02848 WHA. Despite language in the policy stating that the insurer was not obligated to defend after it had deposited remaining policy limits with a court, the district court held that Navigators could not simply interplead the funds and abandon its insured “at the moment of her greatest peril.”
Navigators issued an errors and omissions policy to Commercial Escrow Services (“CES”) and its principal, Antoinette Hardstone. Beginning in 2010, CES and Hardstone were sued by a number of customers alleging improper escrow handling. After CES and Hardstone tendered to Navigators, Navigators assumed the defense of the claims. While the claims were pending, the California Department of Corporations conducted an investigation into CES and determined that it had a shortage of $195,750. The Department of Corporations appointed a receiver, who had authority to collect any insurance proceeds needed to cover the shortage.
The claims against CES and Hardstone remained pending into 2012, at which time Navigators offered to tender the remaining policy limits. However, the Department of Corporations notified Navigators that the CES shortage had not been satisfied and thus, the Department had a claim against the policy proceeds in the amount of $195,750. In light of these competing claims, Navigators filed a complaint for interpleader and deposited the $466,358 remaining policy limits with the court. Navigators then ceased defending CES and Hardstone in the ongoing cases. Left with no money to fund their defense, CES and Hardstone were forced to hire inexperienced substitute counsel on short notice and ultimately had substantial judgments awarded against them. One such verdict was obtained by Doublevision, which took an assignment of CES and Hardstone’s rights against Navigators as partial satisfaction of the judgment.
Doublevision then instituted a coverage action against Navigators, alleging that Navigators had breached its duty to defend by interpleading the entirety of the policy limits rather than only the $195,750 over which there were competing claims. In response, Navigators argued that the policy explicitly permitted it to cease defending the insured once it had “deposited the remaining available limit of liability into a court of competent jurisdiction.”
The court rejected Navigators’ argument. Relying on the “supreme importance of the duty to defend,” the court held that “the insurance policy in question should be read as erasing the duty to defend only to the actual extent that conflicting claims are pending.” Thus, the court granted Doublevision’s motion for judgment as a matter of law on the issue of breach of the duty to defend and denied Navigators’ motion for judgment as a matter of law that the duty to defend was extinguished by the interpleader action.
This decision serves as a warning to insurers that they may not “cut off the supply of oxygen to the defense” until the entirety of the policy limits have been exhausted or properly interpleaded as subject to competing claims.