Acacia Research Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. SACV 05-501 PSG (MLGx), 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008)
The court issued findings of fact and conclusions of law as to the scope of a Directors & Officers policy’s duty to cover reimbursement of defense fees and settlement costs in a patent infringement lawsuit. The court found for the insured.
It awarded plaintiff $31,070,981.62 plus
$310,492.99, the present value of future royalty payments.
The D&O policy was issued from January 22, 1999 to January 22, 2002 on a claims-made basis with $10M policy limits and a SIR of $150,000. The insurer had delayed issuing a coverage opinion which concluded that there was no express exclusion for patent infringement or breach of contract cases. The court reasoned:
The Court finds that all defense costs incurred by Combimatrix arose out of its indemnification of Montgomery for alleged wrongful acts committed by Montgomery. Specifically, the underlying Nanogen action centered on Nanogen’s accusations that Montgomery stole Nanogen’s technology and brought it to Combimatrix. Accordingly, Combimatrix and Montgomery presented a single and joint defense to the Nanogen suit.
Id. at *10.
The court found that the actions alleged by Nanogen against Montgomery arose from Montgomery’s actions as an officer of Combimatrix.
It was only when Montgomery was an employee at Combimatrix that he could have committed the alleged wrongful acts of revealing Nanogen confidential information or using Nanogen’s confidential information inappropriately.
Id. at *11.
The court reasoned:
Contrary to Defendant’s position, the Court finds that, in this case, the duty to advance defense costs is broad as the duty to defend. See Hurley v. Columbia Cas. Co., 976 F.Supp. 268, 275 (D.Del.1997) . . . Shapiro v. Am. Home Assurance Co., 616 F.Supp. 906, 913 (D.Mass.1985) (finding that an insurance contract’s “statement of the duty to reimburse costs of defense ... is at least as broad as the duty to defend under traditional insurance provisions.”).
Id. at *11.
Notice was all that was required. No specific advice that a self-insured retention had been exhausted was necessary to trigger the insurer’s immediate obligation to reimburse defense costs.
Furthermore, the explicit language of the Policy itself required Combimatrix to do no more than it did to notify Defendant of its claim.
Id. at *13.
A settlement was concluded in a manner so as to render it involuntary and in response to defendant’s breach of its duties where the insurer defendant refused to advise further on its insurance coverage position after initially denying a defense. Jamestown Builders, Inc. v. General Star Indemnity Co., 77 Cal. App. 4th 341, 346, 91 Cal. Rptr. 514 (1999). Id. at *13.
The insurer’s conduct in asserting non-coverage of patent infringement claims absent a specific exclusion was a breach of the covenant of good faith and fair dealing.
At trial, Favilla [who handled the claim for NUFI] conceded that the Policy did not contain any exclusions related to breach of contract and patents. Favilla admitted that he gave the coverage opinions to the insured even though he lacked sufficient information to determine whether any exclusions applied.
. . . .
On November 3, 2003, almost 3 years after receiving notice of the claim, Plunkett [who handled the claim for NUFI following Favilla] wrote a first and final coverage letter to Combimatrix. Plunkett approached the review in a manner that revealed a steadfast determination to deny coverage.
Id. at *16.
Punitive damages were inappropriate, however, because there was no sufficient showing of malice, fraud or oppression.
