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March 2013

Insurer Can Rely on Final Judgment When Determining Duty to Defend

The U.S. District Court for the Northern District of California recently held that an insurer that stopped defending its insured based on a final judgment did not breach its insurance policy – even though that judgment was overturned on appeal.

In 2000, Convolve, Inc. and the Massachusetts Institute of Technology filed a lawsuit against Seagate Technology, Inc. National Union Fire Insurance Company of Pittsburgh, P.A. issued liability insurance to Seagate and filed a declaratory relief action (coverage action) seeking a ruling regarding its defense duties in response to the lawsuit. After six years of motions, appeals, and proceedings, on Sept. 2, 2010, Judge James Ware issued a final judgment in the coverage action holding that National Union only had a duty to defend Seagate against the lawsuit from Nov. 1, 2000, to July 18, 2007. Relying on the judgment, National Union stopped paying for Seagate’s defense.

Seagate appealed Ware’s ruling regarding National Union’s defense duties.  On Jan. 20, 2012, the U.S. Court of Appeals for the 9th Circuit ruled that Ware erred in concluding that National Union’s duty to defend Seagate terminated in 2007 and remanded the coverage action. Seagate then delivered to National Union invoices for the defense of the suit from 2007 to 2012 and made a demand for prejudgment interest.  National Union paid only a portion of the invoices finding that the defense rates were too high. It relied on California Civil Code §2860, which limits an insurer’s obligation to pay legal defense fees to rates the insurer pays attorneys it retains “in the ordinary course of business . . . in similar actions.” Seagate filed a motion for summary judgment seeking reimbursement of all defense expenses incurred and arguing that National Union breached the insurance policy by relying on the judgment and, therefore, could not rely on §2860 to limit the fees paid by the insurer.

In National Union Fire Insurance Company of Pittsburgh, PA v. Seagate Technology, Inc., Judge William Alsup of the Northern District of California found there was no direct precedent regarding whether an insurer could breach an insurance policy by relying on a final judgment subsequently reversed on appeal. Seagate cited Harbison v. American Motorists Ins. Co., F.Supp.2d 1030 (E.D. Cal. 2009), for the proposition that National Union breached the insurance policy. In Harbison, the insurer argued that the lower court’s granting of summary judgment on the insured’s breach of contract claim was evidence the decision to deny coverage was reasonable and not in bad faith. However, the Harbison court rejected that argument, explaining that the reasonableness of the coverage decision must be evaluated as of the time it was made. Alsup distinguished Harbison, noting that National Union was not attempting to advance a subsequent declaratory judgment backward in time to justify its decision to stop defending Seagate. Rather, the decision to stop defending Seagate was based on the judgment itself. Public policy favors requiring a party to comply immediately with a final judgment. Alsup held:

These general principles compel the conclusion that NIU did not act wrongfully when it chose to rely on the district court’s final judgment. Seagate appealed but did not seek a stay of the adverse district court ruling at issue. As a result, NIU was entitled to the benefit of the (erroneous) ruling that there was no longer a duty to defend. To hold that NIU 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. Although NIU cross-appealed and chiefly lost, the cross-appeals did not challenge the basic victory that it had already won before Judge Ware.

Accordingly, National Union did not act wrongfully when it denied coverage after entry of the judgment. If Seagate wanted to prevent National Union from relying on the judgment, it was required to make a motion for stay pending appeal rather than just appealing the judgment.

On Jan. 25, Alsup denied Seagate’s motion for summary judgment and held that National Union had properly relied on §2860 in reducing Seagate’s defense fees. The court also held that any dispute regarding reimbursement of Seagate’s legal fees was subject to binding arbitration.  

Click here for opinion.

The opinion in National Union, 2013 WL 308875, is not final. This decision may be cited now as persuasive nonprecedential authority. The decision may be modified by further proceedings in the district court or on appeal.
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Jordan S. Altura