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Grace v Insurance Company of North America (8/22/97), 944 P 2d 460
Notice: This opinion is subject to formal correction before
publication in the Pacific Reporter. Readers are requested to bring errors to the
attention of the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska
99501, phone (907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
JAMES M. GRACE and KATHLEEN )
GRACE, individually and as ) Supreme Court Nos. S-7017/7037
assignees of OCELOT )
ENGINEERING, INC., d/b/a ) Superior Court No.
CHAPARRAL CYCLE SUPPLY and ) 3AN-91-7270 CI
BELL HELMETS, INC., )
Appellants and )
v. ) O P I N I O N
INSURANCE COMPANY OF NORTH )
AMERICA, ) [No. 4870 - August 22, 1997]
Appellee and )
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Dana Fabe, Judge.
Appearances: Richard D. Pennington, Richard D.
Pennington & Associates, P.C., and Laurel J. Peterson, Law Offices
of Laurel Peterson, Anchorage, for Appellants/Cross-Appellees.
Sanford M. Gibbs and Richard L. Waller, Brown, Waller & Gibbs,
Anchorage, for Appellee/Cross-Appellant.
Before: Compton, Chief Justice, Rabinowitz,
and Matthews, Justices. [Eastaugh, Justice, and Fabe, Justice, not
COMPTON, Chief Justice.
James Grace and Kathleen Grace appeal from a grant of
summary judgment dismissing their suit against Insurance Company of
North America (INA) for damages caused by an allegedly defective
product produced by INA's insured, Bell Helmets. We reverse and
remand for further proceedings.
II. FACTS AND PROCEEDINGS
In July 1984, James Grace was injured in a motorcycle
accident. At the time of the accident, Grace was wearing a helmet
manufactured by Bell Helmets (Bell). He had purchased it from
Ocelot Engineering (Ocelot). The helmet cracked on impact,
compounding Grace's injury. Following the accident, Grace brought
a product liability suit against Ocelot and Bell.
At the time of the accident, Bell had several layers of
liability insurance coverage. Bell had a $100,000 self-insured
retention. Bell's primary insurer, Mission National Insurance Co.
(Mission), and first layer excess insurer, Integrity Insurance Co.
(Integrity), originally provided coverage for an additional
$5,000,000 of liability. However, both Mission and Integrity
became insolvent in 1987. [Fn. 1] INA provided liability coverage
in excess of the $5,100,000 ostensibly provided by Mission,
Integrity, and Bell's self-retention, up to a maximum of
$15,100,000. Liability coverage in excess of $15,100,000 was
apportioned among several other carriers.
The Graces offered to settle their suit for $3,000,000.
However, Bell refused to expend any of its assets in excess of
$100,000, the amount of its self-insured retention, to cover claims
falling in the gap in coverage left by the insolvencies of Mission
and Integrity. Bell also tendered defense to INA, and demanded
that INA "drop down"and cover the obligations of the defunct
carriers. INA refused, claiming that its policy did not require it
to "drop down." INA stated to Bell that its policy would "not
respond until the underlying $5 million coverages are spent,
whether they are spent via insurance carriers' assets or are spent
directly from the assets of Bell Helmet themselves."[Fn. 2] In
addition, INA urged Bell to settle the case and dismissed Bell's
$100,000 offer as unrealistic.
In July 1991, Ocelot settled with the Graces. Ocelot
confessed judgment based on an anticipated verdict of $8,120,920.
With interest and attorney's fees, the final judgment amount
exceeded $15,000,000. Ocelot assigned any rights to
indemnification from Bell or its insurers to the Graces. In
exchange, the Graces agreed not to execute on the judgment against
Ocelot for at least three years.
Bell did not join in the settlement between Ocelot and
the Graces. Instead, Bell denounced the settlement as
unreasonable, because the Graces were "unlikely to prevail at
trial, and even if [they] did, the amount of any judgment would be
substantially less than $15.6 million." However, Bell considered
a settlement on similar terms after its defense to the Graces'
action proved questionable. [Fn. 3] The settlement appealed to
Bell because "the covenant not to execute the judgment would
effectively eliminate any risk of execution against Bell's assets.
In effect, the risk of being uninsured would be transferred to the
plaintiffs, who would then litigate with [INA]." However, under
the terms of the INA policy, Bell was forbidden to settle the claim
without INA's consent.
In August 1991, INA sought a declaratory judgment
absolving it of any obligation to provide coverage in the Grace
litigation. The Graces counterclaimed, seeking a declaration that
INA had an obligation to pay all liabilities in excess of
$5,100,000, whether or not the underlying sums were actually paid.
The Graces also claimed that INA had a duty to "drop down."
Following INA's suit, Bell settled the underlying case
without INA's consent. [Fn. 4] Bell confessed judgment based on an
anticipated verdict of $8,120,920. [Fn. 5] With interest and
attorney's fees, the final judgment amount exceeded $17,000,000.
In return, the Graces agreed not to execute the judgment against
Bell. The superior court found the settlement to be reasonable and
made in good faith. INA objected to the settlement, and amended
its complaint to allege that the settlement was the product of
The superior court initially granted partial summary
judgment for INA on the "drop down"issue. The court also held
that a triable issue of fact remained whether the settlement was
the product of fraud or collusion. Later, the court set aside
Bell's attorney-client privilege to allow investigation of the
The court ultimately granted summary judgment for INA on
the remainder of its claim. The superior court acknowledged that
a question of fact remained whether INA had breached its contract
by refusing to provide coverage until the underlying $5,100,000 was
actually paid. However, the court held that Bell's breach of the
cooperation clause would have been excused only if INA's breach
"occasioned"Bell's breach. The court found that Bell's breach was
a response to INA's refusal to "drop down,"rather than its denial
of excess coverage. The court later clarified its ruling, stating
that INA was prejudiced by the settlement as a matter of law, and
that the settlement voided INA coverage.
The Graces appeal, [Fn. 6] claiming that even though the
settlement breached INA's "cooperation clause,"that breach was
excused by INA's improper acts. INA cross-appeals.
A. Standard of Review
As this is an appeal taken from a grant of summary
judgment, we review the issues de novo. Beilgard v. State, 896
P.2d 230, 233 (Alaska 1995). Summary judgment may be granted only
if there is no genuine issue as to a material fact and the moving
party is entitled to judgment as a matter of law. Alaska R. Civ.
P. 56(c); see also Estate of Arrowwood v. State, 894 P.2d 642, 644
n.2 (Alaska 1995). All factual inferences are drawn in favor of
the non-moving party. The existence of a genuine issue as to a
material fact precludes summary judgment. Beilgard, 896 P.2d at
B. The Settlement between Bell and the Graces Was a Breach
of Bell's Agreement with INA.
"Ordinarily, an insured's breach of [a] cooperation
clause relieves a prejudiced insurer of liability under the
policy." Arizona Property & Cas. Ins. Guar. Fund v. Helme, 735
P.2d 451, 458-59 (Ariz. 1987). INA's policy contains a cooperation
clause which states that "no obligation shall be incurred on behalf
of INA without its consent being first obtained." Bell's
settlement not only confessed liability on INA's behalf, but also
resulted in the entry of a judgment which would require INA to pay
the maximum amount possible under its policy. INA did not consent
to this settlement. The settlement violated INA's cooperation
clause. Moreover, that breach prejudiced INA by exposing it to a
judgment in excess of $17,000,000. [Fn. 7] As a result, Bell's
breach voids INA's coverage, unless INA's misconduct justified
Bell's breach. [Fn. 8] Helme, 735 P.2d at 459.
C. If INA Breached Its Obligations to Bell, Bell Was
Entitled to Take Reasonable Steps to Protect Itself.
Under Alaska law, "if an insurer has wrongfully denied
coverage, it has materially breached its contractual obligation to
the insured . . . and cannot escape liability on the ground that
the insured failed to comply with other terms of the contract
subsequent to its own breach." Davis v. Criterion, 754 P.2d 1331,
1332 (Alaska 1988) (holding that if insurer wrongfully denied
coverage, insurer could not raise insured's failure to provide
notice of a suit under a cooperation clause as a defense to
liability); see also Theodore v. Zurich Gen. Accident & Liab. Ins.
Co., 364 P.2d 51, 55 (Alaska 1961) (holding that when insurer
unjustifiably refused to defend insured, insurer "put to an end its
right to demand compliance by the insured with other terms of the
agreement"). Other jurisdictions follow the same rule. Isaacson
v. California Ins. Guar. Ass'n, 750 P.2d 297, 308 (Cal. 1988)
(holding that if insurer violates its contractual duties by
refusing to indemnify or defend insured, insured is "entitled to
make a reasonable settlement of the claim in good faith"); see alsoHelme, 735 P.2d at 459 (holding that insurance policies "are
governed by the basic contract law principle that if one party to
a contract breaches the agreement, the other party is no longer
obligated to perform his or her contractual obligations"including
"obligations under [a] cooperation clause."). If INA wrongfully
refused to indemnify Bell, Bell would be absolved from full
compliance with the cooperation clause. [Fn. 9]
D. INA Had No Duty to "Drop Down,"Provide a Defense of
Bell, or Tender Its Policy Limits in Settlement.
1. INA's refusal to "drop down"did not constitute a
breach of the insurance agreement.
Under Alaska law, "an excess insurer is not required to
drop down upon insolvency of the primary carrier absent policy
language to the contrary." Alaska Rural Elec. Co-Op Ass'n v.
INSCO, 785 P.2d 1193, 1194 (Alaska 1990) (holding that excess
policy did not drop down); see also Safety Nat'l Cas. Corp. v.
Pacific Employers Ins., 927 P.2d 748 (Alaska 1996) (holding that
excess insurers do not insure against underlying carriers'
insolvency absent contrary terms). The policy at issue [Fn. 10]
renders INA liable "only for the ultimate net loss . . . [in]
excess of . . . the Insured's underlying limit,"which is defined
as "an amount equal to the limits of liability indicated beside the
underlying insurance listed in the schedule of underlying
insurance, plus the applicable limits of any other underlying
insurance collectible by the Insured." INA's list of underlying
insurance includes both the Mission and Integrity policies. [Fn.
11] Thus, INA is liable only for amounts in excess of the
liability limits of the Integrity and Mission policies, not for
amounts in excess of the sums actually paid by those policies.
Indeed, a California court which considered identical policy
language concluded that the excess carrier had no duty to "drop
down"upon the insolvency of the underlying insurer. SPAN, Inc. v.
Associated Int'l Ins. Co., 277 Cal. Rptr. 828, 836 (Cal. App. 1991)
(holding that policies listed in Schedule of Underlying Insurance
did not have to be "collectible"to set the lower limit of excess
insurer's liability, since "collectible"referred only to insurance
not listed). [Fn. 12] The reasoning of SPAN is persuasive.
Moreover, the Integrity policy, like the policy at issue
in SPAN, expressly limits INA's role as an underlying insurer to
circumstances in which the underlying limits are exhausted by
payment of losses. [Fn. 13] See id., 277 Cal. Rptr. at 834
(holding that excess policy was triggered when underlying limits
were exhausted "by reason of losses paid thereunder"). The policy
provides no basis for requiring INA to "drop down"if underlying
limits are exhausted by other events, such as the insolvency of the
underlying carriers. INA had no duty to provide "drop-down"
2. INA did not have a duty to defend Bell.
INA's policy provides in part that "INA shall not be
obligated to assume charge of the settlement or defense of any
claim or suit brought or proceeding instituted against the
insured,"although it retains the right to do so. This unambiguous
language defeats any claim that INA had a duty to defend Bell. SeeINSCO, 785 P.2d at 1195 (holding that it is not unfair to leave
risks of primary carrier's insolvency with Insured). Indeed, a
California court held that this policy language does not require an
insurer to defend the insured. Chubb/Pacific Indem. Group v.
Insurance Co. of North America, 233 Cal. Rptr. 539, 541 (Cal. App.
1987) (holding that excess insurer contracted against a duty to
defend the insured). INA's refusal to defend Bell did not
constitute a breach.
3. INA had no duty to evaluate the Graces' claim and
tender its policy limits in settlement.
The Graces contend that INA breached a duty to evaluate
independently claims which potentially might invade its coverage,
and to offer its full policy limit for settlement. They base this
claim on Bonha v. Hughes, Thorsness, Gantz, et al., 828 P.2d 745
(Alaska 1992). Under Bonha, "where an adverse verdict in excess of
policy limits is likely, an insurance company has the duty to
determine 'the amount of a money judgment which might be rendered
against its insured,' and 'to tender in settlement that portion of
the projected money judgment which [it] contractually agreed to
pay.'" Id. at 768 (quoting Schultz v. Travelers Indem. Co., 754
P.2d 265 (Alaska 1988)) (holding that insurer breached obligation
of good faith by failing to tender required amount). This argument
Under Bonha, insurers must tender their policy limits for
settlement in order to prevent their insureds from becoming exposed
to adverse verdicts in excess of policy limits. Id. This rule
permits an insured to accept a settlement within its policy limits,
which it presumably could not do if the insurer refused to release
the needed funds. By facilitating settlements within policy
limits, this rule eliminates the risk that an insurer's refusal to
settle could expose an insured to uncovered liability following
Unlike the circumstance in Bonha, INA's failure to tender
its policy limits did not present an obstacle to the settlement of
the case within Bell's policy limits. Prior to the settlement, the
Graces' highest demand was $3,000,000. This amount fell short of
INA's lower limit. Nevertheless, Bell refused that demand. Any
risk that Bell would become subject to a verdict that invaded INA's
coverage was due to Bell's refusal to settle for $3,000,000, rather
than INA's failure to make it possible for Bell to settle for an
amount in excess of $5,100,000. To require INA to tender funds to
Bell, so that Bell could settle the claim for the $3,000,000 the
Graces demanded, would effectively require INA to provide "drop
down"coverage. As noted, INA was not required to do so. [Fn. 14]
INA had no duty to evaluate the Graces' claim or to make its policy
limits available for use in a settlement.
E. The Superior Court Erred in Granting Summary Judgment on
the Graces' Claim that INA Breached Its Obligations by Refusing to
"Respond"until $5,100,000 Was Actually Paid.
INA's policy required it to pay "all sums . . . for which
the Insured shall become obligated to pay by reason of liability,"
as provided in the Integrity policy. These terms do not require
that such funds actually be paid before coverage is triggered.
Moreover, several cases have held that the payment or non-payment
of funds owed by a primary insurer is irrelevant to an excess
carrier's duty. Federal Ins. Co. v. Strivastava, 2 F.3d 98, 102
(5th Cir. 1993) (holding that under Texas law, excess carrier's
coverage layer begins at the limits of the underlying policies
"regardless of whether the underlying insurers actually pay those
policy limits."); see also Weaver v. Kitchens, 570 So.2d 508, 510
(La. 1990) ("Excess coverage is not dependent on the recoverability
or collectibility of the primary limits"of underlying insurance).
INA has cited no authority to the contrary, nor do its policy terms
unambiguously indicate that its duty to pay was contingent on
actual payment of the underlying limits. [Fn. 15] Hence, if INA
refused to honor its commitments until the underlying $5,100,000
was actually paid, it breached its contract.
It is not clear whether INA did refuse to indemnify Bell
until the underlying $5,100,000 was actually paid. [Fn. 16]
However, the evidence is sufficient to support a finding that it
did so, and that its position was clear enough to constitute an
anticipatory repudiation of the contract. [Fn. 17] Since the facts
could support a finding that INA did breach its contract, summary
judgment on this issue was improper. Accordingly, we remand this
case for a factual determination whether INA in fact anticipatorily
repudiated its contractual obligations. If, on remand, the jury
determines that INA did breach its obligation to provide excess
coverage, the jury must consider the additional factual issues
whether the settlement was reasonable and non-fraudulent. [Fn. 18]
Only if the jury resolves these issues favorably to the Graces [Fn.
19] can the settlement be enforced against INA. [Fn. 20]
Bell breached its contract with INA by settling with the
Graces without INA's consent. However, a genuine issue of material
fact remains whether INA first repudiated its own obligations by
refusing to "respond"until $5,100,000 was actually paid on the
Graces' claim. If INA did commit such a breach, issues of fact
remain as to the reasonable, non-fraudulent nature of the
settlement itself. Accordingly, the decision below is REVERSED,
and the case is REMANDED for further proceedings consistent with
The California Insurance Guaranty Association (CIGA) assumed
$500,000 of their combined coverage obligations.
Bell's ability to pay or borrow $5,100,000 was problematic.
A more complete account of INA's statements concerning its
willingness to "respond"prior to actual payment of the underlying
funds is contained in notes 15 and 16, infra.
Witnesses to the crash insisted that Grace had landed on dirt.
Bell's expert stated that a landing on dirt could not crack the
helmet absent a defect. However, Bell continued to believe that it
would prevail at trial.
The original judgment used an incorrect name for Bell. The
court corrected that error in a later order.
The judgment which Ocelot confessed in favor of the Graces
also was $8,120,920.
While Bell initially appeared through counsel, it since has
withdrawn from this case.
We have held that where an insurer breaches its contract, it
is liable for that amount of a reasonable settlement reached by the
insured which falls within the coverage provided by the policy.
Afcan v. Mutual Fire, Marine, and Inland Ins. Co., 595 P.2d 638,
646-47 (Alaska 1979). Therefore, if the Graces' claims that INA
breached its contract and that the settlement was reasonable are
correct, the settlement would be binding on INA. The Graces' claim
that the potential exposure to a $17,000,000 settlement did not
prejudice INA is disingenuous, and lacks merit.
The Graces contend that even if the settlement is
unenforceable against INA, they are still entitled to litigate the
merits of their product liability claim against INA. This claim
lacks merit. If a party fails to perform its own obligations under
a contract, and no valid excuse for non-performance exists, the
performance obligations of the other party are discharged. See
Restatement (Second) of Contracts sec. 237 cmt. a (stating that
material failure of performance operates as non-occurrence of
condition on other party's duty to perform, and discharges duty if
condition can no longer occur); see also Helme, 735 P.2d at 458-59
(holding that insurer's failure to cooperate relieves insurer of
liability under the contract). If Bell's breach was not excused by
INA's conduct, INA's coverage obligations would be discharged by
that breach, and the Graces would have no basis for recovery.
INA argues that Bell's breach would only be excused if that
breach was "occasioned by"INA's wrongful conduct. See Xebec Dev.
v. National Union Fire Ins., 15 Cal. Rptr. 2d 726, 749-50 (Cal.
App. 1993) (holding that insured's failure to cooperate must be
"occasioned"by the insurer's breach in order for the insured's
conduct to be excused); see also State Farm v. Peaton, 812 P.2d
1002, 1010 (Ariz. App. 1990) ("[F]or an insured to be free to
[breach the cooperation clause] without simultaneously voiding
coverage, the insurer must have done something in violation of its
contract which placed the insured in jeopardy."). Under Davis,
once an insurer has materially breached its obligations, it "cannot
escape liability on the ground that the insured failed to comply
with other terms of the contract subsequent to its own breach."
Davis, 754 P.2d at 1332. Under that view, the cause of the
insured's later breach is irrelevant. See also Restatement
(Second) of Contracts sec. 237 cmt. c (stating that party's duty to
perform is discharged by other party's breach whether or not non-
breaching party is aware of the breach). Since Davis controls,
INA's contention fails.
INA adopted all of Integrity's policy terms which were not
expressly contradicted by INA's certificate. The quoted passage is
contained in the Integrity policy.
The Graces contend that INA's policy adopted Integrity's lower
liability limit. This contention fails. Integrity's lower limit
is calculated with reference to Integrity's schedule of underlying
insurance. The terms used to calculate the lower limit are adopted
by the INA policy, as the Graces claim. However, INA has a
different list of underlying insurers than does Integrity. INA's
lower limit is calculated with reference to a different list of
underlying insurance, which produces a different limit level.
The Supreme Court of Alabama reached the opposite conclusion
when interpreting this language. Alabama Ins. Guar. v. Magic City
Trucking Serv., 547 So.2d 849, 854 (Ala. 1989).
The Integrity policy provides that "In the event that the
aggregate limits of liability of the underlying policies . . . are
exhausted or reduced, solely as the result of occurrences taking
place after the inception date of this policy, this policy shall
. . . continue in force as underlying insurance."(Emphasis added.)
"Occurrence"is defined as "an accident . . . which results in
An attempt by Bell to settle the case for $8,000,000, thus
invading INA's coverage by the $3,000,000 of the Graces' demand,
and then failing to pay the underlying $5,100,000, also would be
nothing more than an attempt to force INA to "drop down."
One portion of the Integrity policy declares that the excess
insurer would operate as "underlying insurance"if the underlying
insurance were exhausted "solely as the result of occurrences,"
with "occurrences"defined as "accident[s] . . . which results in
personal injury." This language could be read to mean that INA
only had a duty to provide "underlying coverage"in the event that
the limits of the Mission and Integrity policies were exhausted by
reason of "occurrences,"and that INA had no duty to act if the
underlying limits were discharged in bankruptcy. However, the
Integrity policy also provides coverage for losses "which the
insured shall become obligated to pay"through judgment or
agreement. This language indicates that INA became obligated to
pay whenever its insured became liable for amounts invading INA's
coverage, regardless of whether or not its insured or one acting on
its behalf actually paid the underlying limits. It is well settled
that ambiguities in insurance contracts are to be resolved in favor
of the insured. U.S. Fire Ins. Co. v. Colver, 600 P.2d 1, 3
(Alaska 1979). INA's duty was triggered when Bell became liable
for sums in excess of INA's lower coverage limit, rather than when
the underlying limits were actually paid.
INA repeatedly claimed that its policy would "not respond
until the underlying $5 million coverages are spent, whether they
are spent via insurance carriers' assets or are spent directly from
the assets of Bell Helmet themselves." INA also argued this
position in court, in opposition to the Graces' motion for summary
judgment. However, on other occasions, INA stated that its own
liability was triggered when the amount of liability was
"adjudged,"rather than when the underlying amount was paid.
Under Drake v. Wickwire, 795 P.2d 195 (Alaska 1990), "language
that under a fair reading 'amounts to a statement of intention not
to perform except on conditions which go beyond the contract'
constitutes a repudiation." Id. at 198 (adopting Sections 250,
251, and 253 of the Restatement (Second) of Contracts). INA's
statements indicated that INA would not indemnify Bell except on
extra-contractual conditions (actual payment of the underlying
amount). This conduct could constitute anticipatory repudiation,
although INA's statements that it would pay upon "adjudication"of
liability indicate otherwise.
INA also has alleged that the settlement was the product of
collusion and a breach of good faith. If INA did breach its
obligations, the Graces had no duty to act out of solicitude for
the interests of INA, and were not forbidden from reaching an
agreement with Bell which ran counter to the interests of INA.
These claims therefore fail. However, in so doing, the Graces
remained obligated to act with honesty, and to reach a reasonable
settlement. As a result, the settlement cannot be enforced if the
jury concludes that settlement was the product of fraud, or was
In addition, we note that Bell's attorney-client
privilege was properly set aside by the superior court. "The
general rule is that there must be a prima facie showing of fraud
before the attorney-client privilege is deemed defeated." United
Servs. Auto Ass'n v. Werley, 526 P.2d 28, 32 (Alaska 1974) (holding
that evidence must support a finding of fraud before attorney-
client privilege ceases to apply). While an issue of fact remains
as to whether this settlement actually was the product of fraud,
the evidence is sufficient to present a prima facie case of fraud.
In Washington Insurance Guaranty Ass'n v. Ramsey, 922 P.2d 237
(Alaska 1996), this court cited a test adopted in Washington for
determination of the reasonableness of a settlement combined with
a covenant not to execute against the insured. That test
considered the following factors: "[t]he releasing person's
damages; the merits of the releasing person's liability theory;
the merits of the released person's defense theory; the released
person's relative faults; the risks and expenses of continued
litigation; the released person's ability to pay; any evidence of
bad faith, collusion, or fraud; the extent of the releasing
person's investigation and preparation of the case; and the
interests of the parties not being released." Id. at 247-48
(citing Glover v. Tacoma Gen. Hosp., 658 P.2d 1230, 1236 (Wash.
INA's contention that the settlement could not be enforced
against it in any event, since there has been no "adjudication of
the merits of the claims against the insured," fails. As noted,
an insurer that breaches its contract is liable for that amount of
a reasonable settlement reached by the insured which falls within
the coverage provided by the policy. Afcan, 595 P.2d at 646-47.
If the settlement was reasonable and non-fraudulent, it would be
enforceable against INA.