Authored by: Judy A. Selby and C. Zachary Rosenberg

On July 11, 2013, the Central District of California held that a liability insurer is not required to reimburse its insured for costs arising out of a breach of contract class action claim.  Screen Actors Guild Inc. v. Federal Ins. Co., No. CV-11-07123 DMG (VBKx) (July 11, 2013).

On September 18, 2007, Ken Osmond, an actor and Screen Actors Guild (SAG) member most famous for his role as Eddie Haskell on Leave it to Beaver, filed a class action suit against SAG, alleging that SAG collected foreign royalties on behalf of its members but never distributed them to their rightful owners.  The Osmond action alleged four causes of action: conversion, unjust enrichment, accounting, and violation of California’s unfair competition statute.  Before 1992, all foreign video royalties were claimed by the major U.S. studios that produced and distributed the videos in foreign countries.  Then, in February 1992, SAG negotiated collective bargaining agreements (CBAs) with the studios and started collecting 50% of the royalties.  SAG was entitled to keep an administrative fee of 5-10% to offset its costs of distributing the royalties to members, but that was to be paid to the performers.  SAG did not begin to distribute these royalties to its members until 2007, and was still very behind when Osmond filed his class action suit.

SAG submitted the claim to Federal Insurance Company (Federal), under a liability policy that included Director’s and Officer’s coverage that applied to claims arising out of “Wrongful Acts.”  Federal agreed to pay SAG’s defense costs, but denied any duty to indemnify.  SAG and Osmond settled their suit, and the court entered a judgment enforcing the settlement and awarding a $15,000 enhanced payment to Osmond and $315,000 in class counsel fees to plaintiff’s counsel.

SAG then tendered the $330,000 claim to Federal.  Federal refused to cover the claim, and SAG filed suit, seeking coverage and bad faith damages.  While the parties sparred about the applicability of various exclusions, the ultimate issue was whether the claim was based on a Wrongful Act or breach of the CBA.

Federal relied on a recent California Court of Appeals case, which held that liability policies do not cover class action plaintiff’s attorneys’ fees arising out of breach of contract claims because there is no wrongful act and no loss – the insured simply owes an amount that it already agreed to pay.  Health Net, Inc. v. RLI Ins. Co., 206 Cal. App. 4th 232 (2012). The court in that case stated, “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.” Id. at 257.

SAG attempted to distinguish Health Net by claiming that its policy was different – unlike SAG’s policy, the Health Net policy limited coverage to “Damages,” which the court held excludes plaintiff’s attorneys’ fees.  Deeming that issue irrelevant, the court based its decision on the fundamental fact that the Federal policy covered claims arising out of a “Wrongful Act.”  The previously owed CBA benefits did not qualify as an insurable loss, even if the insured wrongly failed to pay them.  The court held: “SAG is and was, prior to the Osmond Action, obligated to account for and distribute the foreign levy funds to the plaintiff class, SAG fails to establish that the $330,000 Award arises from a “covered” Claim under the Policy.  As such, the Court finds that SAG’s [claim] fails as a matter of law and Federal owes no duty to indemnify SAG for the $330,000 award.”

The court also highlighted a basic principle of professional liability insurance: “if a contracting party fails to pay amounts due under a lawful contract and is sued for that failure to pay, it cannot then obtain a windfall by having its payments covered by an insurance policy covering only ‘wrongful acts.’”