Two American International Group Inc. (AIG) units and Allied World National Assurance Co. have agreed to pay $60 million to settle claims that they failed to properly cover a California water district in a $69 million award in lawsuits blaming the district for property damage from a 2008 wildfire. Under the settlement agreement, AIG units Insurance Co. of the State of Pennsylvania (ICSOP) and Lexington Insurance Co., along with Allied, agree to pay $52.5 million and $7.5 million, respectively, to resolve and end the litigation.
In July 2012, a California state court judge entered a $69 million judgment against the Yorba Linda Water District (YLWD). This arose from the Freeway Complex Fire, which swept through several communities in Orange County, Calif., in November 2008 and caused hundreds of millions of dollars in property damage. It appears that ICSOP first indicated that it would cover the district in the aftermath of the fire, but then changed its decision, relying on the inverse condemnation exclusion. In 2011, the water district and the Association of California Water Agencies Joint Powers Insurance Authority, which had banded together to purchase insurance, sued ICSOP demanding coverage on the $19 million excess policy. Later, Lexington and Allied were added as Defendants in intervenor complaints filed by private citizens whose property was damaged.
The YLWD was accused by the intervenor Plaintiffs of failing to make water available to fight the wildfire and of intentionally designing a water supply system with insufficient water pressure and water quality that did not meet minimum legal requirements. In August, a California federal judge reversed a colleague’s decision to dismiss a bad faith claim against ICSOP. In March 2013, summary judgment was entered in its favor and against YLWD on its claim for bad faith denial of coverage in the case.
The federal judge who made the decision later recused himself from the case because his former law firm was hired to represent one of the insurers. His replacement, U.S. District Judge Cormac J. Carney, issued an order granting the water district’s motion for reconsideration of the bad faith claim, citing new evidence obtained in depositions of two of ICSOP’s employees and its underwriter. ICSOP first indicated that it would cover the district in the aftermath of the fire, but then changed its decision, relying on the inverse condemnation exclusion.
ICSOP contended that two separate exclusions contained in the policy automatically barred coverage. It was claimed that the water district allegedly ran afoul of one such exclusion because it chose not to install a gravity-fed water system in the area, even though, according to ICSOP, it knew the risks of having a pump-based system during a wildfire.
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