California Appellate Court: Insurer Must Defend Insured In Alternative Dispute Resolution

In an important decision, a California appellate court recently held in Clarendon American Insurance Co. v. StarNet Insurance Co. (StarNet)1 that an insurer was required to defend its insured in a statutorily required pre-litigation dispute resolution process. This coverage issue—the question of what kind of proceeding constitutes a "suit" under a comprehensive general liability insurance policy (CGL)—is an issue of great importance to many insureds and continues a debate that has taken place in the courts throughout the country.

Background

Companies are frequently faced with the difficult question of whether to attempt to resolve a claim through alternative dispute resolution, or ADR—such as mediation or arbitration—before resorting to litigation. Important to their decision is whether their CGL policies cover the ADR process. Some CGL policies explicitly cover arbitrations and similar procedures and some have language extending coverage to "claims or suits." However, many CGL policies have language restricting coverage to "suits." The meaning of the term "suit" contained in these policies has been found by the courts to be capable of various constructions. As a result, courts are divided on the issue of whether a proceeding that is not filed in a court of law—whether ADR or a governmental administrative action—is a "suit" entitling an insured to the defense and indemnity protections of a CGL policy.2 Litigation often involves clarifying the meaning of this policy language, and whether a particular type of proceeding is sufficiently adversarial to constitute a "suit" within the meaning of the policy language and the law.

Approximately a dozen years ago, the California Supreme Court held in an environmental coverage case that in CGL policies providing coverage only for "suits," an insurer is only required to defend its insured against "a court proceeding initiated by the filing of a complaint."3 A later decision extended this rule to settlement, or indemnity, costs.4

These decisions have remained controversial and have been subjected to judicial criticism.5 More recently, a California appellate court noted in Ameron, a 2007 insurance coverage decision, that, had it been "writing on a blank slate," it would have held that a "knowledgeable government contractor" would "reasonably expect" that an administrative hearing on a government contract issue is a "suit seeking damages" under a standard CGL policy against which its insurers were...