The U.S. Court of Appeals for the Ninth Circuit has ruled that an insurance policy's no-voluntary payment provision barred coverage of an insured's demand that the insurer pay for a settlement the insured had reached with its customer.

The Case

Piveg, Inc., supplied allegedly defective astaxanthin oil to J&D Laboratories, Inc. After J&D's customer, NOW Foods, Inc., rejected softgels made from this astaxanthin oil, J&D demanded that Piveg reimburse J&D for the purchase price NOW would have paid J&D had NOW not rejected the softgels.

Following some negotiating, Piveg and J&D agreed that Piveg would fully reimburse J&D. Piveg initially paid J&D $5,000 and continued to make payments for several months.

Piveg then tendered a claim to General Star Indemnity Company, its insurer, based on property damage. General Star denied coverage and Piveg sued.

The U.S. District Court for the Southern District of California granted summary judgment in favor of General Star, reasoning that the no-voluntary payment (“NVP”) provision in the General Star insurance policy excluded coverage to the extent Piveg had “voluntarily ma[de] a payment, assume[d] any obligation, or incur[red] any expense” to resolve third-party claims without General Star's consent.

Piveg appealed to the Ninth Circuit.

The Ninth Circuit's Decision

The Ninth Circuit affirmed.

In its decision, the circuit court explained that NVP provisions typically secure an insurer's rightful and “complete” prerogative to “control . . . the defense or compromise of suits or claims” against the unilateral commitments made by the insured.

Here, the circuit court observed, Piveg had assumed an obligation to pay J&D the entire amount of Piveg's insurance demand without General Star's consent. “This deprived General Star of the ability to control any defense or settlement of the claim,” the Ninth Circuit said.

The circuit court added that the fact that Piveg and J&D may have finalized the payment terms after General Star had denied Piveg's claim was “inconsequential” because explicit payment terms were “unnecessary to form a contract.”

Moreover, it said, the statute of frauds did not render Piveg's agreement to pay J&D unenforceable, because the emails between them sufficiently memorialized their agreement.

Accordingly, the circuit court concluded, the district court had properly granted summary judgment to General Star.

The case is Piveg, Inc. v. General Star Indemnity Co., No. 16-56003 (9th Cir. Feb. 8, 2018).