Caterpillar, Inc. v. Great American Insurance Company

62 F.3d 955 (1995)

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Caterpillar, Inc. v. Great American Insurance Company

United States Court of Appeals for the Seventh Circuit
62 F.3d 955 (1995)

Facts

Caterpillar, Inc. (plaintiff) purchased a directors-and-officers insurance policy from Great American Insurance Company (Great American) (defendant) that covered all losses that the directors or officers were legally obligated to pay for any claim made against the directors or officers for a wrongful act. The insurance policy permitted Caterpillar to handle the litigation but required Caterpillar to obtain Great American’s consent before entering into any settlement and to provide Great American with full information so Great American could determine whether it should consent to the settlement. Thereafter, Caterpillar’s shareholders initiated a federal class-action securities suit against Caterpillar and five of its directors. Caterpillar unsuccessfully moved to dismiss the suit for failure to adequately plead scienter. Caterpillar subsequently engaged in settlement negotiations without conferring with Great American. When Great American learned of the settlement negotiations, it complained to Caterpillar that Caterpillar had made unreasonably high settlement offers without discussing the offers with Great American. Nevertheless, after further negotiations, Great American approved of a settlement in excess of the $10 million policy retention. Caterpillar filed an action seeking a declaratory judgment as to whether Great American must pay the entire settlement amount and defense expenses exceeding the $10 million policy retention. Caterpillar moved for summary judgment. Great American argued that it had no obligation to indemnify Caterpillar, because Caterpillar failed to keep Great American informed of the settlement negotiations in violation of the insurance policy. Alternatively, Great American argued that even if the policy did apply, it should receive an allocation for the portion of the settlement not attributable to the actions of Caterpillar’s directors and officers. The district court ruled that Caterpillar did not violate the insurance policy but found that Great American was entitled to an allocation pursuant to the larger-settlement rule. The allocation finding did not account for Caterpillar’s direct liability. On appeal, Caterpillar argued that the district court erred in awarding the allocation, and Great American argued that the relative-exposure rule of allocation should be followed.

Rule of Law

Issue

Holding and Reasoning (Flaum, J.)

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