The California Court of Appeal has affirmed that Lloyd’s of London and other insurers cannot escape coverage for $132.5 million in settlements arising from the 2008 Chatsworth train crash, in which 25 individuals were killed and more than 130 injured. In Those Certain Underwriters at Lloyd’s, London v. Connex Railroad LLC, No. B276373, 2018 WL 1871278 (Cal. App. 2d Dist. Apr. 19, 2018), the Second District Court of Appeal affirmed the Los Angeles Superior Court’s ruling, discussed in our November 9, 2015 blog post, that the insurers were obligated to indemnify Connex Railroad for the settlements.

The insurers sought to invoke an exclusion for intentional acts, arguing that the insureds “reasonably could have expected” the accident to occur based on the train engineer’s history of texting while on the job. Applying New York law, the three-judge panel disagreed with the insurers and unanimously held that the crash was “unquestionably an ‘accident’ within the meaning of the policies pursuant to New York law,” even if the original act or acts leading to the damage were intentional.  The ruling upholds the view that, to invoke the intentional acts exclusion, an insurer must establish that the injuries “flow directly and immediately from an insured’s alleged intentional act.”  Here, the insurers failed to meet that burden.

The Court of Appeal also held that the insureds could not recover more than the actual policy limits under their bad faith claims, given that the insureds and the insurers had previously entered into an agreement whereby the insureds waived future claims against the insurers in exchange for the insurers’ payment of $146 million to fund the settlements under a reservation of rights. The Court of Appeal held that the insureds had released all claims based on the breach of the duty of good faith and fair dealing, and thus were not entitled to additional extracontractual remedies.

Connex reaffirms the principle that more than a deliberate act by the insured is required for an insurer to successfully limit coverage based on a so-called “intentional acts” exclusion. However, it should also serve as a reminder that policyholders should carefully consider the implications on insurance coverage when they enter into settlement or indemnity agreements. Coverage counsel can assist policyholders to help ensure that they are maximizing—and not waiving—all potential avenues for an insurance recovery.