Leflet v. Redwood Fire and Casualty (CA1 1/20/11)

This is about a Morris agreement to which an insurance company is a party and about fee awards in a class action.

Homeowners sued their subdivision’s developer for construction defects. The case proceeded as a typical construction-defect case: the developer named several subcontractors as third-party defendants and tendered its defense to them and their insurers, whose policies covered the developer for claims arising from the scope of the subs’ work. But when those insurers accepted under a reservation, the developer and its own insurers entered into a Morris agreement with a judgment less than their policy limits, assigning to plaintiffs all claims against the subs and their insurers. The subs’ insurers intervened to challenge the propriety of this; the trial court granted them summary judgment and fees.

Substantively, the Court of Appeals affirms. It holds, for one thing, that the agreement failed because the subs’ insurers were not given proper notice of it.

But the opinion is concerned mostly to say that the agreement failed not merely for lack of notice but because it was fundamentally defective. A Morris agreement “that avoids the primary insurer’s obligation to pay policy limits and passes liability in excess of those limits on to other insurers” is invalid. Such an agreement is “outside the permitted parameters” of Morris. The agreement favored some of the carriers (the developer’s, with which their interests in the agreement were consistent) over others (the subs’) even though the subs’ carriers were responsible only for the scope of their subs’ work. There is also no precedent for a Morris agreement “shrinking [an insurer’s] liability to less than policy limits.” “Because Morris agreements are fraught with risk of abuse, a settlement that mimics Morris in form but does not find support in the legal and economic realities that gave rise to that decision is both unenforceable and offensive to the policy’s cooperation clause.” Because the developer breached their contracts– viz., the cooperation clauses – the subs’ insurers don’t have to pay anything.

Well, yeah, probably. Unfortunately, the opinion is not closely-reasoned, concentrating more on the effects of such an agreement than on its theoretical defects (or else confusing the two).

The last several pages of the opinion concern the fee issue. The trial court had certified this as a class action. Plaintiffs argued that you can’t award fees under 341.01 (action arising out of contract) against a class-action plaintiff. The opinion holds that although the statute doesn’t exempt class plaintiffs, “special considerations nevertheless apply” to fee awards against them. This is because the court thinks that class plaintiffs’ management of the litigation is more “attenuated” than in normal cases. What the class intended to do was to sue the developer; it didn’t know that the method of settlement was legally iffy. And in this case (though we don’t know what this has to do with class actions) the plaintiffs didn’t sue the subs’ insurers; the insurers intervened. So the trial court abused its discretion in awarding fees against the class members jointly and severally.

The opinion affirms the judgment for the subs’ insurers, vacates the fee award, and remands.

(link to opinion)