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A liability insurer cannot limit its responsibility to defend by paying a plaintiff to replead covered claims as uncovered claims, the 7th U.S. Circuit Court of Appeals ruled on Dec. 6. in Lockwood Intl. B.V. v. Volm Bag Co. Inc., No. 01-1275. The ruling undoes a Wisconsin federal district court’s approval of two insurers’ $1.5 million partial settlement with a plaintiff, Lockwood International B.V., in exchange for Lockwood’s amendment of its complaint. Lockwood had sued the insured, Antigo, Wis.-based Volm Bag Co. Inc., alleging that Volm had hired former Lockwood employees, stolen intellectual property and spread false rumors about Lockwood. The complaint alleged unfair competition, tortious interference, breach of fiduciary duty and conspiracy. At different times, Volm was insured by North River Insurance Co. and the Fidelity and Guaranty Life Insurance Co. According to North River’s attorney, Jeffrey A. Schmeckpeper of Milwaukee’s Kasdorf, Lewis & Swietlik, Fidelity disputed its duty to defend, but North River spent more than $2 million defending Volm. Four years into the suit, the insurers settled with Lockwood, paying it to file an amended complaint deleting covered claims like tortious interference and unfair competition. The pact also forbade Lockwood from trying to prove certain allegations that would implicate those theories of recovery. Additionally, Schmeckpeper said, Lockwood agreed to credit $1.5 million against any recovery it made on the uncovered claims. After the trial court approved the deal and entered partial final judgment, Volm appealed. Ruling that North River had to continue defending Volm, the 7th Circuit said it had “difficulty imagining a more conspicuous betrayal of the insurer’s fiduciary duty to its insured.” Writing for the court, Circuit Judge Richard A. Posner underscored the difficulties in enforcing this type of a partial settlement, citing the possibility of the insured’s rights being resurrected by the plaintiff’s introduction of improper evidence and the problems the insurer would have in remedying such a breach. Schmeckpeper said that there would have been no problems because the district court said it could limit the admission of evidence in a manner consistent with the settlement. But Robert L. Gegios of Milwaukee’s Kohner, Mann & Kailas, lead counsel for Volm in the underlying matter, said it would be “indefensible to shift the burden [of enforcement] from the insurer to the court.” Volm’s insurance counsel, David A. Gauntlett of Gauntlett & Associates in Irvine, Calif., said that after Lockwood received the $1.5 million from the insurers, it settled its remaining claims with Volm. He added that his client will try to recover the undisclosed settlement amount from the insurers and will seek punitive damages for failure to defend. Partial settlements are acceptable when covered and uncovered claims are easily severable or when the insured agrees to it, said Robert H. Jerry II, an insurance law professor at the University of Missouri at Columbia, “but giving the insured a benefit — even one in excess of policy limits — doesn’t give the insurer the right to shirk its contractual obligations.”

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