Catastrophic Crayons
Federal Insurance Company (Federal) filed a declaratory judgment action against Binney & Smith, Inc. (Binney) seeking a declaration that it did not owe a duty to defend or indemnify Binney in an underlying class action lawsuit. The bench trial resulted in the award of $1,013,717.76 to Binney for costs and expenses incurred during the underlying class action, which ultimately was settled. Federal appealed on the basis that Binney unreasonably settled the underlying class action and because Binney had already recovered part of the settlement from another insurer. Additionally, because the settlement covered years that Binney was not insured by Federal, Federal contended that the award should have been prorated. Binney cross-appealed the denial of prejudgment interest by the trial court.
Binney is a manufacturer of Crayola Crayons. Asbestos was found in a binding ingredient of the crayons. Binney was sued by a Steven Schwab, who filed a class action for breach of implied warranty of merchantability, breach of express warranty and violation of the Consumer Fraud and Uniform Deceptive Trade Practices Act because the packaging of the crayons contained a “nontoxic” seal. After Schwab filed suit, Binney met with the Consumer Product Safety Commission (CPSC). Tests were performed on the crayons; the results showed the risk of a child being harmed by ingestion or inhalation of the crayon was extremely low. The case was settled six months after Schwab filed suit. The court held a fairness hearing and awarded $1,013,717.76 for costs, attorney’s fees, and expenses. Subsequently, Federal filed this declaratory judgment action against Binney, in which Binney prevailed.
Upon review, the appellate court considered whether the settlement was reasonable with regards to anticipated liability in the suit. The insured, Binney, holds the burden of proving reasonableness. For fairness purposes the burden of proof is on the insured because it agreed to the settlement and the insurer may present evidence of unreasonableness. Even though Binney believed the class action suit had no merit, Binney was worried that the jury would not simply look at the test results which showed chances of harm to be extremely low but that they would simply hear that traces of asbestos were found, Binney went into settlement negotiations. By going to trial, Binney also considered the risk of the award being much greater than the cost of settlement.
Federal argued the settlement should be based on a prorated amount for the time the policy actually covered. The appellate court concluded that Binney was required to provided evidence showing when the crayons were purchased in relation to Federal’s policy coverage. The court found that Binney could not hold Federal responsible for advertising injuries that occurred when there was no coverage under Federal’s policy. The Federal policy only provided Binney with coverage for three years and the total period at issue in the case with the crayons was over 30 years. The appellate court found that Federal should not be responsible for the whole time period and that the amount should be determined on a prorated basis.
On the issue of double recovery, Federal contends that because Binney had already recovered from another insurer, it should not be allowed to recover a second time from Federal. Because double recovery would not only indemnify Binney, but would place it in a better position that it was prior to the suits, the appellate court found there must be a determination of how much the settlement with the third insurer was for, and it should be considered in the amount Federal is required to pay. The appellate court remanded this issue back to the trial court for determination of the specific amounts.
