## Facts

- Caterpillar purchased a directors-and-officers (D&O) liability policy from Great American that covered loss the insured directors and officers became legally obligated to pay for claims alleging wrongful acts.
- The policy required Great American’s consent before settlement, required Caterpillar to provide information relevant to consent, and gave Great American a contractual right to associate in the defense and settlement.
- After a downturn in Brazil reduced profits from Caterpillar’s Brazilian operations, Caterpillar disclosed reduced earnings and its stock price fell about 20% over two days in June 1990.
- Shareholders filed federal securities class actions against Caterpillar and five directors, alleging Exchange Act § 10(b), § 20, and Rule 10b-5 violations and related state-law claims based on alleged misstatements or omissions about the significance of Brazilian operations and reorganization costs.
- Caterpillar notified Great American soon after the litigation was filed; Great American reserved rights while monitoring the case.
- Following denial of a motion to dismiss, Caterpillar negotiated settlement and made substantial settlement offers without first discussing all offers with Great American.
- The parties reached a class settlement of approximately $17.25 million to $23 million, exceeding the policy’s $10 million self-insured retention; after further exchanges of information, Great American consented to the settlement.
- Caterpillar filed a declaratory judgment action seeking indemnity for the settlement and defense costs above the retention; Great American argued coverage was barred by alleged consent/cooperation breaches and, alternatively, the settlement must be allocated between covered insured-person liability and uncovered corporate liability.

## Issues

1. Whether Caterpillar’s handling of settlement negotiations and offers breached the policy’s consent/cooperation conditions so as to forfeit coverage.
2. Whether, and under what standard, the insurer may allocate a global settlement between covered directors-and-officers liability and uncovered corporate or other noncovered liability.

## Decision

- The Seventh Circuit held Caterpillar did not breach policy conditions in a manner that barred coverage.
- The court concluded the policy did not expressly require notice of every settlement offer and Great American failed to show a violation of conditions precedent or material prejudice, particularly given its ultimate consent.
- The court affirmed that allocation is available in principle but modified the analysis: allocation is limited to the incremental portion of the settlement attributable to uncovered claims or parties.
- The court rejected a “relative exposure” apportionment of the entire settlement and instead applied a “larger settlement” inquiry focused on whether uninsured matters increased the settlement amount.
- The court clarified that allocation may include any increment attributable to Caterpillar’s own direct (uninsured) corporate liability, with the insurer bearing the burden to prove that increment.

## Legal Principles

- Ambiguous consent and cooperation provisions in insurance policies are construed against the insurer; courts will not imply broad notice duties (such as notice of every settlement offer) absent clear policy language.
- An insurer that knows of the litigation and ultimately consents to a settlement generally cannot avoid indemnity based on post hoc dissatisfaction with the insured’s negotiation strategy, absent a demonstrated, material impairment of contractual rights.
- In a global settlement resolving both covered insured-person claims and uncovered corporate or other noncovered claims, allocation is permitted only to the extent the insurer proves the settlement was increased by the uncovered matters.
- The proper allocation question is the objective, incremental increase in settlement attributable to uncovered claims or parties, not a proportional division of the entire settlement by comparative exposure.
- The insurer bears the burden of establishing the amount of any allocable increment attributable solely to uncovered liability, including direct corporate liability.

## Conclusion

The Seventh Circuit ruled that Caterpillar did not forfeit D&O coverage through its settlement negotiation conduct where the policy lacked an express duty to report every offer and the insurer ultimately consented, but it allowed allocation only for any proven, incremental increase in the settlement caused by uncovered corporate or other noncovered liability rather than by allocating the entire settlement based on relative exposure.


Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955 (7th Cir. 1995)