California Case Law Update: July 2010

California Case Law Update: July 2010

By Cassandra Franklin, Cassandra Shivers and Shaun Crosner

*Readers that are customers can access the cases referenced below directly. Non-customers can access the cases through LexisNexis Free Case Law.

Since our last update, California courts have issued a number of interesting decisions regarding insurance coverage. We summarize the most significant of those cases below.

Abdelhamid v. Fire Insurance Exchange, 2010 Cal. App. LEXIS 314 (Cal. Ct. App. Feb. 22, 2010)

In Abdelhamid v. Fire Insurance Exchange, 2010 Cal.

App. LEXIS 314 (Cal. Ct. App. Feb. 22, 2010), the court of appeal reviewed a grant of summary adjudication against the insured, Zary Abdelhamid. Ms. Abdelhamid's house was destroyed by a fire, for which she submitted a claim to Fire Insurance Exchange. The Sacramento Fire Department and insurance company investigator both determined that the fire was the result of arson and uncovered numerous facts that made them suspicious that Abdelhamid was a possible suspect, including as to her questionable financial situation and history. There was substantial evidence that during the insurance company's investigation, Abdelhamid failed to provide requested documentation to support her claim, including a completed proof of loss, failed to answer numerous questions in her required examination under oath, and failed to cooperate in the processing of her claim.

The insurance company denied coverage for the claim. The denial of coverage was not based on the fact that the fire was a result of arson. Rather, the insurer denied coverage on the grounds that Abdelhamid's failure "to provide documentation reasonably requested and which should be reasonably available and further [her] failure to answer even basic questions with respect to her finances . . . constitute[] material policy breaches." Id. at *10 (internal quotations omitted). Because of these failures, the insurer concluded that Abdelhamid had failed to cooperate and "failed to comply with the condition of the policy that required her to submit a complete and conforming proof of loss." Id. It also reserved its right to deny the claim on the grounds of concealment and fraud. Id.

After the denial of coverage, Abdelhamid provided some additional documentation to the insurer, which it accepted - subject to its continued reservation of rights and express statement that it did not waive any previous or existing policy breaches by Abdelhamid. Because of this additional information, as well as the fact that Abdelhamid had refused to answer numerous questions in her initial examination under oath, the insurer's coverage counsel requested a second examination under oath. Abdelhamid and her public adjustor (who had accompanied her at the initial examination under oath) eventually responded to that request by stating that Abdelhamid had a new attorney to whom the request should be directed and that the additional documentation provided was "somewhat self explanatory" and that the "initial exam under oath should have addressed most of your questions . . . two days of questioning seems more than sufficient." Id. at *30 (internal quotations omitted). Based on these facts, the trial court granted the insurer's motion for summary judgment as to Abdelhamid's breach of contract, bad faith, and unfair business practices causes of action. Abdelhamid appealed only as to the breach of contract cause of action. Id. at *13.

Affirming the judgment, the court of appeal determined that compliance with the requirement to provide a complete proof of loss within 60 days of the insurer's request was a condition precedent to coverage. The court then concluded that "[t]he deficiencies in Abdelhamid's proof of loss were a far cry from minor defects and no reasonable trier of fact could conclude she substantially performed her obligations or complied with the condition of her insurance contract requiring her to provide a proof of loss with supporting documentation." Id. at *18-*19. The court of appeal also rejected Abdelhamid's contention that the insurer was not substantially prejudiced by her breach of the policy conditions, concluding that the "record firmly establishes [the insurer] was substantially prejudiced by Abdelhamid's failure to produce documentation, failure to answer material questions, failure to submit a complete proof of loss with supporting documentation, and refusal to cooperate." Id. at *34.

The court more thoroughly addressed Abdelhamid's assertion that her failure to answer questions at her examination under oath and to supply requested documents was excused by her reliance on the advice of counsel. Prior to the fire, Abdelhamid had sued both a real estate agent who had acted improperly in the sale of the home and a contractor who had did not completed the contracted work on the home and would not return the money advanced. Id. at *3-*5. Abdelhamid's counsel in those lawsuits had provided some information to the insurer's counsel during its investigation of the claim, but did not appear with her at the initial examination under oath. Id. at *5. Rather, the public adjuster accompanied her. During the examination, Abdelhamid "repeatedly refused to answer any questions about her business or personal finances based on purported legal advice that the questions were not related to her homeowner's claims." Id. at *9. She also refused to answer most questions about her bankruptcy and her receipt of government assistance before the fire. At that time, the insurer's counsel "cautioned that Abdelhamid's refusals to answer could be considered by [the insurer] in coming to a decision on her claim." Id.

The court of appeal rejected Abdelhamid's contention that advice of counsel in any way excused her failure to comply with policy conditions. Initially, it noted that it had "grave reservations about the application of an 'advice of counsel' excuse, whatever its possible parameters, under the circumstances of this case." Id. at * 23-*24. The court also considered the fact that the attorney was not even present at the examination under oath, who the insurer had been told did not even represent Abdelhamid in connection with her insurance claim. Id. at *24. Even more significant to the court's conclusion is its determination that the type of advice-of-counsel excuse asserted by Abdelhamid "runs counter to case law and is inconsistent with statutory law." Id. The court then evaluated case law requiring that an insured bring himself within the terms and conditions of the policy, including the requirements to submit to an examination under oath and to answer all proper questions, in order to be able to recover and concluded that the cases "reflect a strong insistence on an insured's performance of the contractual conditions required for coverage, even when the insured might have a legitimate basis for not wanting to comply." Id. at *26. The court also placed significance on the fact that although the California Legislature has, in Insurance Code sections 2070 and 2071, "specifically recognized an insured's right to withhold information on the basis of privilege or other legal objections," the Legislature has also:

recognized such information may be necessary to the insurer's investigation of the claim and where the failure prevents the insurer from being able to determine the validity of the claim or extent of loss, . . . the insured's rights under the contract may be affected.

Id. at *28. The court then held that allowing Abdelhamid to assert the advice of counsel to avoid her obligation to comply with the policy preconditions for coverage would "undermine this statutory scheme." Id.

In its conclusion, the court found that because the insurer showed that Abdelhamid did not comply with the policy's conditions precedent and materially breached her obligations, summary adjudication as to her breach of contract action was properly granted.
Amerigraphics, Inc. v. Mercury Casualty Co., 2010 Cal. App. LEXIS 377 (Cal. Ct. App. Mar. 23, 2010)

Amerigraphics, Inc. v. Mercury Casualty Co., 2010 Cal. App. LEXIS 377 (Cal. Ct. App. Mar. 23, 2010), involved an appeal of an award against Mercury Casualty Company for its handling of a claim by Amerigraphics, Inc. arising out the flooding of its business premises. Finding that Mercury had acted in bad faith, the jury had awarded $1,700,000 in punitive damages, which was ten times the amount of the compensatory award. The court of appeal considered whether the punitive damages award was appropriate and whether prejudgment interest can be included within the damages award used as the basis upon which punitive damages were multiplied.

The court concluded that evidence at trial showed that Mercury had, in fact, acted dishonestly in its handling of Amerigraphics' claim and showed a conscious disregard of Amerigraphics' rights. That bad faith conduct included that Mercury: (1) failed to advise Amerigraphics about all of the available coverages under its policy; (2) told Amerigraphics that there was no coverage for lost business income and tenant improvements, which was contrary to the policy provisions; (3) denied Amerigraphics' claims for the costs of its tenant improvements at the leased business space; (4) denied Amerigraphics' tenant improvements claim without conducting any investigation of that claim; and (5) after reopening the tenant improvement portion of the claim, letting it languish for months. Id. at *4-*12. There also was evidence that Mercury's records do not reflect "any concern that Amerigraphics would go out of business due to the delays in handling the claim." Id. at *14. After trial, the jury found that Mercury had both breached its contract and acted in bad faith and awarded Amerigraphics $130,000 in compensatory damages, plus $40,000 in prejudgment interest, and $3,000,000 in punitive damages. Id. at *15-*16. As a result of post-trial motions, Amerigraphics consented to a remitttitur of the punitive damages award to $1,700,000. That agreement was based on the trial court's statement of its belief that "the punitive damages award should be reduced to 10 times the compensatory damages." Id. at *16-*17. The court also granted Amerigraphics' post-trial motion for its attorneys' fees and costs. Id. at *17.

On appeal, Amerigraphics argued that the "business income" provision in the Mercury policy provided two distinct component parts in the event of business suspension - under which "Mercury will pay an insured for any lost income and will pay an insured its continuing normal business expenses during the period of business suspension." Id. at *19-*20. In contrast, Mercury contended that these two subparts must be read together to merely add those amounts together and not to provide separate elements of coverage. Id. at *20. The court rejected Mercury's argument, concluding that "[b]ecause the definition provides that 'Business Income' includes both items, a reasonable insured relying on the plain language of the clause would reasonably conclude that the policy covers both items." Id. at *24.

The court also, after evaluating the evidence at trial, concluded that:

In light of the testimony by Amerigraphics's expert and the other evidence presented at trial, there was substantial evidence on which the jury could base findings that not only did Mercury engage in bad faith, it did so with malice, fraud or oppression. Indeed, the vote on each question was 12 to zero.

Id. at *32. The court then considered Mercury's numerous challenges to the punitive damages award.

Mercury first argued that the punitive damages award should be stricken because they were "not supported by the findings on the special verdict." Id. at *33. The court rejected that contention, concluding that,

on the basis of the evidence offered at trial, the jury instructions and counsel's closing argument, it is clear that the jury intended to find that Amerigraphics had been harmed by Mercury's bad faith in the same amount that it had been harmed by Mercury's breach of contract. In other words, Amerigraphics suffered damage in the amount of $ 130,000, which could have been awarded for either breach of contract or bad faith.

Id. at *35-*36. The court likewise rejected Mercury's argument that the punitive damages should be stricken because they were "not supported by substantial evidence of malice, oppression or fraud." Id. at *36. After evaluating the standards of California Civil Code section 3294, the court reviewed the evidence of Mercury's claims handling and determined that "[w]e have little trouble in this case concluding that there was more than substantial evidence to support an award of punitive damages." Id. at *36-*37. Accordingly, the court stated its satisfaction that the record "amply supports" the jury's finding that Mercury acted with the requisite malice, oppression, or fraud to warrant an award of punitive damages. Id. at *41.

Mercury's final argument was that the punitive damage award should be reversed or reduced on the ground that it was "constitutionally excessive." Id. To evaluate that contention, the court considered the "'three guideposts'" for a review of punitive damages articulated in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 416-18 (2003). Amerigraphics, 2010 Cal. App. LEXIS at *42. Those guideposts are:

"(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases."

Id. at *42-*43 (quoting State Farm, 538 U.S. at 418). Of those, the court stated that the "reprehensibility" factor is the most important. Id. at *43. As to the question of determining reprehensibility of conduct, the Supreme Court instructed courts to consider whether:

"[1] the harm caused was physical as opposed to economic; [2] the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; [3] the target of the conduct had financial vulnerability; [4] the conduct involved repeated actions or was an isolated incident; and [5] the harm was the result of intentional malice, trickery, or deceit, or mere accident."

Id. at *43-*44 (alterations in original) (quoting State Farm, 538 U.S. at 419). Of these factors, the court found that only the financial vulnerability factor weighed in favor of Amerigraphics. Id. at *44-*47.

The court then considered the ratio of the punitive damage award to the actual harm suffered by Amerigraphics. The California Supreme Court's decision in Roby v. McKesson Corp., 47 Cal. 4th 686 (2009), was decided after the trial court decision awarding Amerigraphics punitive damages of 10 times the compensatory damages award. In Roby, the high court reduced a punitive damage award to a one-to-one ratio based on its finding that there was "'relatively low degree of reprehensibility'" and that ratio "was the federal constitutional limit." Id. at *49-*50 (quoting Roby, 47 Cal. 4th at 719). The court of appeal distinguished the Amerigraphics claim from that in Roby and concluded that Mercury's egregious conduct and the circumstances warranted a higher punitive damages ratio of 3.8-to-one. Id. at *54-*55. The court stated its belief that based on the circumstances, an award of that ratio was consistent with constitutional due process. That 3.8-to-one ratio was to be applied only to the compensatory damages award and not to the amount of Brandt fees awarded to Amerigraphics or to the prejudgment interest on the award. With these findings, the court of appeal reversed the judgment only as to the punitive damages award and remanded the matter to the trial court with directions to modify the judgment to reduce the punitive damages award to $500,000. Id. at *55.
Intergulf Development v. Superior Court, 2010 Cal. App. LEXIS 384 (Cal. Ct. App. Mar. 24, 2010)

In Intergulf Development v. Superior Court, 2010 Cal. App. LEXIS 384 (Cal. Ct. App. Mar. 24, 2010), the court of appeal addressed whether a liability insurer's alleged breach of contract and bad faith must be determined before the insurer is entitled to arbitration of a purported Cumis fee dispute pursuant to California Civil Code section 2860(c).

The case arose out of construction defect litigation against Intergulf Development LLC ("Intergulf"). Intergulf tendered the construction defect claims to Interstate Fire & Casualty Co. ("Interstate") seeking a defense and indemnification. Interstate acknowledged receipt of tender and agreed to defend Intergulf under a full reservation of rights. However, because Interstate only agreed to defend under a reservation of rights, Intergulf requested appointment of independent defense counsel pursuant to section 2860(c) - the statute governing an insured's right to independent counsel. Interstate never responded to Intergulf's request or subsequent demands for independent counsel, forcing Intergulf to hire defense counsel and fund its own defense. Intergulf ultimately sued Interstate for bad faith, breach of contract, and declaratory relief.

Just before trial, Interstate filed a petition to compel arbitration regarding the amount that it should pay Intergulf's independent counsel under section 2860(c), which provides:

The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. . . . Any dispute concerning attorney's fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.

Even though the parties disputed "when, if ever, Interstate agreed that Intergulf was entitled to select its own counsel," the trial court granted Interstate's petition and continued the trial pending completion of the arbitration. Id. at *5. Seeking to challenge the trial court's ruling, Intergulf petitioned for a writ of mandate from the court of appeal.

The court of appeal ultimately concluded that the trial court erred in granting Interstate's petition. The court noted that, by suing Interstate, Intergulf made clear that it was "treating Interstate's failure to acknowledge Intergulf's right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend." Id. at *7. The court also noted that Interstate's alleged breach and bad faith, if established at trial, would preclude Interstate from relying on section 2860(c)'s rate limitations, which are only available to insurers that satisfy their defense obligations pursuant to the statute. Id. at *8. As such, the court held that pre-trial arbitration of the fee issue was improper, stating:

If . . . Intergulf proves that Interstate owed it a duty to defend, breached that duty and/or committed bad faith as alleged in its complaint, at minimum, the trier of fact applies the contract measure of damages in the trial court. In these circumstances, a premature determination that Interstate is entitled to binding arbitration under section 2860, subdivision (c) may prejudice Intergulf's claim that Interstate failed to accept Intergulf's selection of independent counsel and pay its share of defense costs in a timely manner - a factual question at the heart of Intergulf's breach of contract and bad faith claims.

Id. at *11.

In so holding, the court of appeal distinguished a line of cases that had construed section 2860(c) as requiring arbitration of all disputes relating to the amount of attorney's fees owed independent counsel. Although Interstate disputed the amount of fees that it should pay independent counsel, Intergulf's lawsuit also involved the threshold questions of whether Interstate owed a duty to defend and whether Interstate satisfied its obligations under section 2860(c). The court stated that these preliminary issues needed to be resolved before any section 2860(c) arbitration could take place. Accordingly, the court of appeal issued an order directing the trial court to vacate its order granting Interstate's petition to compel arbitration and enter an order denying the petition. Id. at *11-*12.
Minkler v. Safeco Insurance Co. of America, 2010 Cal. LEXIS 5669 (Cal. June 17, 2010)

In Minkler v. Safeco Insurance Co. of America, 2010 Cal. LEXIS 5669 (Cal. June 17, 2010), the California Supreme Court considered the effect of a severability-of-interests or "separate insurance" clause upon an expected or intended exclusion. The court addressed this issue in response to the Ninth Circuit's certification of the question pursuant to California Rule of Court 8.548(f)(5).1

Safeco issued a homeowner's insurance policy to Betty Schwartz under which her son, David Schwartz, was also an insured. The policy provided coverage for general liability up to a per occurrence limit of $300,000 for each insured. Id. at *5. The policy further contained an exclusion for intentional acts providing:

"Personal liability [coverage] do[es] not apply to bodily injury or property damage: (a) which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured . . . ."

Id. at *6. The policy also contained the following severability-of-interests clause: "This insurance applies separately to each insured. This condition will not increase our limit of liability for any one occurrence." Id.

Scott Minkler sued Betty and David Schwartz alleging that David had molested Scott in Betty's home and that Betty failed to take reasonable steps to stop her son from doing so although she knew of her son's misconduct. Safeco denied tender of the lawsuit as to both David and Betty Schwartz, citing the intentional acts exclusion. Minkler then obtained a default judgment against Betty Schwartz and Betty settled with Minkler. In exchange for a covenant not to execute on the judgment, Betty assigned her claims against Safeco to Minkler. Minkler then filed his action against Safeco for breach of contract and tortious breach of the covenant of good faith and fair dealing in Superior Court.

Safeco removed the case to the United States District Court and filed a motion to dismiss that the intentional acts exclusion barred coverage for Minkler's claims against Betty. The district court granted Safeco's motion to dismiss and Minkler timely appealed. The California Supreme Court, answered the Ninth Circuit's question "no." Id. at *40.

The court noted that:

California decisions uniformly have held that viewed in isolation, a clause excluding coverage for particular conduct by "an" or "any" insured, as opposed to "the" insured, means that such conduct by one insured will bar coverage for all other insureds under the same policy on claims arising from the same occurrence. This rule applies even when the insureds seeking coverage did not themselves participate in the act for which coverage is excluded, and even when their liability is premised on their own independent acts or omissions that would otherwise be covered.

Id. at *12-*13.

Nonetheless, the court looked to the severability provision in the policy and noted that:

[A] reasonable interpretation of the severability language simply contradicts any inference that a coverage exclusion for the intentional acts of "an insured" - i.e., one insured among several - would bar coverage for all others, such that all must sink or swim together. The severability clause stated that "[t]his insurance" (italics added) was "separately" applicable to "each insured." The broad reference to separate application of "this insurance" suggested, as indicated above, that each person the policies covered would be treated, for all policy purposes, as if he or she were the sole person covered - i.e., that in effect, each insured had an individual policy whose terms applied only to him or her.

Id. at *13-*14.

Safeco argued that the severability clause was designed solely to specify that each insured was separately entitled to full policy limits but should have no bearing on the expected or intended exclusion. The Supreme Court disagreed, noting that "Safeco could easily have removed any uncertainty and made explicit that the severability clause had only the limited meaning Safeco now asserts." Id. at *15. However, Safeco did not do so. Id.

The court recognized that a majority of jurisdictions outside California had taken the opposite view, concluding that a severability clause did not alter collective application of an intentional acts exclusion such as that contained in Safeco's policy. Id. at *35. Nonetheless, the court agreed with the cases that gave effect to severability or "separate insurance" clauses as against such expected or intended exclusions. Id. at *38.

The ambiguity [created by the severability clause and the expected or intended exclusion] must be resolved, if possible, in a way that preserves the objectively reasonable coverage expectations of the insured seeking coverage. Here, even if Betty's homeowner's policies excluded liability coverage for injuries intentionally caused by "an" insured, she had, in light of the policies' severability clause, an objectively reasonable expectation that the policies would cover her so long as her own conduct did not fall within the intentional acts exclusion. She had no reason to expect that David's residence in her home, and his consequent status as an additional insured on her homeowners' policies, would narrow her own coverage, and the protection of her separate assets, against claims arising from his intentional acts . . . . We therefore hold that, in light of the severability clause in Betty's policies, the exclusion of coverage for injuries arising from 'an' insured's intentional acts did not preclude coverage for Betty's liability, if any, arising from the molestations for the sole reason that David, another insured under the policies, had committed intentional, and thus excludable, acts. Instead, Betty's coverage must be analyzed on the basis of whether she herself committed an act or acts that fall within the intentional act exclusion.

Id. at *40-*41 (footnotes omitted).
Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 2010 Cal. App. LEXIS 981 (Cal. Ct. App. June 28, 2010)

In Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 2010 Cal. App. LEXIS 981 (Cal. Ct. App. June 28, 2010), the court of appeal evaluated a liability insurer's duty to defend and indemnify in the face of language limiting coverage to occurrences taking place during the policy period. Pennsylvania General Insurance Co. ("Pennsylvania General") sought equitable contribution from American Safety Indemnity Co. ("ASIC") in connection with underlying construction defect litigation brought against their mutual insured, Whitacre Construction, Inc. ("Whitacre").

Whitacre, a subcontractor on a construction project, was sued in a construction defect lawsuit after its work allegedly created multiple problems with a construction project. Between August 1998 and December 2001, the period in which Whitacre was working on the project, it was insured under a commercial general liability insurance policy issued by Pennsylvania General. After its work on the project was completed, Whitacre purchased a CGL policy from ASIC. Whitacre was sued during the ASIC policy period, and it tendered its defense to both Pennsylvania General and Whitacre. Although ASIC denied the claim, Pennsylvania General ultimately paid the defense and settlement costs for Whitacre. Pennsylvania General then sued ASIC for equitable contribution, arguing that ASIC had a duty to pay a portion of Whitacre's defense costs and a portion of the settlement.

Both ASIC and Pennsylvania General filed cross-motions for summary judgment. ASIC asserted that there was no potential for coverage under its policy because its policy limited coverage to occurrences that happened after the effective date of its policy. ASIC's policy covered "'property damage'" caused by "an 'occurrence' that takes place in the 'coverage territory' . . . during the policy period." The policy defined "'Occurrence' [as] an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance." The policy also provided that "'Property damage' . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during the term of this insurance." The policy also contained a "pre-existing injury or damage exclusion" barring coverage for "[a]ny occurrence, incident or suit . . . which first occurred prior to the inception date of this policy[,] or which is, or is alleged to be, in the process of occurring as of the inception date of this policy . . . even if the 'occurrence' continues during this policy period." Id. at *16-*17.

ASIC argued that the construction defect lawsuit was not an occurrence that "happened" during the policy term because Whitacre completed its work on the construction project before the start of the ASIC policy period. This fact, ASIC argued, negated the potential for coverage of the subsequent construction defect litigation against Whitacre. The trial court agreed, granting summary judgment in ASIC's favor and denying Pennsylvania General's related motion. Pennsylvania General then appealed.

The court of appeal began its analysis by noting that numerous courts have found that "occurrence" typically refers to the point in time when the complaining party is damaged, not when the alleged wrongful act was committed. The only question, then, was whether ASIC's definition of "occurrence" as something that "happens" during the policy term unambiguously altered the normal trigger of coverage under occurrence-based liability policies. The court ultimately found that ASIC's policy language was "reasonably susceptible to the interpretation that resulting damage, not the causal conduct, is still a defining characteristic of the occurrence that must take place during the policy period to create coverage." Id. at *21.

The court emphasized that ASIC's policy merely limited coverage to those occurrences happening during the policy period; it did not, as ASIC suggested, unambiguously require that the causal conduct giving rise to the occurrence also take place during the policy period. Id. at *22-*23. The court further noted that other provisions in the ASIC policy, including the policy's exclusion for pre-existing injury or damage, seemed aimed at limiting coverage for injury or damage - not causal conduct - taking place before the start of the policy period.

The court held that the relevant ASIC policy language, read as a whole, could reasonably be construed as an attempt to obviate the continuous trigger rule developed in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995). The court did not, however, view the language as unambiguously excluding coverage if the injury-producing conduct preceded the policy's inception. The court distinguished case law relied upon by ASIC in the following way:

[ASIC's] cited cases address the distinct question of how to construe the term "occurrence" in the context of determining how to apply the policy's "per occurrence limits" or a policy's per occurrence deductibles, not in the context of determining (as here) whether the trigger for coverage had happened within the policy period. . . . For the purpose of determining whether there was coverage within the policy period, it is well established that the time of the relevant "occurrence" or "accident" is not when the wrongful act was committed but when the complaining party was actually damaged. . . . [F]or the purpose of an insurer's [per-occurrence] limitation of liability . . ., occurrence has generally been held to mean the underlying cause of the injury, rather than the injury or claim itself . . . . Id. at *26-*28 (citations omitted).

Against this backdrop, the court concluded that ASIC's policy was "reasonably susceptible to the interpretation that the trigger of coverage was damage to property, not the causal conduct . . . ." Id. at *39. The policy language limiting coverage to occurrences happening during the policy period was, the court found, "merely designed to obviate the application of the 'progressive damage-continuous trigger' articulated in Montrose." Accordingly, the court reversed the trial court's judgment in ASIC's favor and awarded costs on appeal to Pennsylvania General. Id. at *39-*40.
Risely v. Interinsurance Exchange of the Automobile Club, 2010 Cal. App. LEXIS 399 (Cal. Ct. App. Mar. 26, 2010)

In Risely v. Interinsurance Exchange of the Automobile Club, 2010 Cal. App. LEXIS 399 (Cal. Ct. App. Mar. 26, 2010), the court of appeal addressed the issue of whether an insurer that refused to defend a liability claim that was being defended under a second policy could be liable for damages. Sean Turner purchased an automobile policy with limits of $25,000 per person and $50,000 per occurrence from the Interinsurance Exchange of the Automobile Club (the "Auto Club"). Id. at *3, *11. He also purchased a separate homeowner's policy from the Auto Club with policy limits of $300,000. Id. at *3. The homeowner's policy provided coverage for personal injury arising from false imprisonment, which was not included within the automobile policy. Id. at *3-*4. Lisa Risely sued Turner for motor vehicle negligence, negligence per se, and false imprisonment. Id. at *4. The Auto Club agreed to defend the Risely action under the automobile policy, but denied coverage under the homeowner's policy. Id. During the litigation, Risely offered to settle the claims against Turner for $300,000 - the homeowner's policy limit. Id. The Auto Club declined that settlement demand on the grounds that it was in excess of the $50,000 automobile policy limit and that there was no other coverage available. Id. at *4-*5. Turner then agreed to a stipulated judgment against him and to assign to Risely any claims he might have against the Auto Club under the homeowner's policy. Id. at *5. Thereafter, the trial court entered a final judgment against Turner of $434,000 (offsetting the amount of the $450,000 settlement by the amount that the Auto Club had paid on the claim under the automobile policy). Id. at *5 & n.4. The Auto Club refused Risely's requests to pay that judgment. Id. at *5.

In Risely's subsequent lawsuit against the Auto Club, she stated causes of action for breach of contract and bad faith for failure to defend and indemnify the false imprisonment cause of action, and failure to accept her reasonable settlement demand. In a motion for summary judgment, the Auto Club asserted that Risely could not establish damages resulting from a refusal to settle because there had been no judicial determination of liability against Turner. Id. at *7. Although it acknowledged that when an insurer refuses to defend a claim the insured may enter into a noncollusive settlement with the claimant without the insurer's consent, the Auto Club also contended that because it had provided a defense to Turner under the automobile policy, the stipulated judgment was not binding against it. Id. at *7-*9. The Auto Club further contended that because it had provided a defense under the automobile policy, its failure to defend under the homeowner's policy was of "'no consequence.'" Id. at *8-*9. Moreover, the stipulated judgment could not be enforced under the "no action" clause in the homeowner's policy under which no action could be brought against the Auto Club "until the insured's obligation to pay had been determined either by a judgment after trial, or by the written consent of both the Auto Club and the insured." Id. at *9-*10. Because it had defended the automobile policy, the Auto Club argued that the "no action" provision precluded recovery based on a stipulated judgment.

Risely opposed the summary judgment on the grounds that by its failure to defend and indemnify under the homeowner's policy, the Auto Club had forfeited the right to object to the stipulated judgment and its defense under the automobile policy did not excuse that breach. Moreover, given the false imprisonment coverage of the homeowner's policy and its higher policy limit, the Auto Club's defense of Risely's false imprisonment claim under the automobile policy was not equivalent to a defense under the homeowner's policy because:

"[t]he defense provided under the automobile policy exposed [Auto Club] to absolutely no liability for any claim, settlement and/or judgment for the false imprisonment claim, while leaving its insured liable for a covered risk under the homeowner's policy."

Id. at *11-*12 (alterations in original).

The trial court granted the Auto Club's motion for summary judgment, finding that the failure to defend under the homeowner's policy "'was of no consequence'" and that:

A stipulated judgment in excess of the policy limits, for which the insured is relieved from personal liability by a covenant not to execute, may not be deemed even a presumptive determination of the insured's damages in an action against a defending insurer for breach of its duties.

Id. at *14-*15. The trial court thereafter denied Risely's motion for a new trial and/or to vacate or set aside the judgment. Id. at *15.

Reversing the trial court's grant of summary judgment, the court of appeal held that the Auto Club's defense under the automobile policy did not excuse its failure to defend under the homeowner's policy. The court applied well-established principles regarding an insurer's duty to defend, duty to act in good faith, and duty to settle. Id. at *16-*18. In addition, the court noted that "[w]here more than one insurer has a duty to defend an insured, each insurer's duty is 'separate and independent from the others.'" Id. at *22 (quoting Aerojet-General Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 70 (1997)). Although an insured is entitled to only one full defense, when the non-defending insurer's breach of the duty to defend "potentially increased the insured's exposure to personal liability," the insured can allege damages from the breach of the defense duty. Id. at *23.

Applying these standards, the court of appeal agreed with Risely's claims that the Auto Club's defense under the automobile policy did not excuse its failure to defend under the homeowner's policy. In so ruling, the court acknowledged that the facts were unique because the Auto Club provided both policies:

Although there appears to be no prior case in which a court has considered whether an insured may establish damages based on an insurer's alleged breach of its duty to defend where a single insurer is alleged to owe a duty to defend under more than one policy, Auto Club offers no reason why the law should differ depending on whether the policies in question are issued by a single insurer, or instead, by multiple insurers. If, in this case, Auto Club had issued only the homeowners policy and refused to defend, and a different insurer had issued the automobile policy and defended, Auto Club would not be in a position to argue, as it does here, that its refusal to defend under the homeowners policy was, as a matter of law, "of no consequence" to the insured. Rather, under that scenario, Auto Club would be in the same position as the nondefending insurer was in Wint [v. Fidelity & Casualty Co., 9 Cal. 3d 257 (1973)], in which the court unequivocally rejected Fidelity's argument that a defense by Great American, an insurer whose policy had a limit below the amount claimed, was equivalent to a defense by Fidelity, whose policy limit was 10 times higher than the Great American policy limit.

Id. at *36-*37. The court then concluded that, assuming that the homeowner's policy provided coverage for the false imprisonment claim, the Auto Club has not established that its failure to provide a defense under that policy did not damage Turner. Rather,

it is clear that Auto Club's refusal to defend Turner under the homeowners policy, and its choice to defend him under only the automobile policy - which provided no coverage for Risely's claim - would have exposed Turner to a greater potential for personal liability.

Id. at *37-*38. The court likewise rejected the Auto Club's contention that the "no action" clause precluded it from being bound by the stipulated judgment. Id. at *39. Accordingly, the grant of summary judgment was reversed.
Scottsdale Insurance Co. v. Century Surety Co., 2010 Cal. App. LEXIS 319 (Cal. Ct. App. Mar. 10, 2010)

In Scottsdale Insurance Co. v. Century Surety Co., 2010 Cal. App. LEXIS 319 (Cal. Ct. App. Mar. 10, 2010), the court of appeal addressed the issues of damages and burden of proof in an equitable contribution action by one insurer against another insurer. Scottsdale Insurance Company and Century Surety Company had many insureds, primarily construction subcontractors, in common. Generally, when a lawsuit was filed against one of the mutual insureds, the claim would be tendered to all of the applicable insurers. Century often declined to participate in the insured's defense and indemnity, relying upon the prior work exclusion and a policy endorsement that purported to make its coverage excess to other insurance policies. Id. at *7. In contrast, Scottsdale and other insurers agreed to defend and indemnify the mutual insureds and to share the costs of defense equally and to also share the costs of settlement. Id.

Scottsdale brought suit against Century for equitable contribution with respect to over 300 underlying actions involving 17 common insureds. Id. at *9-*10. None of the other insurers or any of the common insureds brought suit against Century for its failure to defend and indemnify. Scottsdale's complaint against Century did not state the specific damages sought. Rather, it generally alleged that it had paid "more than its equitable share" and that Century should pay "'an amount according to proof at trial, and in accordance with equitable principles.'" Id. at *10. After a bench trial and post-trial briefs, the trial court concluded that the prior work exclusion in the Century policy did not apply to preclude coverage, that a tolling agreement did not apply, and that "Scottsdale could recover one-half of the amounts it paid on the approximately 80 underlying claims on which it could recover" against Century. Id. at *10-*11. Both Scottsdale and Century appealed the judgment for that amount (as well as prejudgment interest).

The portions of the appellate decision regarding the applicability of the prior work exclusion and the tolling agreement are not published. However, the published portion reflects that the trial court determination on both of those grounds was affirmed. The court then turned to the primary issue of calculating the damages to be awarded to Scottsdale. The court noted the general principle:

"Equitable contribution permits reimbursement to the insurer that paid on the loss for the excess it paid over its proportionate share of the obligation, on the theory that the debt it paid was equally and concurrently owed by the other insurers and should be shared by them pro rata in proportion to their respective coverage of the risk. The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others."

Id. at *13 (quoting Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App. 4th 1279, 1293 (1998)). The court then stated that in order to determine the appropriate method of allocating defense costs,

"a trial court must determine which method of allocation will most equitably distribute the obligation among the insurers 'pro rata in proportion to their respective coverage of the risk,' as 'a matter of distributive justice and equity.'"

Id. at *14 (quoting Centennial Ins. Co. v. United States Fire Ins. Co., 88 Cal. App. 4th 105, 111 (2001) (internal citations omitted in original)). It also noted that the apportionment of defense costs will be done "on the basis of equitable considerations not found in the insurers' own contracts, since the insurance companies who must share the burden do not have any agreements among themselves." Id. at *16 (quoting CNA Cas. of CA v. Seaboard Surety Co., 176 Cal. App. 3d 598, 619 (1986)). Thus, "because of the 'varying equitable considerations which may arise, and which affect the insured and the . . . carriers, and which depend upon the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers,'" there are no definitive rules for allocating defense costs among carriers. Id. (quoting CNA Cas., supra, 176 Cal. App. 3d at 619).

The court then provided the various methods of allocation that a court may apply in its discretion to apportion the burden of costs among multiple insurers:

"(1) apportionment based upon the relative duration of each primary policy as compared with the overall period of coverage during which the 'occurrences' 'occurred' (the 'time on the risk' method); (2) apportionment based upon the relative policy limits of each primary policy (the 'policy limits' method); (3) apportionment based upon both the relative durations and the relative policy limits of each primary policy, through multiplying the policies' respective durations by the amount of their respective limits so that insurers issuing primary policies with higher limits would bear a greater share of the liability per year than those issuing primary policies with lower limits (the 'combined policy limit time on the risk' method); (4) apportionment based upon the amount of premiums paid to each carrier (the 'premiums paid' method); (5) apportionment among each carrier in equal shares up to the policy limits of the policy with the lowest limits, then among each carrier other than the one issuing the policy with the lowest limits in equal shares up to the policy limits of the policy with the next-to-lowest limits, and so on in the same fashion until the entire loss has been apportioned in full (the 'maximum loss' method); and (6) apportionment among each carrier in equal shares (the 'equal shares' method)."

Id. at *15-*16 (quoting Centennial Ins. Co. v. United States Fire Ins. Co., 88 Cal. App. 4th 105, 112-113 (2001) (internal citations omitted in original)).

The court of appeal then evaluated the evidence presented by Scottsdale to determine which allocation method was appropriate. Scottsdale argued that Century should reimburse it for one-half of all amounts in paid in connection with the underlying lawsuits, whether it had paid 1%or 100%of the costs and indemnity. Id. at *17-*18. Century contended that any allocation should be based on the amounts of the total costs of defense and indemnity paid by all of the insurers according to the method the other insurers had previously agreed to use, simply adding Century's appropriate share into that calculation. Id. at *19-*20. The court observed that neither Scottsdale nor Century took steps to involve the other insurers in the equitable contribution case, presumably because it benefitted them financially to have those insurers absent from the mix. Id. at *21. Although those insurers were not involved in the case, the court stated that "in equitable contribution cases outside the realm of insurance, courts have stated that a person who has paid no more than his or her just proportion of a debt cannot obtain equitable contribution, even from a party who has paid nothing." Id. at *22 (citations omitted). It then rejected Scottsdale's argument that this principle should not apply to insurance cases, holding that "[a]n insurer can recover equitable contribution only when that insurer has paid more than its fair share; if it has not paid more than its fair share, it cannot recover, even against an insurer who has paid nothing." Id. at * 23-*24.

Century acknowledged (based on the evidence in Scottsdale's files regarding the allocation with the other insurers) that Scottsdale paid more than its fair share. Notwithstanding, the court stated that "unless Scottsdale also established that some of the amount it paid was allocable to Century's fair share, it did not meet its burden of proof." Id. at *24. Although the court determined that Scottsdale failed to meet that burden of proof, it did consider the evidence offered by Century and found that it could be applied to meet Scottsdale's burden of proof. Id. at *25, *30-*31. Evaluating that evidence, the court determined that there is evidence from which the trial court could conclude that Scottsdale paid more than its fair share on some of the underlying claims. Id. at *25.

However, the court of appeal disagreed with the allocation method urged by Scottsdale and accepted by the trial court. Commenting that "Scottsdale should not receive a windfall from Century simply because the other insurers chose not to timely pursue their own actions," the court determined that the trial court's distribution method was inequitable. Id. at * 28 n.31 & n.32. The court concluded that the appropriate method of allocation is the one agreed to by Scottsdale and the other insurers:

Scottsdale can only recover based on evidence that it paid more than its fair share under the allocation agreements it made with the other insurers. It cannot recover an amount from Century that would result in it paying less than its fair share under those same agreements.

Id. at *28-*29. Because the trial court applied an improper allocation method, the court of appeal remanded the case in order to reallocate damages under the method agreed to by Scottsdale and the other insurers.
United Enterprises, Inc. v. Superior Court, 2010 Cal. App. LEXIS 491 (Cal. Ct. App. Mar. 24, 2010)

In United Enterprises, Inc. v. Superior Court, 2010 Cal. App. LEXIS 491 (Cal. Ct. App. Mar. 24, 2010), the court of appeal addressed the scope of a trial court's discretion when faced with an insured's motion for a Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993) ("Montrose I") stay. The insured, United Enterprises, Inc. ("United"), was sued in underlying litigation seeking recovery of environmental response costs in connection with its operation of a shooting range. Royal Indemnity Company ("Royal"), United's insurer for three of the years during which United operated the shooting range, defended United subject to a reservation of rights. Royal also filed a declaratory relief action seeking a declaration that it had no duty to defend United in connection with the underlying litigation, which alleged that United and others "intentionally, recklessly or negligently placed, maintained, purchased, used, and/or disposed of Hazardous Substances . . . among other things. . . ." United Enterprises, 2010 Cal. App. LEXIS at *4. Royal moved for summary judgment and summary adjudication on the grounds that United could not show that its conduct was "unexpected and unintended" and argued that the pleadings as well as extrinsic evidence to the complaint demonstrated that there was no coverage for the underlying action because United's conduct was intentional. Id. at *6.

United moved to stay Royal's declaratory relief action pursuant to Montrose I, arguing that the summary judgment motion "placed it in 'an untenable conflict of interest.'" Id. at *7. Specifically, United argued that it would be forced to "'prove the central issue asserted against it by the plaintiffs in [the underlying litigation]: that the property is contaminated by its own affirmative or negligent conduct or the negligence of its agents.'" Id. at *7-*8.

Royal opposed the stay arguing that less drastic measures, such as sealing United's response to the motion for summary judgment could sufficiently address United's concerns. The trial court concluded that, "'[g]iven the undisputed material facts, the way they are stated, . . . [Royal] is putting the insured in a position where they will have to try to prove some of the things that they are actually trying to defend themselves from.'" Id. at *8. Nonetheless, rather than staying the proceedings, the trial court ordered that all pleadings and other supporting documents be filed under seal and allowed the motion for summary judgment to proceed.

United timely filed a petition for writ of mandate and the court of appeal requested a response from Royal and issued an order to show cause. The court reviewed the several ways in which an insured might be prejudiced by concurrent litigation of insurance coverage actions and third party actions:

(1) the insurer will "join forces with the plaintiffs in the underlying actions as a means to defeat coverage"; (2) the insured will be "compelled to fight a two front-war, doing battle with the plaintiffs in the third party litigation while at the same time devoting its money and its human resources to litigating coverage issues with its carriers"; and (3) "the insured may be collaterally estopped from relitigating any adverse factual findings in the third party action, notwithstanding that any fact found in the insured's favor could not be used to its advantage." A stay is required in the first and third type of prejudice involving factual overlap. In other cases, the question whether to grant a stay or fashion some other remedy is left to the discretion of the trial court.

Id. at *14-*15. The court then concluded that the trial court abused its discretion by fashioning an alternative remedy in the circumstances of this case. Id. at *11-*12.

In this case, the court misread Montrose I and denied United's request for a stay of the declaratory relief action, even though it found that Royal's motion was "putting the insured in a position where they will have to try to prove some of the things they are actually trying to defend themselves from." We agree with United that the factual issues raised [in] . . . Royal's separate statement of undisputed facts overlap the cited allegations of the underlying actions. We therefore conclude that the court erred in denying United's request for a stay.

Id. at *15-*16.

The court also disagreed with the notion that Haskel, Inc. v. Superior Court, 33 Cal. App. 4th 963 (1995), provided authority for sealing the record as an alternative to a stay of the declaratory relief action. Id. Instead, the court read Haskel to condone the sealing of the record as an alternative to the issuance of a stay only in the context of discovery, where a confidentiality order might limit the use and dispersal of information gleaned from discovery responses. Id. Such information was in stark contrast to that at issue in Royal's summary judgment motion, which was part of the court record. Id. Accordingly, the court issued a preemptory writ of mandate directing the trial court to vacate its order denying United's motion to stay and instead enter an order granting the motion. Id.

1. The certified question as stated by the Ninth Circuit was:

Where a contract of liability insurance covering multiple insureds contains a severability-of-interests clause in the "Conditions" section of the policy, does an exclusion barring coverage for injuries arising out of the intentional acts of "an insured" bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?

Id. at *8.

The California Supreme Court recast the question slightly to read:

Where a contract of liability insurance covering multiple insureds contains a severability clause, does an exclusion barring coverage for injuries arising out of the intentional acts of "an insured" bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?


[Editor's Note: Cassandra Franklin is a partner, Cassandra Shivers is of counsel, and Shaun Crosner is an associate in the Los Angeles office of Dickstein Shapiro LLP. They represent insureds in complex coverage matters. Copyright 2010 by Cassandra Franklin, Cassandra Shivers and Shaun Crosner.]