Ninth Circuit Clarifies Excess Insurer’s Options Under For Proposed Settlements That Invades Excess Layer Of Coverage

By and on March 31, 2017
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A recent decision from the Ninth Circuit Court of Appeals clarified an excess insurer’s options under California law when it is presented with a proposed settlement that invades its excess layer and has been approved by the insured and primary insurer. See  Teleflex Medical Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2017 U.S.App.LEXIS 4996 (9th Cir. March 21, 2017). In Teleflex, the court applied the rule set forth in Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co. (1991) 227 Cal.App.3d 563 (“Diamond Heights”) stating that the excess insurer can: (1) approve the settlement; (2) reject the settlement and assume the defense of the insured; or (3) reject the settlement, decline the defense, and face a potential lawsuit by the insured seeking contribution.

In Teleflex, LMA became involved in a lawsuit with a competitor. LMA filed suit seeking recovery of damages for patent infringement and the competitor filed counterclaims for trade disparagement and false advertising. After several years of litigation, the parties agreed to settle their respective claims. As part of the settlement, LMA agreed to pay $4.75 million for the disparagement claims and LMA’s competitor agreed to pay $8.75 million for the patent claims. The settlement was contingent upon LMA obtaining approval and funding from its primary and excess insurers.

LMA’s primary carrier agreed to the settlement, but its excess insurer, National Union requested additional information which was provided by LMA, along with a demand that National Union could accept the settlement, reject the settlement and take over the defense, or reject the settlement, refuse to defend, and face a reimbursement claim. National Union ultimately rejected the settlement without offering to take over the defense.

LMA then brought suit against National Union for breach of contract and bad faith, where a jury awarded LMA damages for both. On appeal, National Union argued, among other things, that the district court erred in applying the rule articulated in Diamond Heights, asserting that it had effectively been overruled by Waller v. Truck Ins. Exch. (1995) 11 Cal.4th 1. National Union argued that under Waller, an insurer can only waive a policy provision through an intentional relinquishment of a known right. Accordingly, National Union asserted that LMA’s claims failed as matter of law because the “no voluntary payments” and “no action” clauses gave National Union the absolute right to reject the settlement. Disagreeing, the Ninth Circuit held that Waller did not mention Diamond Heights and reasoned that it simply reiterated general waiver principles that existed prior to and were not in conflict with Diamond Heights. In so holding, the Ninth Circuit reasoned that regardless of Diamond Heights use of the term “waiver” its rule is really about an insurer’s breach of its obligations under the policy and/or the implied covenant of good faith and fair dealing – not the waiver or expansion of a policy provision addressed by the Waller court.

Of note, the Ninth Circuit also expressed skepticism regarding the application of the “genuine dispute doctrine” to third party claims and held that an insurer was not entitled to a specific jury instruction regarding that defense. The court also affirmed the district court’s ruling that an insured was not entitled to Brandt fees associated solely to the insured’s bad faith and related punitive damages claims.

Based upon this decision, excess insurers should be cognizant of the pitfalls of withholding consents to settlements and should ensure that they have been afforded a reasonable opportunity to analyze the reasonableness of the settlement and adequate time to consider whether to participate or undertake the defense of the insured.

Filed under Duty to Defend

District Court Holds California’s 10- Year State of Repose Effectively Bars General Liability Coverage For Construction Defect Claims

By on October 11, 2016
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On September 27, 2016 the U.S. District Court for the Northern District of California issued its opinion in Swiss Re International Se, et al. v. Comac Investments, Inc., et al., effectively closing the door on ISO form general liability coverage for construction defect claims that are subject to California’s 10-year statute of repose. 2016 U.S. Dist. LEXIS 132793 (N.D. Cal. Sept. 27, 2016).

California Code of Civil Procedure §337.15 provides that latent construction defect claims are subject to a 10-year statue of repose, which commences upon substantial completion of the construction. The statue of repose is not subject to equitable tolling and the only exception to the statue of repose is provided in subsection (f), which allows for “actions based on willful misconduct or fraudulent concealment” See Lantzy v. Centex Homes, 31 Cal.4th 363, 367 (2003); Cal. Code. Civ. Proc. §337.15(f).

In Comac, the plaintiff homeowner’s association sued the insured builder, Comac, in connection with alleged construction defects at a residential project. The Plaintiffs, however, filed suit more than 10 years after the project’s completion. Nonetheless, the Plaintiffs alleged that Comac’s responsible managing officer observed the defective workmanship, did not correct the defects in order to avoid additional costs, and in some cases “directed [the] condition be covered up….” Seeking to skirt California’s 10-year statue of repose, Plaintiffs alleged that Comac’s actions “amount[ed] to reckless disregard and/or willful misconduct as defined by [C.C.P.] §337.15(f).”

Each of Comac’s insurance policies required that property damage be caused by an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Rejecting the plaintiffs’ argument that Comac did not intend any injury, the court held the homeowners’ allegations of willful misconduct could not, by definition, be an “accident.” In so holding, the court noted that the claims against Comac were limited to claims that “Comac’s deliberate acts caused the property damage” and did not include any alleged intervening, unexpected causes. Central to the court’s analysis were the allegations that “any contractor who chose not to remedy [the defects] would be doing so with actual or constructive knowledge that injury was a probable result” and “any knowledgeable construction supervisor who chose not to direct the contractor to remedy the condition would have done so with actual or constructive knowledge that injury was a probable result.”

The court harmonized the term “willful” under Cal. Code. Civ. Proc. §337.15(f) and Cal. Ins. Code §533, finding both encompassed conduct where a reasonable person under the same or similar circumstances would be aware of the highly dangerous character of his or her conduct and that neither necessarily required an actual intent to injure. Thus, the court found that Comac’s alleged willful misconduct was also subject to the policies’ “expected or intended” exclusions and California Insurance Code §533.

Filed under California Insurance Code, Commercial General Liability, Construction Defect

California Appeals Court Rejects Insurer’s “Escape” Clause And Confirms Tolling Of Statute Of Limitations For Equitable Contribution Claims

By on November 4, 2015
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In Underwriters of Interest v Probuilders Specialty Ins. Co. (Case No. D066615, filed 10/23/15), the California Court of Appeal for the Fourth District, Division One, rejected an insurer’s “escape” clause, ruled that a Contractors Special Conditions endorsement was inapplicable, and confirmed that the statute of limitation for an insurer’s claim for equitable contribution against a co-carrier is tolled until it makes its last defense payment.

Construction siteUnderwriters insured Pacific Trades Construction & Development (“PTCD”) from 2001 to 2003. Probuilders insured PTCD from 2002 to 2004. Pursuant to its policies, Underwriters agreed to defend PTCD in a construction defect action arising out of the construction of single family homes. In contrast, Probuilders denied PTCD’s tender arguing that its policies only provided a duty to defend when “no other insurance affording a defense against such a suit is available to [the insured].” In addition, Probuilders argued its policy included a Contractors Special Conditions (“CSC”) endorsement which provided that as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” PTCD must have: (1) written indemnity agreements with each subcontractor hired; (2) certificates of insurance from each subcontractor’s insurer showing PTCD as an additional insured; and (3) maintained records evidencing PTCD’s compliance with these obligations.

Turning first to Probuilders’ defense obligation, the Appellate Court, citing Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204, held that Probuilders’ other insurance clause was an “escape” clause disfavored under the law.

[C]ourts have considered this type of “other insurance” clause as an “escape” clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance….Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.

Reasoning the policies issued by Underwriters and Probuilders were not completely overlapping and provided coverage for at least different periods of time, the Appellate Court refused to enforce Probuilders’ other insurance clause.

The appeals court also rejected Probuilders’ argument that its CSC endorsement obviated a duty to defend because PTCD had failed to secure indemnity and/or additional insured coverage from all of its subcontractors. Noting Probuilders had not conclusively established that all of the claims against PTCD were limited to work performed by subcontractors and that while there was evidence of incomplete compliance with the CSC endorsement at least one subcontract had complied, the court found there was a question of fact precluding summary judgment in Probuilders’ favor.

Next, the appeals court found Underwriter’s equitable contribution claim was timely because while the claim first accrued at the time Probuilders first refused to participate in PTCD’s defense, the statute of limitations was “tolled until all of the defense obligations in the underlying action are terminated by final judgment.”

While not a departure from current case law, the case confirms California’s rejection of “escape” type clauses in contribution disputes between carriers and that under the right set of facts, endorsements requiring insureds to secure additional insured coverage from subcontractors may serve as a means to limit or possibly obviate the duty to defend and/or indemnify.

Filed under Construction Defect, Contribution Actions, Other Insurance, Statute of Limitations

Denial of Summary Judgment Does Not Automatically Establish Duty To Defend

By and on February 10, 2015
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In McMillin Companies, LLC v. American Safety Indemnity Company, a California appeals court found a trial court erred in finding the denial of an insurer’s motion for summary judgment on the duty to defend meant the insurer’s duty to defend was established as a matter of law.

McMillin Companies, LLC was the general contractor for a series of residential construction projects in Temecula, California.  After the projects were completed, McMillin was named in a construction defect lawsuit that arose out of the projects.  McMillin tendered its defense to the insurers of allegedly implicated subcontractors, including American Safety Indemnity Company (“ASIC”), contending it was an additional insured.  None of the insurers accepted McMillin’s tender.

McMillin sued ASIC and other insurers for breach of contract and bad faith based on their alleged failure to defend.  After numerous settlements, ASIC was left as the sole remaining defendant.  ASIC submitted a motion for summary judgment, arguing, inter alia, that it did not owe any duty to defend because its policy only covered  liability arising out of its named insured’s “ongoing operations” which had ceased prior to the occurrences alleged in the litigation.  This motion was denied on the basis ASIC had not met its initial burden of proof to show no triable issue of material fact.

At trial, McMillin moved in limine to exclude argument disputing ASIC’s duty to defend, and ASIC moved in limine to preclude McMillin from arguing the amounts it had received from the other insurers in settlement were not offsets to McMillin’s alleged damages against ASIC.  The trial court granted McMillin’s motion, finding the prior denial of ASIC’s motion for summary judgment demonstrated the existence of a disputed issue of material fact which necessitated a finding of a duty to defend.  The trial court also granted, without explanation, ASIC’s motion as to the settlement offsets.

The California court of appeal reversed, holding the trial court erred in granting the motions in limine.  Disagreeing with the trial court’s conclusion, the appeals court reasoned that the denial of an insurer’s motion for summary judgment because it failed to meet its initial burden of proof was not the same as denying the motion based on an unresolved factual dispute.  The appeals court also concluded McMillin’s settlements with the other insurers were not potential offsets to damages but rather would only affect McMillin’s right to recover any damages awarded at trial.

Filed under Bad Faith, Duty to Defend

Contractors Dismayed by Decision Expanding Right to Repair Act

By and on October 30, 2013

The California Court of Appeal, Fourth Appellate District, held that California’s Right to Repair Act, Civil Code section 895, et seq., does not provide the exclusive remedy for homeowners when alleged construction defects have resulted in actual damage.

CON BLOG_contractorsThe Aug. 28 decision in Liberty Mutual Insurance Company v. Brookfield Crystal Cove, LLC involved a 2008 pipe failure in a sprinkler system at a newly constructed home.  While the builder (Brookfield) performed repairs and remediation at the property, the homeowner’s insurance company (Liberty Mutual) paid for the homeowner’s relocation expenses.  In 2011, Liberty Mutual filed a subrogation lawsuit against Brookfield to recover those expenses.

The Right to Repair Act had been expected to limit a contractor’s exposure for construction defects and procedural remedies. Liberty Mutual’s claim would have been time-barred under the Act. However, because its insured sustained consequential damages, Liberty Mutual had the right to pursue them outside the Act’s limitations. As the court noted, other remedies available to homeowners continue to exist.

Image courtesy of Flickr by Kansas City District U.S. Army Corps of Engineers

Filed under Right to Repair Act