Insurance Coverage - Third Party - California

20th Century v. Schurtz (2001) A093193

Basich v. Allstate Insurance Co. (2001) B132634

Centennial Insurance Company v. United States Fire Insurance Company (2001) A090305; First Appellate District Holds that Defense Costs should be shared pro rata by time on risk, NOT divided equally by number of carriers

Golden Eagle v. Rocky Cola Café (2001) B146869

Gulf Insurance Company v. TIG Insurance Company (2001) B135799 - No 'subrogation' of bad faith rights

Haynes v. Farmers' Insurance (2002) G028171 - COVERAGE; APPELLATE PROCEDURE; SETTLEMENT

John R. MacKinnon v. Truck Insurance Exchange (2002) E028662 - COVERAGE - INTERPRETING POLLUTION EXCLUSION

Kotlar v. Hartford Fire Insurance Company (2000) B133614

Martin v. World Savings (2001) B145688

Scottsdale v. National Union Fire Insurance Exchange (2002) E028602

Tosco Corporation v. General Insurance Company of America (Commercial Union and Chicago Insurance) (2000) A082765, A084044, and A086154

Travelers v. American Equity (2001) A093081 COVERAGE (Can be Applied to Construction Defect Coverage Analysis) -  Indemnification Provision in a Contract Does Not Make Primary Policy Coverage Excess

Truck Insurance Exchange v. County of Los Angeles (2002) B134182 - LIMITING ADDITIONAL INSURED OBLIGATIONS

United Services Automobile Association (USAA) v. Alaska Insurance Company (New Hampshire Insurance Company) (2001) D038629 - NO EQUITABLE CONTRIBUTION OR EQUITABLE SUBROGATION FOR BAD FAITH

20th Century v. Schurtz (2001) A093193

The First Appellate District found no coverage under a homeowner's policy for the insured's felony shooting of someone.

Basich v. Allstate Insurance Co. (2001) B132634

Division Three of the Second Appellate District (Los Angeles) issued this really chewy decision on equitable estoppel and punitive damages. In short:

• Whether or not a party can rely on equitable estoppel to toll the Statute of Limitations with respect to litigation resulting from an insurance claim is a question of fact, not of law.
  
• Just because a party is represented by counsel doesn't mean that there is no equitable estoppel.
  
• Malice, oppression or fraud that would result in an award of punitive damages against an insurance company for breach of the implied covenant of good faith and fair dealing must be shown by "clear and convincing evidence".

Plain English Translation: In California, by law, insurance policies have terms that state there is a one-year statute of limitations in which the insured can dispute an insurer's handling of a claim. That statute of limitations starts to run when the insurance company tells the insured what the insurance company's final position is on the claim. Whether or not an insurance company has told an insured what the insurance company's final position on a claim is a factual issue. That means that if there are facts in dispute, the trier of fact (which can be the Court or a jury) will decide whether or not the insurance company communicated its final position on the claim to the insured. This is true, even if the insured was represented by an attorney who is presumed to know the law about the statute of limitations.

Punitive damages, when they are sought against an insurance carrier, must be proven with "clear and convincing evidence". California Jury Instructions define clear and convincing evidence as, "Clear and convincing" evidence means evidence of such convincing force that it demonstrates, in contrast to the opposing evidence, a high probability of the truth of the fact[s] for which it is offered as proof. Such evidence requires a higher standard of proof than proof by a preponderance of the evidence."

Any tort or statutory cause of action based on allegations relating to the handling of a claim or the manner in which it is processed is “an action on the policy” subject to the policy limitations clause. A bad faith action based on denial of a claim in the underlying policy is an action on the policy.

An insurance policy’s one-year contractual limitations period is equitably tolled while the insurer investigates a claim -- that is, from the time that the insured notifies the carrier of the loss until the claim is formally denied in writing. If the insurer’s conduct after denying a claim expressly waives the one-year limit or induces the policyholder to forbear from filing suit, the doctrines of waiver and estoppel may be applicable to preclude reliance on the running of the one-year limitations period during the time of reconsideration. The extension of a courtesy, to look at anything else that plaintiffs might have to offer, did not render the denial equivocal.

The essence of an estoppel is that the party to be estopped has by false language or conduct ‘led another to do that which he would not otherwise have done and as a result thereof that he has suffered injury. .) It is “settled law” that conduct by an insurance company that induces the policyholder not to file a prompt action can result in an estoppel. “[A]n insurer that leads its insured to believe that an amicable adjustment of the claim will be made, thus delaying the insured’s suit, will be estopped from asserting a limitation defense. [Citations.]”

In cases in which the plaintiff has been represented by counsel, the claim of equitable estoppel is frequently denied. “ ‘[W]here one acts with full knowledge of plain provisions of law, and their probable effect upon facts within his knowledge, especially where represented by counsel, he can neither claim (1) ignorance of the true facts or (2) reliance to his detriment upon conduct of the person claimed to be estopped, two of the essential elements of equitable estoppel. A plaintiff’s representation by counsel may make it extremely difficult to establish facts sufficient to equitably estop the defendant from asserting the bar of the statute of limitations. In fact, in those instances in which the alleged misrepresentation relates solely to a legal matter, there is no estoppel “as a matter of law.” But there simply is no general rule that, as a matter of law, a party represented by counsel may never prevail on a claim of equitable estoppel regardless of the factual context.

Basich and Harris owned residential rental property in Los Angeles. The property was insured by Allstate. The Allstate insurance policy provides, as required by statute (Ins. Code, §§ 2070, 2071, set forth below), that an insured has one year from the date of the loss to file an action against the insurer

• January 17, 1994 Northridge Earthquake
• January 18, 1994 Plaintiff submits claim
• October 26, 1994 Allstate pays $50,065.41
• November 10, 1994 Allstate pays $5,225.00 advance on lost rental income
• November 10, 1994 Allstate notifies Plaintiff that "your file is being closed with this payment" . (Allstate stipulates that the statute of limitations is tolled to this date.)
• December 9, 1994 Plaintiff writes to Allstate that the claim was not settled, and "asserting that the claim had not been settled, expressing concern about the running of the one-year contractual limitations period for filing claims contained in the policy and requesting a waiver of that limitations period"
• January 9, 1995 Allstate writes to Plaintiff and states "Only when we have reached a final resolution to your claim does the one year clock again run."
• March 1, 1996 After investigating claim for 14 months, Allstate writes it “will be closing our file and concluding our handling of your earthquake claim at this time.”
• March 7, 1996 Allstate writes to Plaintiff and states, “[w]e believe your earthquake claim is now concluded" and “[t]his one year period did not run between the time that you reported the claim to Allstate and the date of this letter when Allstate provided you with its formal coverage position.”
• June 29, 1996 Allstate writes to Plaintiff and states, "“[t]his claim was closed by Allstate on March 13, 1996, and the one-year limitations period commenced running as of that date.”
• March 10, 1997 Plaintiff files a Complaint against Allstate for breach of contract and breach of the implied covenant of good faith and fair dealing ("bad faith"; Allstate pays the remaining policy limits a month later
• February 24, 1998 Plaintiff files a second Complaint against Allstate, this one seeking damages for "Allstate’s unreasonable delay in investigating the claim and paying the policy limits", alleging breach of the implied covenant of good faith and fair dealing (bad faith)

"339. Within two years: 1. An action upon a contract, obligation or liability not founded upon an instrument of writing, except as provided in Section 2725 of the Commercial Code or subdivision 2 of Section 337 of this code; or an action founded upon a contract, obligation or liability, evidenced by a certificate, or abstract or guaranty of title of real property, or by a policy of title insurance; provided, that the cause of action upon a contract, obligation or liability evidenced by a certificate, or abstract or guaranty of title of real property or policy of title insurance shall not be deemed to have accrued until the discovery of the loss or damage suffered by the aggrieved party thereunder. "

"2070. All fire policies on subject matter in California shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy or Section 2080; provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy."

California Insurance Code §2071

2071. The following is adopted as the standard form of fire insurance policy for this state: California Standard Form Fire Insurance Policy No. (Space for insertion of name of company or companies issuing the policy and other matter permitted to be stated at the head of the policy.) (Space for listing amounts of insurance, rates and premiums for the basic coverages insured under the standard form of policy and for additional coverages or perils insured under endorsements attached.) In consideration of the provisions and stipulations herein or added hereto and of ____ dollars premium this company, for the term of ________ from the _________ day of ______, 19__ ( at 12:01 a.m., to the ___________ day of ______, 19__ ( standard time, at location of property involved, to an amount not exceeding ____ dollars, does insure ____ and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture, nor in any event for more than the interest of the insured, against all LOSS BY FIRE, LIGHTNING AND BY REMOVAL FROM PREMISES ENDANGERED BY THE PERILS INSURED AGAINST IN THIS POLICY, EXCEPT AS HEREINAFTER PROVIDED, to the property described hereinafter while located or contained as described in this policy, or pro rata for five days at each proper place to which any of the property shall necessarily be removed for preservation from the perils insured against in this policy, but not elsewhere. Assignment of this policy shall not be valid except with the written consent of this company. This policy is made and accepted subject to the foregoing provisions and stipulations and those hereinafter stated, which are hereby made a part of this policy, together with such other provisions, stipulations and agreements as may be added hereto, as provided in this policy. IN WITNESS WHEREOF, this company has executed and attested these presents; but this policy shall not be valid unless countersigned by the duly authorized agent of this company at Secretary. President. Countersigned this ______ day of _______, 19__ _________________________ Agent Concealment, fraud This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto. Uninsurable and excepted property This policy shall not cover accounts, bills, currency, deeds, evidences of debt, money or securities; nor, unless specifically named hereon in writing, bullion or manuscripts. Perils not included This company shall not be liable for loss by fire or other perils insured against in this policy caused, directly or indirectly, by: (a) enemy attack by armed forces, including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) civil war; (g) usurped power; (h) order of any civil authority except acts of destruction at the time of and for the purpose of preventing the spread of fire, provided that such fire did not originate from any of the perils excluded by this policy; (i) neglect of the insured to use all reasonable means to save and preserve the property at and after a loss, or when the property is endangered by fire in neighboring premises; (j) nor shall this company be liable for loss by theft. Other insurance Other insurance may be prohibited or the amount of insurance may be limited by endorsement attached hereto. Conditions suspending or restricting insurance Unless otherwise provided in writing added hereto this company shall not be liable for loss occurring (a) while the hazard is increased by any means within the control or knowledge of the insured; or (b) while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of 60 consecutive days; or (c) as a result of explosion or riot, unless fire ensue, and in that event for loss by fire only. Other perils or subjects Any other peril to be insured against or subject of insurance to be covered in this policy shall be by endorsement in writing hereon or added hereto. Added provisions The extent of the application of insurance under this policy and of the contribution to be made by this company in case of loss, and any other provision or agreement not inconsistent with the provisions of this policy, may be provided for in writing added hereto, but no provision may be waived except such as by the terms of this policy or by statute is subject to change. Waiver provisions No permission affecting this insurance shall exist, or waiver of any provision be valid, unless granted herein or expressed in writing added hereto. No provision, stipulation or forfeiture shall be held to be waived by any requirement or proceeding on the part of this company relating to appraisal or to any examination provided for herein. Cancellation of policy This policy shall be canceled at any time at the request of the insured, in which case this company shall, upon demand and surrender of this policy, refund the excess of paid premium above the customary short rates for the expired time. This policy may be canceled at any time by this company by giving to the insured a five days' written notice of cancellation with or without tender of the excess of paid premium above the pro rata premium for the expired time, which excess, if not tendered, shall be refunded on demand. Notice of cancellation shall state that said excess premium (if not tendered) will be refunded on demand. Mortgagee interests and obligations If loss hereunder is made payable, in whole or in part, to a designated mortgagee not named herein as the insured, such interest in this policy may be canceled by giving to such mortgagee a 10 days' written notice of cancellation. If the insured fails to render proof of loss such mortgagee, upon notice, shall render proof of loss in the form herein specified within sixty (60) days thereafter and shall be subject to the provisions hereof relating to appraisal and time of payment and of bringing suit. If this company shall claim that no liability existed as to the mortgagor or owner, it shall, to the extent of payment of loss to the mortgagee, be subrogated to all the mortgagee's rights of recovery, but without impairing mortgagee's right to sue; or it may pay off the mortgage debt and require an assignment thereof and of the mortgage. Other provisions relating to the interests and obligations of such mortgagee may be added hereto by agreement in writing. Pro rata liability This company shall not be liable for a greater proportion of any loss than the amount hereby insured shall bear to the whole insurance covering the property against the peril involved, whether collectible or not. Requirements in case loss occurs The insured shall give written notice to this company of any loss without unnecessary delay, protect the property from further damage, forthwith separate the damaged and undamaged personal property, put it in the best possible order, furnish a complete inventory of the destroyed, damaged and undamaged property, showing in detail quantities, costs, actual cash value and amount of loss claimed; and within 60 days after the loss, unless such time is extended in writing by this company, the insured shall render to this company a proof of loss, signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: the time and origin of the loss, the interest of the insured and of all others in the property, the actual cash value of each item thereof and the amount of loss thereto, all encumbrances thereon, all other contracts of insurance, whether valid or not, covering any of said property, any changes in the title, use, occupation, location, possession or exposures of said property since the issuing of this policy, by whom and for what purpose any building herein described and the several parts thereof were occupied at the time of loss and whether or not it then stood on leased ground, and shall furnish a copy of all the descriptions and schedules in all policies and, if required and obtainable, verified plans and specifications of any building, fixtures or machinery destroyed or damaged. The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described, and submit to examinations under oath by any person named by this company, and subscribe the same; and, as often as may be reasonably required, shall produce for examination all books of account, bills, invoices and other vouchers, or certified copies thereof if originals be lost, at such reasonable time and place as may be designated by this company or its representative, and shall permit extracts and copies thereof to be made. Appraisal In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon such umpire, then, on request of the insured or this company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him and the expenses of appraisal and umpire shall be paid by the parties equally. Company's options It shall be optional with this company to take all, or any part, of the property at the agreed or appraised value, and also to repair, rebuild or replace the property destroyed or damaged with other of like kind and quality within a reasonable time, on giving notice of its intention so to do within 30 days after the receipt of the proof of loss herein required. Abandonment There can be no abandonment to this company of any property. When loss payable The amount of loss for which this company may be liable shall be payable 60 days after proof of loss, as herein provided, is received by this company and ascertainment of the loss is made either by agreement between the insured and this company expressed in writing or by the filing with this company of an award as herein provided. Suit No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss. Subrogation This company may require from the insured an assignment of all right of recovery against any party for loss to the extent that payment therefore is made by this company.

Actual text of decision:  Basich v. Allstate Insurance Co. (2001) B132634

California Civil Code §2860

2860.  (a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which
creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel
to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured
expressly waives, in writing, the right to independent counsel.  An insurance contract may contain a provision which sets forth the
method of selecting that counsel consistent with this section.
   (b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the
insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be
controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.  No conflict of
interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for
an amount in excess of the insurance policy limits.
   (c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the
counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1)
at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the
litigation, and (2) errors and omissions coverage.  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.  This subdivision does not
invalidate other different or additional policy provisions pertaining to attorney's fees or providing for methods of settlement of
disputes concerning those fees.  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.
   (d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the
insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and
consult with the insurer on all matters relating to the action.  Any claim of privilege asserted is subject to in camera review in the
appropriate law and motion department of the superior court.  Any information disclosed by the insured or by independent counsel is not
a waiver of the privilege as to any other party.
   (e) The insured may waive its right to select independent counsel by signing the following statement:
"I have been advised and informed of my right to select independent counsel to represent me in this lawsuit.  I have considered this
matter fully and freely waive my right to select independent counsel at this time.  I authorize my insurer to select a defense attorney to
represent me in this lawsuit."
   (f) Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer
and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation.  Counsel shall
cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured.
Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance
contract.

Click here for the text of the case Centennial 3/30/01

Haynes v. Farmers' Insurance (2002) G028171 - COVERAGE; APPELLATE PROCEDURE; SETTLEMENT

In this 10-page decision, Division Three of the Fourth Appellate District (Orange County) made three different findings: one on Coverage; one on Appellate Procedure; and one on Settlements.

HOLDING

Coverage - Because the endorsement and definition limiting coverage for permissive drivers were inconspicuous,  the limitation was unenforceable.

Appellate Procedure - A Plaintiff is barred from filing a voluntary dismissal after trial starts, or there has been an adjudication on the merits, as happened in this case.  Therefore, the fact that a dismissal with prejudice was filed after the Summary Judgment was granted did not bar the Appeal.

Settlement - A dismissal, with prejudice, for a waiver of fees and costs, requires the consent of the client to be valid and binding.

FACTS

Farmers issued a $250,000/$500,000 automobile policy.  Under the “Other Insurance” provision of the policy, the coverage for a permissive user is limited to that provided by the Financial Responsibility Law of the state only ($15,000/$30,000 in California).  Under endorsements, incorporated by reference by the Declarations page, the coverage for a permissive user was similarly limited.  That endorsement probably appeared around page 40 of the policy package.

The Trial Court granted Summary Judgment in favor of Farmers’.  After the Summary Judgment, attorneys for Plaintiff and Farmers agreed that Farmers would waive fees and costs in exchange for Plaintiff’s dismissal, with prejudice, of the matter.  Plaintiff filed a request for dismissal and sent a letter confirming the agreement.

The full text of this decision can be viewed at http://www.courtinfo.ca.gov/opinions/documents/G028171.PDF. 

John R. MacKinnon v. Truck Insurance Exchange (2002) E028662 - COVERAGE - INTERPRETING POLLUTION EXCLUSION

This is a refreshingly easy to read and understand coverage case interpreting a pollution exclusion.  Division Two of the Fourth Appellate District (San Bernardino) held that a pollution exclusion excluded coverage for a third party personal injury claim arising from spraying an apartment building with insecticide.  The Appellate Court affirmed the Trial Court’s finding that an insecticide is a chemical pollutant within the policy definition.  The Trial Court also found that Truck, which initially provided a defense under a reservation of rights letter while it determined whether or not there was coverage, was entitled to withdrawal coverage with 30 days’ notice.  The Appellate Court also determined that the pollution exclusion in Truck’s policy was not ambiguous.

The case has a lot of great language (a) discussing when a policy provision is ambiguous and (b) comparing pollution exclusion interpretations from around the country.  The full text of the decision can be viewed at http://www.courtinfo.ca.gov/opinions/documents/E028662.PDF. 

Golden Eagle v. Rocky Cola Café (2001) B146869

Division Seven of the Second Appellate District (Los Angeles) found that Golden Eagle had a duty to defend Rocky Cola Café when Krista Bollman, a former waitress, sued one of its shift managers, Christopher Vitolo.  Among other things, Mr. Vitolo followed Ms. Bollman to her gym and called her a  “sexually promiscuous and a calculating b**** when she broke off a physical relationship with him.   The duty to indemnify was not discussed, as Ms. Bollman did not win the underlying litigation.

The Court found there was coverage because Rocky Cola’s policy covered defamation that was not excluded by the “employment-related practice” exclusion.  The Court reasoned that calling Ms. Bollman these names was not in the course and scope of her employment.

Comment:  Personally, I do not understand how one employee’s stalking of another employee is a business practice of the employer that would be covered.  Does that mean the Court was holding Mr. Viola’s actions were in the course and scope of his employment?

 To view the full text of this decision, click http://www.courtinfo.ca.gov/opinions/documents/B146869.PDF.

Tosco Corporation v. General Insurance Company of America (Commercial Union and Chicago Insurance) (2000) A082765, A084044, and A086154.   Taking a bite out of Montrose.  Also available:  Fox Law comments on Tosco Corporation v. General Insurance Company of America (Commercial Union and Chicago Insurance) (2000) A082765, A084044 and A086154

In this decision, Division Four of the First Appellate District (San Francisco) affirmed that an insurance company does not have a duty to defend and indemnify an insured with respect to liabilities arising from property that the insured did not own during the policy period. This case relies heavily on  A.C. Label Co. v. Transamerica Ins. Co. (1996) 48 Cal.App.4th 1188 and Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1.

The Appellate Court affirmed the 'continuous trigger' language in Montrose II, but distinguished this case by saying that what was triggered was CGL policies covering the property at the time of the trigger.

This particular case involves environmental and asbestos claims, but should apply to construction defect claims as well. It may also have some impact on additional insured obligations.

Tosco was insured by Commercial Union, Chicago, General Insurance Company of America, and other insurers under various policies issued from 1962 to 1991. Tosco apparently acquired property after 1991. Various asbestos claims and claims for environmental pollution were asserted against Tosco relating to the property Tosco acquired after 1991 were then asserted against Tosco. Tosco tendered its defense and indemnity to those insurance companies, who denied on the basis that Tosco did not have an insurable interest in the property at the time the policies were in effect.

The appellate court found no coverage because Tosco had no connection whatsoever with the properties in question at the time the CGL policies were issued.

Click to view the actual decision:  A082765

Gulf Insurance Company v. TIG Insurance Company (2001) B135799 - No 'subrogation' of bad faith rights

Division 5 of the Second Appellate District (Los Angeles) held that the right of a party to pursue a claim for breach of the implied covenant of good faith and fair dealing cannot be pursued by a subrogee, even though the subrogee "stands in the shoes" of the subrogor. This decision has a good discussion of the difference between subrogation, equitable contribution, and equitable subrogation.

FACTS

Gulf Insurance Company issued a performance and payment bond to Santa Susanna Construction, which was replacing pipes in a culvert. Santa Susanna's Commercial General Liability carrier was TIG. During construction, Santa Susanna damaged an adjoining property owners' property. Gulf paid $46,793 to repair the damaged property. Gulf alleged that TIG did not investigate the claim within the statutory time, and that it refused to pay the claim. Gulf was awarded the $46,793 it paid to repair the damaged property. However, the trial court held that Gulf did not have standing to pursue a claim for breach of the implied covenant of good faith and fair dealing. Gulf argued that, as a subrogee (or assignee) of Santa Susanna's rights, it did have standing.

HOLDING

The general rule is that parties who are not entitled to benefits under the policy cannot maintain a cause of action for an implied covenant. As the Supreme Court explained in Murphy v. Allstate Ins. Co., "A third party should not be permitted to enforce covenants made not for his benefit, but rather for others. . . ." Claims for bad faith violation of an insurance contract are "strictly tied" to an implied covenant of good faith and fair dealing, which arises out of an underlying contractual relationship. In the absence of such a relationship, no recovery for bad faith may be had. Accordingly, the insurer's duty of good faith and fair dealing is owed only to its insured and any express beneficiary of the policy. There is no contractual relationship between Gulf and TIG. In the absence of a contractual relationship, no implied covenant claims may be stated.

SUBROGATION

Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim. By undertaking to indemnify or pay the principal debtor’s obligation to the creditor or claimant, the ‘subrogee’ is equitably subrogated to the claimant (or ‘subrogor’), and succeeds the subrogor’s rights against the obligor. In the case of insurance, subrogation takes the form of an insurer’s right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid. ‘“As now applied the doctrine of equitable subrogation is broad enough to include every instance in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter.” The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured’s claim, and succeeds only to the rights of the insured. The subrogated insurer is said to ‘“stand in the shoes”’ of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have.

EQUITABLE CONTRIBUTION

Equitable contribution is entirely different. It is the right to recover, not from the party primarily liable for the loss, but from a co-obligor who shares such liability with the party seeking contribution. In the insurance context, the right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. Where multiple insurance carriers insure the same insured and cover the same risk, each insurer has independent standing to assert a cause of action against its coinsurers for equitable contribution when it has undertaken the defense or indemnification of the common insured. 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.

EQUITABLE SUBROGATION

An insurer's cause of action for equitable subrogation contains six elements: (1) the insured has suffered a loss for which the party to be charged is liable; (2) the insurer has compensated for the loss; (3) the insured has existing, assignable causes of action against the party to be charged, which the insured could have pursued had the insurer not compensated the loss; (4) the insurer has suffered damages caused by the act or omission which triggers the liability of the party to be charged; (5) justice requires that the loss be shifted entirely from the insurer to the party to be charged; and (6) the insurer's damages are in a stated sum, which is usually the amount paid to the insured, assuming the payment was not voluntary and was reasonable.

../Cases/B135799.DOC

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Kotlar v. Hartford Fire Insurance Company (2000) B133614

Holding - A named insured must be informed of an insurance policy cancellation under California Insurance Code 677.2. An additional named insured must also be informed of a policy cancellation. However, California Insurance Code 677.2 does not require that an additional insured be given notice of a policy cancellation.

Facts - Meier leased property from Kotlar.  Under the lease agreement, Meier purchased insurance from Hartford naming Kotlar as an additional insured.  Hartford cancelled the policy when Kotlar failed to pay premiums.  Hartford did not make any effort to notify Kotlar, even though it agreed that it would "endeavor" to notify him.

B133614 

Martin v. World Savings (2001) B145688

A lender that did not require that a property owner obtain earthquake insurance, but had in its agreement a provision that if the property owner did obtain earthquake insurance the lender had the right to control the proceeds of the earthquake insurance, was entitled to control those proceeds.

Scottsdale v. National Union Fire Insurance Exchange (2002) E028602

In Scottsdale v. National Union Fire Insurance Exchange (2002) E028602, Division Two of the Fourth Appellate District (San Bernardino) upheld Scottsdale’s “other insurance” clause which split the duty to defend from the duty to indemnify, finding that Scottsdale did not have a duty to defend although it did have a duty to indemnify.

HOLDING

The provision of Scottsdale’s policies which requires it to defend if, and only if, “no other insurance affording a defense or indemnity against such a suit is available” is enforceable.  Under this provision, Scottsdale cannot have any duty to defend until appellants’ duty to defend and their duty to indemnify have both terminated.

APPLICATION

Claims Professionals.  Scottsdale wrote the policies referenced in this decision in 1991 and 1992.  From denial letters I’ve seen on other cases, my guess is they probably have continued to use the same clauses.  This clause isn’t going to be effective when there are burning limits policies that have been exhausted (see the decision itself for more information).

Underwriting.  Two things to look at.  First, especially for construction defect cases, has Scottsdale been a carrier in the last ten years (statute of limitations for latent defect) for someone that you are underwriting?  If so, without a limiting clause of your own, don’t count on them contributing to defense costs.  Second, you might want to consider a clause like this in your own policy, but of course, make sure that your brokers know and understand what it means.

RATIONALE

The reciprocal rights and duties of several insurers who have covered the same event do not arise out of contract, for their agreements are not with each other.  Their respective obligations flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.  As these principles do not stem from agreement between the insurers their application is not controlled by the language of their contracts with the respective policy holders.

The courts will therefore generally honor the language of excess ‘other insurance’ clauses when no prejudice to the interests of the insured will ensue.  No case holds that ‘escape’ clauses are void per se.  As long as the insured is protected and financial responsibility is provided for the protection of the public an ‘escape’ clause is not contrary to public policy or the law. 

POLICY YEARS AND RELEVANT POLICY LANGUAGE (ACCORDING TO THE DECISION, THESE ARE ALL UMBRELLA POLICIES)

05/01/88-05/01/89          Superior National Insurance Company (not a party to this appeal, as Superior was liquidated)

05/01/89-05/01/90          National (burning limits policy)

“Other Insurance” Clause:  “If other valid and collectible insurance with any other insurer is available to the insured covering a loss also covered hereunder, this insurance shall be excess of, and shall not contribute with, such other insurance.”

“Duty to Defend” Clause:  “This section shall . . . apply to occurrences not covered by any underlying insurance due to exhaustion of any aggregate limits by reason of any losses paid thereunder:

“1.        We will defend any suit against the insured alleging liability insured under the provisions of this policy and seeking recovery for damages on account thereof . . . .”

Other important policy language:

“This policy shall cease to apply after the applicable limits of liability have been exhausted by payment of defense costs and/or judgments and/or settlements.”

05/01/90–05/01/92         Scottsdale

                                    “Other insurance” Clause: 

“The insurance afforded by this policy shall be excess insurance over any other valid and collectible insurance available to the insured . . . ; provided that if such other insurance provides indemnity only in excess of a stated amount of liability per occurrence, the insurance afforded by this policy shall contribute therewith with respect to such part of ultimate net loss as is covered hereunder but the Company shall not be liable for a greater proportion of such loss than the amount which would have been payable under this policy bears to the sum of said amount which would have been payable under each other excess indemnity policy applicable to such loss, had each such policy been the only policy so applicable.”  (Capitalization omitted.)

Other important language:

“The Company shall have the right and duty to defend any suit against the insured, seeking damages which are payable under the above Insuring Agreement . . . , provided, however, that no other insurance affording a defense or indemnity against such a suit is available to the insured.”

Definition of “other insurance” that would excuse Scottsdale’s duty to defend:

“Insurance affording a defense or indemnity” against “any suit against the insured, seeking damages . . . payable under the above insuring agreement.”

05/01/92-05/01/93          Industrial Indemnity Company (not a party to this appeal)

05/01/93-05/01/94          American. 

“Other Insurance” Clause:  “If other valid and collectible insurance with any other insurer is available to the insured covering a loss also covered hereunder, this insurance shall be excess of, and shall not contribute with, such other insurance.” 

“Duty to Defend” Clause:  “This section shall . . . apply to occurrences not covered by any underlying insurance due to exhaustion of any aggregate limits by reason of any losses paid thereunder:

“1.        We will defend any suit against the insured alleging liability insured under the provisions of this policy and seeking recovery for damages on account thereof . . . .”

Other important policy language:

“We agree to pay the amounts incurred under this Insurance Agreement [i.e., defense costs] . . . in addition to the limits of liability”

CITES

Cases

Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38

Alonzo v. A‑117/118, San Bernardino Superior Court Case No. SCV 51470

Amer. Auto. Ins. Co. v. Seaboard Surety Co. (1957) 155 Cal.App.2d 192

Argonaut Ins. Co. v. Transport Indem. Co. (1972) 6 Cal.3d 496

BKHN, Inc. v. Department of Health Services (1992) 3 Cal.App.4th 301

Billedo v. John Laing Homes, San Bernardino Superior Court Case No. SCV39706

Centennial Ins. Co. v. United States Fire Ins. Co. (2001) 88 Cal.App.4th 105

Century Indemnity Co. v. London Underwriters (1993) 12 Cal.App.4th 1701

Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945

Chamberlin v. Smith (1977) 72 Cal.App.3d 835

Commerce & Industry Ins. Co. v. Chubb Custom Ins. Co. (1999) 75 Cal.App.4th 739

Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27

Continental Casualty Co. v. Pacific Indemnity Co. (1982) 134 Cal.App.3d 389

Continental Ins. Co. v. Lexington Ins. Co. (1997) 55 Cal.App.4th 637

CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th 1839

Culligan v. State Compensation Ins. Fund (2000) 81 Cal.App.4th 429

Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180

Dorsey v. J.C. Manning Company, Inc., San Bernardino Superior Court Case No. SCV40993

Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279

FMC Corp. v. Plaisted & Companies (1998) 61 Cal.App.4th 1132

Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857

Fremont Indem. Co. v. New England Reinsurance Co. (1991) 168 Ariz. 476

Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263

Hartford Accident & Indemnity Co. v. Superior Court (1994) 23 Cal.App.4th 1774

Helfand v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 869

Home Ins. Co. v. St. Paul Fire & Marine Ins. Co. (1st Cir. 2000) 229 F.3d 56

In re Marriage of King (2000) 80 Cal.App.4th 92

Jarrett v. Allstate Ins. Co. (1962) 209 Cal.App.2d 804

Jenkins v. Insurance Co. of North America (1990) 220 Cal.App.3d 1481

Johnson v. Continental Ins. Companies (1988) 202 Cal.App.3d 477

La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27

Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645

Pacific Indemnity Co. v. Bellefonte Ins. Co. (2000) 80 Cal.App.4th 1226

Pacific Legal Foundation v. California Coastal Com. (1982) 33 Cal.3d 158

Reliance Nat. Indemnity Co. v. General Star Indemnity Co. (1999) 72 Cal.App.4th 1063

Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal.3d 359

Simmons v. California Institute of Technology (1949) 34 Cal.2d 264

Slatkin v. University of Redlands (2001) 88 Cal.App.4th 1147

Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810

Styne v. Stevens (2001) 26 Cal.4th 42

Truck Ins. Exchange v. Unigard Ins. Co. (2000) 79 Cal.App.4th 966

Underground Constr. Co. v. Pacific Indemnity Co. (1975) 49 Cal.App.3d 62

Vandenberg v. Superior Court (1999) 21 Cal.4th 815

Statutes

California Civil Code § 1638

California Civil Code § 1644

Treatises

Cal. Practice Guide:  Insurance Litigation (The Rutter Group 2001)

The full text of this decision, along with a table of authorities with page numbers, is attached to this e-mail.

Centennial Insurance Company v. United States Fire Insurance Company (2001) A090305; First Appellate District Holds that Defense Costs should be shared pro rata by time on risk, NOT divided equally by number of carriers

The First Appellate District, Division Three (Alameda County), has held that defense costs in a construction defect action should be apportioned pro-rata by time on risk, not divided equally by the number of carriers. 

This is a departure from traditional sharing among carriers in construction defect actions.  Usually we see pro rata, by time on the risk, for indemnity dollars.  Defense costs, including filing fees and experts' fees are divided into equal shares among defending carriers.  Attorneys' fees are generally split into equal shares among the carriers that have appointed that attorney.  In practical application, though, carriers often appoint different attorneys to represent the same insured in a case.

Comment

This decision is long on case cites, but short on discussion of those cases and devoid of the terms of the insurance policies themselves. The issue of sharing of defense costs among multiple carriers with a duty to defend and indemnify is addressed in some ISO form policies.  Furthermore, this decision does not take into account the fact that no tender was made to US Fire until the matter had been in litigation for three years.  The duties in the event of a claim are addressed in every ISO form policy that I have seen.  Finally, it also does not address whether or not US Fire was reimbursing Centennial and Travelers just for the attorneys' fees incurred from the time of tender until US Fire appointed its own attorneys six months later.  The Appellate Court gave that short shrift in Footnote 4, holding that the reciprocal rights and duties of insurance companies are not controlled by the insuring agreement.

Nonetheless, I'd recommend before going to the mattresses on this issue, make sure to look at the policies in question, especially if those policies are manuscripted.

Facts

Lincoln Associates developed, built and marketed a condominium project called Pacific Plaza.  US Fire insured American Builders, which was a member of the joint venture Lincoln Associates.  US Fire insured Lincoln from January 19, 1982 to July 1, 1982.  Centennial insured Lincoln from February 1, 1985 to February 1, 1988.  Travelers insured Lincoln from February 1, 1988 to February 1, 1989. 

Lincoln Associates was sued for construction defects in 1991.  Centennial and Travelers began defending sometime thereafter.  In March, 1995, Lincoln tendered to US Fire.  US Fire began defending in December 1995, appointing its own counsel.

Centennial, Travelers, and US Fire all defended under a reservation of rights.  Centennial and Travelers, believing a conflict of interest might arise, permitted Lincoln to pick independent counsel under California Civil Code §2860.

The matter was settled for $1,000,000.  Centennial and Travelers paid $875,000 and Lincoln paid $125,000.  Centennial and Travelers paid $611,000 in attorneys' fees.  US Fire reimbursed Centennial and Travelers $68,000 for attorneys' fees.

Helpful Dicta

This decision detailed six methods of apportioning the burden among multiple insurers, which are set forth below.

Time on Risk - Apportionment based on the relative duration of each primary policy as compared with the overall period of coverage during which the "occurrences" "occurred".

Policy Limits - Apportionment based upon the relative policy limits of each primary policy.

Combined Policy Limit Time on the Risk - 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

Premiums Paid - Apportionment based upon the amount of premiums paid to each carrier

Maximum Loss - 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

Equal Shares - Apportionment among each carrier in equal shares.

Travelers v. American Equity (2001) A093081 COVERAGE (Can be Applied to Construction Defect Coverage Analysis) -  Indemnification Provision in a Contract Does Not Make Primary Policy Coverage Excess

This decision by Division Two of the First Appellate District (Alameda County) held that a "general indemnity clause" between two parties to a contract (the first party of whom is a "named insured" of a primary insurance policy issued to the second party), does not change the character of the primary insurance policy issued to the second party to a policy excess to the primary policy insuring the first party.  [CCM Note:  The language in "quotes" is taken directly from the decision.]

I am concerned about this decision for several reasons, and therefore, recommend caution when relying on it.  Although this isn't a construction defect case, an obvious use would be to get a recalcitrant primary carrier to step up to the plate. 

Some of the more puzzling aspects of this case are:

·          The decision appears to address coverage for an additional insured [CCM Note:  I am not really sure], but the decision never uses the words "additional insured."  That is important because there is a whole body of California case law on additional insureds not mentioned in this decision.
 

·          The decision interprets an indemnification provision by calling it a "general indemnity clause" without identifying the type of indemnification provision (Type I, Type II or Type III).  Exactly what type of indemnification provision is in the contract is not clear, but it is not a Type II.

·          The decision has a long discussion about subrogation, but then holds that Travelers is entitled to recovery under equitable contribution.  [CCM Note:  Subrogation = insurance company stands in the shoes of the insured.  Equitable contribution:  Insurance company can recover from another carrier who should have participated in defense and indemnity.]
 

·          This decision mentions "intentional negligence" which just plain makes me shudder.

Facts

An apartment complex was foreclosed on and M.A. Hoopes was appointed as a Receiver.  Preferred Capital, a property management firm, managed that apartment complex under a contract to the Receiver.  The contract contained what this Court characterized as a "general indemnity provision" in which the Receiver agreed to indemnify Preferred Capital.  [CCM Note:  The indemnity provision appears to be an emasculated Type I indemnification provision.]  Someone was injured on the property and sued Preferred Capital.

Preferred Capital was insured under a CGL policy issued by Travelers.  Preferred Capital was also a (named) insured of an American Equity policy issued to Receiver M.A. Hoopes.  Both policies contained identical "other insurance" provisions.  Travelers defended and indemnified Preferred Capital under a reservation of rights, but American Equity refused to participate in Preferred Capital's defense. 

Travelers paid a settlement on behalf of Preferred Capital and then sought to recover half of the defense costs and indemnity it paid in the matter from American Equity.

 If you need to see the text of the whole decision, it is available at http://www.courtinfo.ca.gov/opinions/documents/A093081.PDF.

Truck Insurance Exchange v. County of Los Angeles (2002) B134182 - LIMITING ADDITIONAL INSURED OBLIGATIONS

Division Three of the Second Appellate District (Los Angeles) has handed down a decision that might help take some of the sting out of Presley v. Superior Court (2001) G023182, review denied, S099244.  The additional insured endorsement and contractual indemnity language at issue in Truck v. County of Los Angeles (2002) B134182 worked in tandem so that not only did Truck not have to pay for the defense costs of additional insured County of Los Angeles, the County had to reimburse Truck for the fees and costs Truck paid to defend its policyholder.

The full text of the decision is available at http://www.courtinfo.ca.gov/opinions/documents/B134182.DOC. 

Holding

An insurance company cannot sue its own insured for subrogation.  However, “If the policy does not cover the insured for a particular loss or liability, however, it would neither undermine the insured’s coverage nor be inequitable to impose the loss or liability on the insured if the insured caused or was otherwise responsible for the loss or liability.”   The rule prohibiting an insurer’s subrogation against an insured applies only “for a claim arising from the very risk for which the insured was covered.”

Rationale

Since Hospital was not at fault and County’s misconduct was a substantial factor in causing Hospital to incur defense costs, the Court concluded that County was primarily liable and equitably should bear the entire obligation.  Even though County was an Additional Insured of the Truck policy issued to Hospital, Truck was entitled to reimbursement of the defense costs it paid on behalf of its insured, Hospital.

Application

Underwriting:  This points out the importance of limiting the language in additional insured endorsements.

Claims Professionals:  This could be a really cool tool to combat Presley v. Superior Court (2001) G023182, provided that the AI endorsement and contract language is limiting.  If so, I’d mention this case in your reservation of rights letter.

Attorneys:  Emphasizes the importance of special verdict forms.

Recovery:  If you’ve got cases that have been resolved with a finding of no liability to a policyholder, but had to pay out on additional insured obligations, take a look at the AI endorsement and contract and see if something is there for you.

Equitable Subrogation

The essential elements of an insurer’s cause of action for equitable subrogation are as follows:  (a) the insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer; (b) the claimed loss was one for which the insurer was not primarily liable; (c) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of its insured to protect its own interest and not as a volunteer; (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; (g) justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) the insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

Truck’s Additional Insured Endorsement

The additional insured endorsement stated that it extended coverage to County, “but only for legal liability arising out of the acts or omissions of the named insured [hospital], as respects the agreement to provide Obstetrical & Newborn Care [the Agreement],” and that it did “not extend coverage to the acts or omissions of County of Los Angeles [or its] agents, officers, and employees.”

Contractual Indemnification Language

County to Hospital:  County agreed to indemnify hospital against any claim for damages arising out of the provision of professional services under the Agreement.  County also agreed to indemnify hospital against any claim for damages “arising from or connected with services performed by County pursuant to this Agreement.”

Hospital to County:  County against any claim for damages “arising from or connected with hospital’s operations or its services hereunder,” but only if the claim was not covered by County’s indemnity for professional services and only for County’s “vicarious or other indirect liability . . . resulting from the acts or omissions of hospital.

Facts

County and Hospital entered into a contract with the mutual indemnification provisions described above.  Hospital agreed to provide routine obstetric care to patients referred by County.  County referred a high-risk delivery to Hospital.  The baby was hurt during delivery, and mother sued Doctor, Hospital and County.  A jury found County 90% at fault, Doctor 10% at fault and Hospital not at fault.

United Services Automobile Association (USAA) v. Alaska Insurance Company (New Hampshire Insurance Company) (2001) D038629 - NO EQUITABLE CONTRIBUTION OR EQUITABLE SUBROGATION FOR BAD FAITH

This 13-page decision by Division One of the Fourth Appellate District (Orange County) is long on facts and short on law, which makes me uneasy, although I don’t disagree with the outcome. 

USAA, in its position of an excess carrier on a claim, tried to recover money it paid to settle a bad faith action brought against it (yes, USAA itself) from the primary carrier under theories of equitable indemnity and equitable contribution.  To paraphrase the movies, “Gutsiest move I ever saw.”  The Trial Court agreed with USAA, but the Appellate Court reversed.

Holdings

1. When a liability insurer denies coverage for a third party claim and abandons its insured, it relinquishes the right to object to the manner in which the claim is resolved by the insured or any other insurer providing coverage for the claim.
    
2. An insurance company cannot recover money it paid to settle a bad faith action from another insurance company, when the first insurance company was settling a bad faith action against itself, under equitable indemnity.

   Equitable indemnity applies in cases in which one party pays a debt for which another is primarily liable and which in equity and good conscience should have been paid by the latter party.

3. An insurance company cannot recover money it paid to settle a bad faith action from another insurance company under equitable contribution theories, either.

   Equitable subrogation is when an insurance company “stands in the shoes of the insured.”  The elements are:

                                                                     i.      The insured has suffered a loss for which the party to be charged is liable.

                                                                      ii.      The insurance company has compensated its insured for the loss.

                                                                       iii.      The insured has existing, assignable causes of action against the party to be charged, which the insured could have pursued if the insurance company had not compensated its insured for the loss.

                                                                  iv.      The insurance company has suffered damages caused by the act or omission of which triggers the liability of the party to be charged.

                                                                v.      Justice requires that the loss be shifted entirely from the insurance company to the party to be charged.

                                                              vi.      The insurance company’s damages are in a stated sum, which is usually the amount paid to its insured, assuming the payment was not voluntary and was reasonable.

 Facts

Alaska requires that its drivers carry a minimum $50,000/$100,000 automobile insurance.  Dr. and Mrs. Thomas rented a car in Alaska, buying $1,000,000 in insurance issued by Alaska (subsequently acquired by New Hampshire) offered by the rental car company.  The Thomases also had personal automobile coverage from USAA, an insurer domiciled in Texas.  The USAA policy excluded coverage for bodily injury to a family member.

There was an accident while Mrs. Thomas was driving, and Dr. Thomas was badly injured.  Dr. Thomas sued Mrs. Thomas for negligence in the state of Alaska. 

Mrs. Thomas stipulated to a judgment of $850,000, along with an assignment of her bad faith rights against USAA to Dr. Thomas.  New Hampshire paid Dr. Thomas for $200,000 as partial satisfaction of the judgment, and Dr. Thomas agreed to defend and indemnify insurer Alaska/New Hampshire from liability to insurer USAA.

During the litigation, the Texas Supreme Court decided (in an unrelated case) that the policy exclusion for bodily injury to a family member in the USAA policy was invalid to the extent it excluded minimum coverage required by Texas, but valid to the extent it excluded coverage over the minimum.

Therefore, USAA decided to pay Dr. Thomas Alaska’s minimum $50,000 to Dr. Thomas, interest incurred until the time of payment, and attorneys’ fees.  USAA did not ask for a release.  It only asked that Dr. Thomas acknowledge receipt of that money.  USAA later settled the bad faith action for $75,000.
 

Copyright 2000-2002, The Law Offices of Cynthia Coulter Mulvihill, APC