To Stay or Not to Stay
When an insurer contemplates the pros and cons of filing a declaratory relief action to determine a coverage issue, one important factor is whether the action is likely to be stayed until conclusion of the underlying dispute against the insured. In California, coverage actions are stayed to avoid having facts that impact both coverage and the insured’s liability in the underlying action decided (or even the subject of discovery) in the coverage lawsuit if this would prejudice the insured’s defense of the underlying lawsuit. See Haskel, Inc. v. Sup. Ct. (1995) 33 Cal.App.4th 963, 980; Montrose Chem. Corp. v. Sup. Ct. (1993) 6 Cal.4th 287, 302.
In Great American v. Sup. Ct. (Angeles Chem. Co.) ___ Cal.App.4th __ (2009 WL 3234636), California’s appellate court (Second District – Los Angeles/Crosky) reviewed the issue of overlapping facts. However, after doing so (and finding the coverage action could proceed because it raised contract interpretation issues and not factual issues pertinent to the underlying lawsuit), the court still remanded the case to the trial court to “balance the possible prejudice to the parties by the grant or denial of the insured’s motion to stay.” This may pose a nearly impossible situation for an insurer if no other insurer is defending the lawsuit. However, CGIS Insurance Services, Inc. v. Sup. Ct. (2008) 168 Cal.App.4th 1493 (also written by Justice Crosky) should also be considered, in which the court found a stay inappropriate where the question presented was a strictly legal issue.
Great American’s coverage lawsuit arose out of an underlying environmental pollution case. Great American and several other insurers agreed to defend the insureds. Great American filed its declaratory relief action for a determination that its policy limits were exhausted and therefore there was no further duty to defend. The legal issues presented by this claim were two fold: (1) whether there was only $500,000 per occurrence available in applicable limits; and (2) whether there was an additional annual limit available because the insured had paid for an additional couple of months of coverage. The insured argued the policy limits question necessitated determination of facts in the underlying case, including whether there was more than one occurrence and what caused the pollution. The insured also argued it might assert a bad faith claim which would create factual issues that should be stayed.
The appellate court made short shrift of these arguments. The possible bad faith claim was speculative. No proposed claim had been presented to the court and, therefore, none could be considered. On the issue of the amount of policy limits available, the court concluded these were contract interpretation issues that did not require discovery of or determination of the facts in the underlying case. So a stay was not appropriate on those grounds.
However, the appellate court held another factor had to be considered - the prejudice of the insured being compelled to fight a “two-front war.” The court indicated this factor must be considered “every time an insured seeks to stay a declaratory relief action while the underlying action is still pending.” Thus, the trial court was instructed to balance the insured’s interests in not fighting a two-front war against the insurer’s interest in not being required to continue to pay for the defense where it may not owe a defense and may not be able to recoup that money. The appellate court noted this issue is “circumstance-specific” and suggested it could depend on factors such as:
• the anticipated duration of the underlying litigation,
• whether the insured has separate counsel in the two actions, and
• availability of other insurance to cover the costs of defense.
Certainly the appellate court’s consideration of the relative burdens/prejudice is based in part on that, in California, an insurer has a right to reimbursement from the insured and contribution from other insurers if the insurer defends or indemnifies and later is found to have had no obligation to defend or indemnify. See Buss v. Sup. Ct.(1997) 16 Cal.4th 35, 48-49.
The appellate court directed the trial court, on remand, to balance “the prejudice to the insureds if they are required to litigate both cases at once against the prejudice that Great American will sustain if it is forced to continue to provide a defense until the underlying action is resolved.” What may help Great American in this particular case is that there are other solvent insurers defending. This certainly is not always the case. The court also indicated the trial court should consider alternative methods to achieve a fair balance of the interests of insurer and insured – suggesting there may be legal issues that could be determined on demurrer or motion for summary judgment at no great expense to either party.
