Since Justice Kennard noted her criticism with the California Supreme Court’s literal approach to policy interpretation in her dissents in Foster-Gardner and Powerine, insurance coverage lawyers have been watching to see whether California’s highest court will limit the impact of those decisions. This line of cases stand for a number of propositions including that for a policy that only defends against suits, there is no duty to defend unless there is a civil action in a court of law that seeks money damages. Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857 (1998) (no duty to defend where there is no civil action prosecuted in a court). See also Certain Underwriters at Lloyd’s, London v. Superior Court (Powerine Oil Company, Inc.), 24 Cal.4th 945 (2001). This differs from most states’ “functional equivalent approach” which results in insurers having to defend against adversarial matters which are not lawsuits.
It will be interesting to see what (if anything) the California Supreme Court does with the recent Clarendon v. Starnet case, albeit that case involves a specific construction statute, which is dissimilar to the environmental context of the Foster-Gardner line of cases.
This inter-insurer dispute, Clarendon America Ins. Co. v. Starnet Insurance Co., __ Cal.App.4th __ (2010) (2010 WL 2904995), involved the question of whether there was a duty to defend under a primary policy that defined “suit” as a “civil proceeding in which damages . . . are alleged.” The definition also includes “any other alternative dispute resolution proceeding . . . to which the insured submits with our consent.” At issue was a pre-suit requirement for construction claims, the “Calderon Act.” Under California’s Calderon Act (Calif. Civil Code § 1375, et seq.), homeowners associations are required to provide the builder, developer, or general contractor with notice of construction or design defects prior to instituting litigation. The association has to provide notice, list defects, and describe the results of the defects. This notice triggers a period, not to exceed 180 days, during which the parties “shall try to resolve the dispute . . .”
Pursuant to the Calderon Act, the builder, developer, or contractor who have been put on notice must then notify subcontractors, their insurers, and insurers of additional insureds, and schedule a meeting to try to resolve the dispute. The participants are required under the Act to provide information about insurance. If this process does not resolve the dispute, then the association may file suit.
To determine whether the Calderon Act was a “suit” which Starnet had to defend against, the court had to interpret the term “civil proceeding” in the definition of “suit.” (In Foster-Gardner the term suit was not defined and, therefore, the court used the word’s plain meaning of a proceeding in a court of law.) The Clarendon court claims it took a literal approach to interpreting the words “civil proceeding.” The court’s reasoning was that because the Act was created by the civil code, is mandatory, must be satisfied prior to filing suit, and has specific requirements of notice, exchange of information, and a demand, therefore compliance with the Act was a “civil proceeding.” Further, the court held that extending the duty to defend to the “function and significance” of the Calderon Act process would be consistent with a hypothetical insured’s reasonable expectations. (Sounds more like a functional equivalent.)
The appellate court did not address another part of the definition of “suit” which was: “an alternative dispute proceeding . . . to which the insured submits with our consent.” The trial court had noted it was not clear whether consent meant voluntary consent or “may also include legally mandated consent” because of the Act’s requirements. Fortunately, this part of the trial court’s decision was not upheld as it would have created a broader (rather than a plain) meaning of the word “consent.”
