California Supreme Court distinguishes impact of Foster-Gardner "suit" ruling

Posted on November 20, 2010 by Sara Thorpe

In 1998, the California Supreme Court, consistent with contract interpretation rules, took a literal approach to what is meant by “suit” in liability insurance policies, ruling that when not otherwise defined, “suit” means a proceeding brought in a court of law by the filing of a complaint. Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857. The Supreme Court went on from there in subsequent decisions to hold that policies that pay when the insured is “legally obligated to pay damages” require money damages ordered by a court. Certain Underwriters at Lloyd’s v. Superior Court (“Powerine I”) 24 Cal.4th 945. California is in the minority in this approach.

Justice Joyce Kennard has long criticized these rulings, and in her comments in her concurring opinion to the latest on this topic from California’s highest court, notes that “the decision here is a step in the right direction.” However, this new case is not an erosion of the “suit” rule so much as a finer drawing of the "bright line" around the rule.

In Ameron International Corp. v. Ins. Co. of State of Pa., __ Cal.4th __ (2010) (2010 Cal.Lexis 11679), the California Supreme Court held that where the insurance policies did not define the term “suit,” there was a duty to defend and indemnify a contractor that settled a government claim in an administrative adjudicative proceeding before the United States Department of Interior Board of Contract Appeals (“IBCA”).  The California Supreme Court, on the narrow issue before it, found Foster-Gardner did not apply because there was a complaint requirement and trial-like features in the administrative adjudicatory proceeding.

In Foster-Gardner, two government agencies (the water board and health department) investigated environmental contamination which lead to the California Dept. of Toxic Substances issuing an order to remediate the site. That situation, the California Supreme Court held, under a literal interpretation of the term in the overall context of the policy, did not qualify as a “suit.” In contrast, in Ameron, the proceedings in the IBCA were commenced by the filing of a notice and complaint which required a simple, concise and direct statement of each claim. A judge presided and the proceedings were governed by federal evidence rules. Parties subpoenaed witnesses and evidence was introduced. The witnesses were sworn in and cross-examined. In general, the same relief was available as could have been awarded if Ameron had chosen the other available means of disputing the government’s claim (the Court of Federal Claims).

Those features in the proceedings were examined in light of the Court’s concerns that led to the decision in Foster-Gardner. There was concern in Foster-Gardner that the lack of a formal complaint could leave insurers with insufficient notice of the parameters of the action against the insured. The IBCA requirements require a complaint. The insurers argued an IBCA proceeding should not be considered to be the same as a court proceeding because Ameron had such a proceeding available through the Federal Claims Court. The Supreme Court disagreed, explaining that Congress set up two avenues for contract appeals in order to address volume and reduce delays.

Relying on general principles of contract interpretation, the Supreme Court concluded that ambiguity in the term “suit” meant the term should be construed to protect the insured’s reasonable expectations. Given the trial-like nature of the IBCA administrative proceedings, the court found a “reasonable policyholder would recognize such proceeding as a suit and would expect to be defended and, if necessary, indemnified by its insurer.”

The Court ended by noting its decision is in keeping with its “policy of emphasizing substance over form,” and consistent with the thrust of Foster-Gardner which was that insurers did not bargain to be, and therefore should not be, liable for the “threat” of legal action. The Supreme Court found the IBCA proceeding was not a threat of legal action, but an “administrative adjudicative action.”  

The California Supreme Court will be deciding another case on the "suit" issue when it takes up a dispute over whether California’s prelitigation Calderon proceedings in the construction defect setting qualify as a “suit” under Foster-Gardner. Clarendon America Insurance Company v. Starnet Insurance Company, 10 C.D.O.S. 9499, review granted 11/10/10.

 

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A Oregon District Court Considers Whether A Dissolved Corporation's Liability Policy Constitutes An Undistributed Asset

Posted on July 14, 2010 by Diane Polscer

The issue of whether a liability policy of a dissolved corporation is an undistributed corporate asset capable of being distributed has not been addressed by Oregon’s state appellate courts. In the recent Oregon District Court opinion, Ironwood Homes, Inc. v. Bowen, 2010 U.S. Dist. LEXIS 59933 (D. Or. June 14, 2010), Oregon District Court Judge Anna Brown examined a dissolved corporation’s motion to dismiss claims against it for failure to state a claim based on the plaintiffs’ failure to allege that the dissolved corporation holds any undistributed assets, and thus lacks the capacity to be sued.  The Ironwood court’s opinion is of interest because the court considered the fact that the dissolved corporation’s liability insurer was paying the attorney representing the dissolved corporation as a factor in its denial of the motion.

In Ironwood, the plaintiffs sought partial relief for environmental response costs under CERCLA.  The dissolved corporation, Linke Enterprises, Inc. (“Linke”), apparently represented by an attorney paid by its liability insurer, moved to dismiss the claims against Linke on the ground that the plaintiffs did not allege that Linke holds any undistributed assets and, accordingly, lacks the capacity to be sued.  Linke asserted that it is a “dead and buried” corporation under Oregon law with no undistributed assets and thus not able to be sued or held liable for environmental response costs.  Noting that Fed. R. Civ. P. 17(b) (2) provides that the capacity of a corporation to sue or to be sued is determined by the law under which it was organized, and also noting that the Ninth Circuit has held that FED. R. Civ. P. 17(b) (2) requires the court to apply state law when deciding whether the dissolved corporation may be sued for damages, the Ironwood court looked to apply Oregon law.

Oregon statutes provide that the dissolution of a corporation does not prevent the commencement of a proceeding against it in its corporate name, and also provide that a claim against a dissolved corporation may be enforced to the extent of its undistributed assets unless the corporation complies with specified notice provisions, which, while not addressed in the opinion, Linke likely did not fulfill.  The Ironwood court noted that the parties did not cite, and the court did not find, any Oregon authorities helpful in addressing the issue as to whether a liability policy is a corporate asset capable of being distributed when a corporation is dissolved, but also noted that courts of other jurisdictions have found that liability policies should be listed as assets of a bankruptcy estate.

 

In light of the lack of Oregon law on the central issue, the court found it reasonable to infer that Linke’s liability insurance policies are an asset of the company because an attorney paid by the insurer is representing Linke’s interests in this case.  That inference, together with the court’s finding that the plaintiffs were not required to allege that Linke has undistributed assets to satisfy a judgment, resulted in the court’s denial of Linke’s motion to dismiss.
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2000, 2001, 2002 - Additional California Highlights

Posted on December 24, 2009 by Sara Thorpe

2000, 2001, 2002 – Of the final decisions issued by the California courts during those years which had a significant impact on insurers over the course of this decade, in addition to what Mike Aylward notes, I would add the following:

2000

  • No comparative bad faith. Kransco Int. v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390. There are still affirmative defenses, affirmative relief, and defenses insurers can pursue, and the insured’s conduct is relevant.
  • Construction defects that do not cause damage to property fall within the economic loss rule. Aas v. Superior Court (2000) 24 Cal.4th 627. Not an insurance case, but the ruling is in line with insurance coverage requirements that there be physical injury to tangible property.
  • An insurer’s reconsideration of whether there is coverage for a claim vitiates claims of bad faith. Shade Foods, Inc. v. Innovative Product Sales & Marketing (2000) 78 Cal.App.4th 847.
  • Other insurance may satisfy self-insured or deductible requirements. Vons Cos., Inc. v. United States Fire Ins. Co. (2000) 78 Cal.App.4th 52. This depends, of course, on the policy language. But where the insurance policy does not require the insured to pay the SIR, other insurance applicable to the claim may be used by the insured to satisfy that requirement.
  • Self-insurance is not insurance. Montgomery Ward & Co. v. Imperial Cas. & Indem. Co. (2000) 81 Cal.App.4th 356. It looks like insurance and acts like insurance and has insurance in its name, but it is not insurance.

 

2001

  • Where there is a genuine issue in dispute – factual or legal – there cannot be bad faith liability imposed on an insurer for advancing its side of the dispute. Chateau Chamberay v. Associated Int. Ins. Co. (2001) 90 Cal.App.4th 335.
  • Cumis counsel is not required where insurer agreed to defend all claims even though it denied coverage for some, distinct claims and refused to prosecute insured’s cross-claim. James 3 Corp. v. Truck Ins. Exchg. (2001) 91 Cal.App.4th 1093.
  • Additional insured is entitled to same considerations as named insured, insured can select insurer to pursue, and award of attorney fees against the insured are covered by the policy’s “supplementary payments provision” even if the claim upon which they are based is not covered by the policy. Pressley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal.App.4th 571. On the third point, there has been further clarification that attorneys fees awarded on claims that cannot be covered by insurance (i.e., the insured’s willful conduct) are not covered. Combs v. State Farm Fire & Cas. Co. (2006) 143 Cal.App.4th 1338. Further in State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274, the court held that there was no coverage for attorney fees awarded against the insured if based on a claim not potentially covered by the policy (there, a wage and hour claim).
  • The insured must prove the amount of damage attributable to the covered portion of the loss in order to prove breach of contract. Golden Eagle Refinery Co. v. Assoc. Int. Ins. Co. (2001) 85 Cal.App.4th 1300. This decision was recently overruled in State of Calif. v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, in which the court held the burden is on the insurer.

2002

  • Insurance policy can be proven by secondary evidence, including oral testimony and standard forms, and other evidence. Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059.
  • Insured cannot settle around its insurer where the insurer is defending the insured. Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718.
  • An affirmative defense that seeks damages in the form of a set-off is a claim for damages. Constructive Protective Services, Inc. v. TIG Specialty Ins. (2002) 29 Cal.4th 189.
  • No duty to provide independent counsel even where counsel retained by insurer was staff counsel of insurer. Gafcon, Inc. v. Posnor & Assocs. (2002) 98 Cal.App.4th 1388.
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Insurer's Obligation To Search For Coverage - Expanding The Insurer's Duties

Posted on May 7, 2009 by Sara Thorpe

A recent case in California, takes an insurer’s duty to search for coverage a step farther than required to date and, while the insurer acted correctly on the coverage of which it was aware and acted promptly as it discovered additional coverage, that was not enough – it was found liable to the tune of $3.2 million (damages, interest, and attorneys fees).

Safeco Ins. Co. v. Parks (2009) 170 Cal.App.4th 992 (“Safeco II”), is a case every insurer should review.  The court’s decision flows from a rather bizarre set of facts, and a convoluted legal history, which will not be fully summarized here. The claimant was 16 year old Michelle Park’s boyfriend who was left by the side of the road in February 1999 to make his way home following his rude behavior towards his girlfriend. He was hit by a car which resulted in the need to amputate one of his legs.

Michelle’s parents were divorced. She lived with her father, Charles, and grandmother, Evelyn. Her mother lived with a man (Barnett) that had a homeowners policy with Safeco. The claim by the injured boyfriend was tendered under Barnett’s policy.  Safeco denied, was sued, and was ultimately (years and a court decision later) found to be correct.  See Safeco Ins. Co. v. Parks (2004)122 Cal.App.4th 779 (“Safeco I”).

During that bad faith case, discovery was sought of other policies issued by Safeco “providing coverage for the nature and extent of the damages alleged.”  Safeco objected to the discovery. Parks did not move to compel.

 

Behind the scenes (the Safeco II court tells us), Safeco knew Miller lived with her father. Safeco’s unit manager had apparently instructed the adjuster to determine whether Michelle had other applicable insurance. The court noted that Safeco’s claim file did not show it searched for policies for the adults with whom Michelle resided “nor did Safeco interview Michelle’s father or grandmother to determine whether they had Safeco policies that might cover her claim.”  No mention is made of whether the claimant’s lawyer deposed the father or grandmother or conducted any discovery for policies other than sending the request to Safeco, which the lawyer failed to pursue.

 

As it turns out the grandmother owned the home in which Michelle lived and had a homeowners policy with Safeco. Once this came to Safeco’s attention, Safeco acted promptly and paid policy limits.  But too much water was already under the bridge. There had been a policy limits demand and an excess judgment.

 

The lesson in all of this? Follow the claim supervisor’s instructions.  Search for logical sources of insurance coverage for a claim. Document any search conducted. Hindsight is always 20/20.
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Oregon's Court of Appeals Defines "Collapse"; Rules on Scope of Coverage

Posted on May 4, 2009 by Diane Polscer

In Hennessy v. Mutual of Enumclaw Ins. Co., A133592 (April 29, 2009), Oregon's Court of Appeals adopted a “none of the above” approach to first-party “collapse” claims. The majority of jurisdictions that have considered the undefined term “collapse” have found coverage to be triggered by one of the following three circumstances: (1) a finding of substantial impairment to structural integrity, (2) a finding of an imminent collapse, or (3) an actual collapse, being an actual falling down and/or reduction to rubble. In Hennessy, Oregon’s Court of Appeals held that the undefined term “collapse” “requires only that an object fall some distance.” Thus, in Hennessy, a collapse was found where a portion of a building’s stucco exterior had separated from the building wall but had not yet fallen to the ground.
 

While some may criticize Hennessy as a liberal interpretation of “collapse” coverage, see dissenting opinion by Judge Landau (“I respectfully disagree with the majority that what is essentially a crack between a piece of stucco and the building to which it is adhered is a ‘collapse’ of that stucco”), the decision also represents a substantial victory for insurers with respect to the scope of coverage. Specifically, whereas the trial court had awarded the insured $98,859.03 to entirely replace the failed stucco system, the Court of Appeals reduced the award to $2,469.68 to reflect only those costs directly associated with repairing the “collapsed” portion of the stucco. Even though the parties had agreed that it was “reasonable and prudent” to replace all of the stucco that “was no longer attached to the underlying walls,” the court found that no “collapse” had occurred where the stucco was no longer properly adhered to the building but “had not moved or fallen.” Thus, repairs to those areas of the building were not necessitated by any “collapse” but by the hysteresis (grout decay) that had caused the adhesion to fail.

Prior to the Hennessy decision, insureds repeatedly argued in Oregon that once coverage is found the insurer must pay for all work that is necessary to complete the repair job in a “good and workmanlike fashion.” Thus, if, as the parties agreed in Hennessy, it was “reasonable and prudent” to repair all stucco while repairing the portion that had actually separated from the building, the insured would argue that the entire repair project should be covered. Hennessy stands for the proposition that although a broad scope of work may be “reasonable and prudent,” or even required in order for a contractor to complete the job in a workmanlike manner, coverage only extends to those repairs actually necessitated by a covered event. "Logically, this rule should not be limited to "collapse" claims but should extend to all first-party property claims, and potentially even to third-party liability claims. In most cases, a reasoned expert opinion will likely be helpful to properly limit an insured’s recovery pursuant to the Hennessy standard.
 
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Can't Have It Both Ways: ELI Coverage and Workers' Comp Exclusion

Posted on November 16, 2008 by Sara Thorpe

While not a new development, this case is a reminder that logic and common sense prevail in evaluating coverage, even in the face of tragedy. The California Court of Appeal for the Fourth Appellate District affirmed an order granting summary judgment in favor of an insurer in an action for breach of the duties to defend and indemnify under a policy’s Employer Liability Insurance (ELI) coverage, holding the underlying claim was within the scope of the workers’ compensation exclusion because it was covered by the workers’ compensation law and the insured did not assert any exceptions applied to the statute. Power Fabricating Inc. v. State Comp. Ins. Fund (2008) __ Cal.App.4th __ [08 CDOS 13719].

This claim arose out of a fatal electrocution in the course of employment. State Compensation Fund issued insurance to Power Fabricating Inc., which afforded coverage for workers’ compensation and ELI coverage. State Fund paid workers’ compensation benefits to the deceased employee’s widow. However, the widow also sued Power and a related entity, Power Temporary Systems, Inc. (“PTSI”). Power tendered the suit to State Fund which denied coverage.  Power then sued State Fund for breach of contract. The trial court granted summary judgment for State Fund.

On appeal, Power argued summary judgment was inappropriate because there was a disputed issue of fact as to whether Power, PTSI, or a joint venture of the two entities, was the deceased’s employer at the time of the accident. Power contended ELI coverage would apply if the deceased was an employee of the joint venture and was injured by Power’s negligent acts or Power’s employee but injured by acts of the joint venture for which Power was derivatively liable.  The court disagreed, holding that ELI coverage only applied to injury arising out of or in the course of employment by the insured. To the extent the joint venture, as an entity distinct from either Power or PTSI, employed the deceased, the ELI coverage would not apply in the first instance. The court held Power could not invoke coverage under the ELI provisions, which required employment by an insured, but then attempt to avoid application of the worker’s compensation exclusion on the theory a non-insured entity was actually the employer.

The court also rejected Power’s second argument, holding the workers’ compensation exclusion would apply to Power’s derivative liability for the joint venture. The complaint alleged only Power, not PTSI, was negligent, eliminating any risk of derivative liability. Even if that risk existed, Power’s derivative liability did not fall within any exception to the workers’ compensation law.

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U.S.D.C. for Southern District of Mississippi Allows Insurer to Correct Admission as to Operative Policy

Posted on October 10, 2008 by Diane Polscer

Geico Insurance Co. v. Hall, 2008 U.S. Dist. Lexis 77347 (S.D. Miss. Oct. 1, 2008) presents at least some evidence that in some states insurers are able to make mistakes and still prevail. When Geico filed its complaint, it included a copy of the insurance policy Geico claimed was the operative policy at issue. Under that policy, the limits were arguably as much as $200,000 for defendant’s claim against Geico’s insured. (Defendant also alleged that the insured’s copy of the policy was lost during Hurricane Katrina.) Later in the case, Geico discovered and presented what it claimed was the actual policy, with an endorsement that established available limits at $25,000.

 

Despite somewhat equivocal testimony provided by Geico as to whether the disputed endorsement was sent with the renewal policy, the court accepted the endorsement as established, relying primarily on Wells Fargo Bus. Credit v. Ben Kozloff, Inc., 695 F.2d 940, 944 (5th Cir. 1982) (“Placing letters in the mail may be proved by circumstantial evidence, including customary mailing practices used in the sender’s business.”).  Citing Ben Kozloff, the court found that its decision was justified because no evidence was presented to rebut the legal presumption that “Once properly mailed, the endorsement is presumed to have been received by the insureds.” The court therefore allowed Geico to substitute what the court deemed to be the actual policy at issue for the one Geico had originally presented, and limited Geico’s liability to $25,000.

 
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Texas Supreme Court Limits Claims Between Settling Co-Insurers

Posted on October 16, 2007 by Chris Martin

On October 12th, the Supreme Court of Texas issued a surprising decision of importance to liability carriers doing business in Texas regarding the reimbursement claims available to liability insurers against other insurers in Texas. 

In Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., No. 05-0261 (Tex. October 12, 2007), Mid-Continent provided a $1 million CGL policy which covered a general contractor as an additional insured. The general contractor also had its own $1 million CGL policy with Liberty Mutual and a $10 million excess policy. Neither insurer disputed that both owed a portion of the general contractor’s defense and indemnity expenses and both agreed that a total verdict for the injured parties would fall in the $2 to $3 million range, but they disagreed both on the settlement value of the case and the percentage of liability to be assessed against the general contractor. Mid-Continent would only agree to pay $150,000 to settle. Liberty Mutual then paid the $1.35 million needed to settle sued Mid-Con for the difference.  On appeal, the Texas high court held that Texas does not recognize a direct action by one insurer against another – they can only bring an equitable subrogation claim. Because the only extra-contractual tort claim recognized in Texas for an insured to assert against its liability insurer is a “Stowers” claim for the insurer’s failure to settle a covered claim within policy limits, the high court ruled that a liability insurer asserting an equitable subrogation claim against another carrier could only assert such a claim. 

This decision raises very significant questions for any carrier facing the settlement of tort claims where the insured has multiple primary carriers. If one carrier plays “hard ball,” can they be sued in Texas by the settling carrier who pays more than its “fair share?” Probably not, unless the insured contributes to the settlement and still possesses a claim against the recalcitrant insurer. Such a claim may also exist if the reluctant carrier is subject to a valid Stowers claim for failing to settle within limits. Otherwise, liability carriers may force more cases to trial due to the reluctance of co-carriers to fund tort settlements for their insureds due to this shift in Texas law. 
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