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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Eroding Away California's "Foster-Gardner" Rule?

Posted on August 12, 2010 by Sara Thorpe

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.”
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2003, 2004, 2005 - In Review

Posted on January 6, 2010 by Sara Thorpe

2003, 2004, 2005 – (Happy new year!)  It is difficult to keep up with that Mike Aylward – especially when he is in a reminiscing-kind of mood. But I have to add my two cents, in addition to Mike’s list, of important California decisions from these three years because of their long-lasting impact, mainly in the area of policy interpretation. Of these, 2005 was the watershed year when a number of decisions from California’s Supreme Court were based on strict and literal policy interpretation.

2003

  • First party property policy with coverage for actual collapse did not cover imminent collapse – the court could not rewrite the parties’ contract. Rosen v. State Farm Gen. Ins. Co. (2003) 30 Cal.4th 1070.
  • Intentional misconduct may be excluded from coverage, but still may require duty to defend (depending on policy language and whether exclusion based on Ins. Code § 533). Marie Y. v. General Star Indem. Co. (2003) 110 Cal.App.4th 928.

 

2004

  • One that does not fit with the others summarized here is a decision that the underlying indemnity agreement must be considered along with the insurance policy provisions when determining indemnity and contribution rights. Hartford Cas. v. Mt. Hawley Ins. Co. (2004) 123 Cal.App.4th 278.

2005

  • Whether there is an obligation to pay defense costs under umbrella policies when there is no duty under the underlying primary policies because there is no “suit” depends on the policy’s language - in particular the insuring agreement and definition of ultimate net loss. Powerine v. Superior Court (2005) 37 Cal.4th 377; County of San Diego v. ACE Property & Cas. Co. (2005) 37 Cal.4th 406.
  • The pollution exclusion still does exclude coverage, here silica dust, in the wake of MacKinnon. Garamendi v. Golden Eagle Ins. Co. (2005) 127 Cal.App.4th 480.
  • Even with California’s efficient proximate cause law which decidely favors policy-holders, a weather conditions exclusion in a property policy precluded coverage. Julian v. Hartford Underwriters (2005) 35 Cal.4th 747.
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