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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Texas Supreme Court Distinguishes "No Notice" from "Late Notice" for Liability Insurers

Posted on February 20, 2008 by Chris Martin

Last Friday, the Texas Supreme Court answered “no” to the following certified questions from the Fifth Circuit: 

"Where an additional insured does not and cannot be presumed to know of coverage under an insurer's liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the available coverage?"  and,

"Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy?"

In National Union fire Insurance Co. v. Crocker, 2008 WL 400398 (Tex. February 15, 2008), a nursing home resident sued the insured nursing home and its employee for injuries suffered when hit by a door swung open by the employee. The employee was terminated after the incident but before suit was filed. The insurer defended the nursing home but did not defend the employee even though the claims against him were covered and the insurer knew he had been served. The insurer attempted to contact the employee by phone and mail without success. During the suit, the employee spoke privately with plaintiff’s counsel at a deposition but refused to speak with the nursing home’s defense counsel. At trial, the jury returned a take nothing defense verdict against the nursing home but the court entered a $1,000,000 default judgment against the employee. The injured resident then sought to collect against the liability insurer because of its alleged coverage on the employee. 

The federal district court hearing the coverage case found the insurer breached its duty to defend the employee by failing to notify him of the available coverage. That court also found prejudice had to be shown to establish a coverage defense based on late notice and the insurer’s “actual awareness” of the suit against the employee precluded it’s ability to establish the required prejudice. On appeal, the Fifth Circuit certified the above questions to the Texas Supreme Court. In addressing the notice requirement in last Friday’s decision, the Texas Court observed that a “more basic purpose” of requiring an insured to forward suit papers to the insurer is to advise them that the insured has been served and the insurer is expected to file an answer on their behalf. An insurer’s knowledge that suit has been filed “does not satisfy this ‘more basic purpose’ or require the insurer to “gratuitously subject itself to liability.” The high court noted: “Simply put, there is not duty to provide a defense absent a request for coverage.”

Addressing the prejudice question, the court distinguished its recent decision in PAJ, Inc. v. Hanover Insurance Co. 2008 WL 109071 (Tex. 2008) (See Texas Insurance Law Newsbrief January 14, 2008), by observing in PAJ the notice was actually late in contrast to the present case where there was no notice from the additional insured at all. Because an insured may opt against seeking a defense from an insurer for a number of reasons, the Texas Supreme Court concluded that “insurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense.” As such, the insurer had no duty to inform the employee of available coverage or to voluntarily undertake his defense. And, the high court concluded actual knowledge of the suit against him did not establish prejudice as a matter of law.

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