- St. Paul Mercury Insurance Company vs Mountain West Farm Bureau Mutual Insurance Company
- November 20, 2012 | Author: John V. O'Meara
- Law Firm: Bremer Whyte Brown & O'Meara, LLP - Woodland Hills Office
THE CALIFORNIA COURT OF APPEAL ISSUES A STERN WARNING TO CARRIERS WHO FAIL TO DEFEND THEIR ADDITIONAL NAMED INSUREDS
In St. Paul Mercury Insurance Company v. Mountain West Farm Bureau Mutual Insurance Company (2012) 012 Cal. App. LEXIS 1118, the California Court of Appeal, Second Appellate District, affirmed the award of attorney's fees, costs and indemnity in favor of a primary carrier against a carrier that had an additional insured endorsement in favor of the primary carrier's insured, yet denied the duty to defend or indemnify.
The insurance dispute at issue pertains to a construction defect case involving the development of the Four Seasons Hotel and Resort, located in Teton Village, Wyoming. St. Paul Mercury Insurance Company (“St. Paul”) insured the project’s general contractor, Jacobsen Construction Company (“Jacobsen”). Mountain West Farm Bureau Mutual Insurance Company (“Mountain West”) insured Teton Builders, Inc. (“Teton”), who was the framing subcontractor on part of the project.
Pursuant to its subcontract agreement, Teton was obligated to have Jacobsen named as an additional insured on its insurance policy. Mountain West did issue such an endorsement, which was in force for nine months.
Jacobsen sued the owner for breach of contract, and the owner crosscomplained against Jacobsen for construction defects. Jacobsen then crosscomplained against various subcontractors whose scopes of work were implicated in the construction defect case, and tendered to their insurers pursuant to the additional insured endorsements. Teton was named as a cross-defendant, and Mountain West received an additional insured tender of defense and indemnity. Mountain West denied the tender.
The underlying action eventually settled in two parts. In the first portion of the settlement, the siding and drywall issues were addressed. St. Paul, on behalf of Jacobsen, paid $1 million. Although Teton's work was implicated in the siding and drywall issues, Mountain West paid nothing towards settlement one. Settlement two concerned all of the remaining issues. In settlement two, St. Paul paid $1,265,000 and Mountain West paid $100,000 on behalf of Teton.
St. Paul then sued a number of non-participating subcontractors and insurers for equitable contribution - Teton and Mountain West among them. After various settlements and some motion practice, only Mountain West remained in the action at the time of trial.
Prior to the beginning of trial, the trial court granted St. Paul's motion for summary adjudication as to Mountain West's duty to defend Jacobsen pursuant to the additional insured endorsement. The trial court found that the allegations in the underlying construction defect case did implicate the scope of work of Teton, the framer, and this obligated Mountain West to defend Jacobsen.
Having already determined that a duty to defend existed as against Mountain West, at trial on the remaining issues, the court found that Mountain West owed St. Paul $2,087,171.50 in defense and settlement costs, plus over $300,000 in prejudgment interest. This amount was calculated based on time on the risk as between St. Paul and Mountain West. Mountain West appealed the trial court's decision.
The California Court of Appeal affirmed the trial court's award of damages. In discussing the law of equitable contribution, the court noted that equitable contribution apportions costs among insurers covering the same insured at the same level of risk, where one insurer has paid more than its share. The purpose of equitable contribution is to equalize responsibility among co-insurers and prevent one insurer from benefitting at the expense of another.
In regard to which insurer has the burden of proof, the Court of Appeal found that the matter of Safeco Ins. Co. v. Superior Court (2006) 140 Cal. App. 874 controls. In an equitable contribution action by one insurer against a nonparticipating insurer, the participating insurer only needs to prove a potential for coverage under the non-participating insurer’s policy. The burden then shifts to the non-participating insurer to prove that no potential for coverage exists, and the lack of coverage must be plead as an affirmative defense.
During the appeal, Mountain West admitted that, pursuant to the additional insured endorsement, it had a duty to defend Jacobsen. However, Mountain West argued that it fulfilled its duty to defend to Jacobsen by defending Teton. The Court of Appeal rejected this argument, ruling that Mountain West had a separate duty to defend Jacobsen as its additional insured.
Mountain West also argued that Teton's participation in settlement two precluded St. Paul’s contribution claim, but the court disagreed as the insurers were not parties to the settlement agreement. Even more, the settlement agreement explicitly reserved Jacobsen’s insurers’ right to seek equitable contribution from other insurers.
Mountain West also argued that the additional insured endorsement limited coverage to damage “arising out of” Teton’s work for Jacobsen, and thus, a time on risk allocation was improper. The court found this wording to be broad, and Mountain West did not meet its burden of proving any limitation on indemnity coverage under the endorsement. Mountain West’s coverage applied to “property damage” during the policy period, and Mountain West failed to prove the absence of such.
After establishing that Mountain West owed a duty to defend, St. Paul's further burden was to prove that it paid more than its fair share of defense and indemnity. The court found that St. Paul, in fact, did pay more than its share. And worse for Mountain West, by failing to defend Jacobsen, the court ruled that Mountain West waived any right to challenge the reasonableness of defense or settlement payments on behalf of Jacobsen. Therefore, the Court of Appeal concluded that the trial court did not abuse its discretion by ordering Mountain West to pay 43% of defense and indemnity based on time on the risk.
The court did reverse the trial court’s award of prejudgment interest under Civil Code Section 3287, which authorizes interest where damages are certain. As the court was required to determine allocation of responsibility, St. Paul’s damages were not certain until the judgment. Thus, the Court of Appeal held the award of prejudgment interest was in error.
Consequences of the Case
In construction defect cases, the issue of whether there is "additional insured indemnity" has long been debated. Carriers for subcontractors argue that their payment of settlement monies on behalf of their primary named insured constitutes payment of monies "arising out of" the work of their primary named insured, so no additional indemnity need be paid on behalf of the additional insured. This court did not buy that argument. And worse, this court did not limit the indemnity to any allocation based on the scope of work of the subcontractor or the allegations against the subcontractor. Once the court determined that that the subcontractor's scope of work was widely implicated, the court held the additional insured carrier liable for all attorney's fees, costs and indemnity allocated based on time on risk.
It is worth emphasizing that the trial court and the Court of Appeal found it significant that Mountain West did not defend Jacobsen. If Mountain West did agree to defend Jacobsen and a later conflict developed over defense fees and/or indemnity, it is likely that the trial court would have permitted Mountain West to debate reasonableness of the defense, indemnity and allocation.