• National Union Fire Ins. Co. v. Tokio Marine & Nichido Fire Ins. Co., B244899 and B247258, ----Cal.Rptr.3D ----- (2015)
  • May 7, 2015
  • Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office

    Pursuant to a supplier agreement, Yokohama agreed to manufacture tires to be sold and distributed by Costco. Yokohama further agreed to indemnify Costco for tire defects and to maintain products liability insurance listing Costco as an additional insured. Yokohama obtained a policy from Tokio Marine which named Costco as an additional insured pursuant to a vendor's endorsement. In 1996, Costco allegedly terminated its relationship with Yokohama by delivering a termination letter and phase-out schedule. All purchases of tires from Yokohama ceased in September 1997.

    In 1997, Jack Daer purchased Yokohama Tires from Costco. In addition, Costco regularly serviced Daer's vehicle. In March 2001, five weeks after a service visit, the rear left tire failed resulting in a rollover accident. Daer was rendered a quadriplegic. Daer filed a lawsuit against Yokohama and Costco alleging products liability against both defendants as well as negligence against Costco for the alleged sale of the wrong size and type of tire for his vehicle and negligent post-sale servicing of the tire. Costco tendered its defense to Yokohama under the Supplier Agreement and to Tokio Marine as an additional insured under its policy.

    Daer designated tire defect expert Robert Ochs, who opined in his deposition that there were three defects in the tire. Yokohama maintained the tire was free of defects and failed because of an unrepaired screw puncture and because it had been run underinflated for many miles. On the first day of trial, Costco and Yokohama settled separately with Daer.

    National Union, which defended and indemnified Costco in connection with the Daer action, subsequently filed a lawsuit against Yokohama and Tokio Marine asserting causes of action for indemnity against Tokio Marine on its own behalf and as a subrogee of Costco, contribution against Tokio Marine on its own behalf, express contractual indemnity against Yokohama as Costco's subrogee under the indemnity provision of the supplier agreement, and breach of contract against Yokohama as the subrogee of Costco under the insurance provisions of the supplier agreement. The trial court ordered bifurcation of the breach of contract claim, determining that resolving the issues on that cause of action would resolve most, if not all, of the other claims.

    National Union hired Troy Cottles as a tire defect expert. Cottles testified that the subject tire contained eight defects which caused it to fail. His theory was substantially different from that offered by Daer's tire expert. The trial on the contractual indemnity claim was bifurcated into a bench trial phase to determine the interpretation of the supplier agreement and the appropriate burdens of proof. This bench trial was then to be followed by a jury trial determining whether the tire was defective, whether Costco was negligent and the allocation of liability between Costco and Yokohama. Yokohama sought to exclude testimony with respect to theories of tire defect which had not been raised in the underlying litigation. It argued that since National Union had settled the underlying case based on the evidence that Daer would be presenting at trial, additional defect theories raised by Cottles were not relevant. The trial court agreed and found the new defect theories raised by Cottles inadmissible.

    In its Statement of Decision, the trial court ruled that Yokohama's indemnity obligation extended only to tire defects and not Costco's negligence. It also concluded that National Union had the burden of proving actual liability on the part of Yokohama and any allocation of liability between concurrent causes of Daer's injuries. Since National Union conceded that its expert could not testify that the defects identified by Ochs caused the tire failure, it had no evidence of tire defect. Yokohama moved for nonsuit on the ground that proof of tire defect liability was necessary to establish the indemnity claim. The trial court granted nonsuit on the cause of action for contractual indemnity and entered judgment.

    On appeal, National Union first argued that the trial court erred in refusing to allow Cottles' testimony. Yokohama argued that National Union should be limited to the evidence in the underlying action to prove a tire defect since it settled that case based on the evidence Daer was prepared to present. The court disagreed, noting that to accept Yokohama's argument would mean that a business sued for products liability and negligence would be forced to gather evidence of its own liability or risk impairing its rights of indemnity against the product manufacturer. This would not only be an unfair burden, but could also undermine public policy in favor of settlement. The court also noted that if the tire was in fact defective and resulted in its failure, accepting Yokohama's argument would result in a windfall.

    National Union next argued that the trial court erred in failing to consider its argument that Yokohama had a duty to defend all claims brought against Costco including the negligence claim. However, the Court of Appeal elected not to address this contention, finding that since it was reversing the trial court's decision to exclude Cottles' testimony, it did not believe the trial court's failure to address the duty to defend issue was prejudicial to National Union.

    National Union next contended that the decision granting the motions of Tokio Marine and Yokohama for nonsuit and summary adjudication was based on the trial court's erroneous rulings regarding burden of proof and the exclusion of Cottles' testimony and, as such, should be reversed. The Court of Appeal noted that the exclusion of Cottles' testimony resulted in the granting of a nonsuit to Yokohama on the cause of action for breach of indemnity obligations as well as summary adjudication on the sixth cause of action for breach of the obligation to procure insurance for liability arising from tire defects. In addition, the trial court granted summary adjudication in favor of Tokio Marine on the causes of action for equitable subrogation, indemnity and contribution under the insurance policy. Judgment was entered on each of these causes of action. The Court of Appeal concluded that, because the trial court had erroneously excluded the expert testimony and judgment was entered based on such erroneous ruling, such judgment should be reversed.

    Finally, National Union, as subrogee of Costco, had pled a cause of action against Tokio Marine for bad faith. It sought to recover $187,000 paid by Costco to settle the action and $4.3 million paid by National Union. It also sought its attorney's fees under Brandt v. Superior Court (1985) 37 Cal.3d 813. Tokio Marine demurred to the cause of action and the trial court sustained the demurrer. The Court of Appeal agreed with the trial court, finding that the elements of bad faith had not been pled since there were no allegations Costco suffered harm as a result of Tokio Marine's bad faith and for which National Union paid. The settlement paid by National Union was not a loss suffered by Costco and the payments that Costco made had not been reimbursed by National Union. As such, the payments made did not meet the specific pleading requirements for a bad faith subrogation claim.

    This case establishes that an indemnitee is not limited to presenting, in a subsequent indemnity claim, only the evidence which the plaintiff was prepared to present against it in the underlying action. Under the trial court's ruling, Costco and its insurer would have been required to retain an expert to prove Costco's derivative product liability in order to preserve a future indemnity claim. Obviously, proving its own liability should not be required at a time when the indemnitee should be focused on defending itself against the plaintiff's claims. Furthermore, such a result would undermine the public policy in favor of settlements. Simply put, the right of an alleged tortfeasor to vigorously defend itself should not be compromised by superimposing an inconsistent motivation which would both complicate its defense and compound its expense.