DBO Development developed a shopping center project and hired Moorefield to act as the general contractor. The project included a space to be used as a Best Buy store. Under the contract between DBO and Moorefield, the Best Buy building was to be completed by a certain date and a failure to complete by that date would result in Moorefield being required to pay $1500 per day in liquidated damages for the first 30 days and $2500 per day thereafter. The plans and specifications for the building required that an interior concrete floor slab be installed. Vinyl composition tile (VCT) and carpet tile were to be installed on top of the concrete slab. Moorefield subcontracted with Higgins Construction to install the slab, with George Roofing to install the roof, and Solo Flooring to install the VCT's and the carpet tiles. Pursuant to the project manual Moorefield was required, before installing the VCT's, to ensure the concrete floors were dry with a maximum moisture content of five pounds per 1000 square feet. As to the carpet tiles, the manufacturer's specifications for maximum moisture content of three, four, or five pounds per 1000 square feet were used. According to Moorefield's project manager, however, an emission rate of five pounds was treated as the specification for both the VCT's and the carpet tiles.
JSL filed a complaint against Moorefield and DBO to recover the amounts Best Buy had withheld from rent payments and DBO cross-complained against Moorefield. Moorefield tendered its defense to Navigators, which accepted the defense pursuant to a reservation of rights. JSL sought property damages in the amount of $377,404 and attorney fees pursuant to the terms of the contract between DBO and Moorefield. DBO also sought its attorney fees under the contract. The litigation settled for $1.3 million. JSL received $885,000 while DBO received $425,000. Of this settlement amount, Navigators paid its $1 million policy limit, Moorefield contributed $150,000, and $160,000 was made up of contributions from Best Buy, Solo Flooring, George Roofing and Higgins Construction. Navigators then filed an action seeking a declaration that it had no duty to defend or indemnify Moorefield under its policies. The trial court concluded that there was no duty to defend as the damages did not result from an occurrence. Furthermore, the trial court found Moorefield failed to show by a preponderance of the evidence that any amounts paid in settlement were for attorneys fees or costs falling within the policies' supplementary payments provision. Judgment was entered in favor of Navigators for the full $1 million policy limit plus $68,274 in prejudgment interest. Moorefield appealed.
APPELLATE COURT'S RULING
In agreeing with Navigators that there was no coverage under its policies for the alleged property damage, the appellate court noted that it was undisputed that Moorefield acted deliberately in directing Solo Flooring to install the flooring knowing that moisture emission rates exceeded specifications. Therefore, there was no accident unless there was some additional, unexpected, independent, and unforeseen happening that produced the damage. The trial court found that the flooring failed because of excessive concrete slab moisture and rejected other potential causes, including roof leaks. The evidence established that a decision was made to install the flooring after a cost-benefit analysis; it was decided to ready the store to open for holiday shopping, and deal with any floor problems at a later date. If Moorefield guessed there was little or no risk the flooring would fail, it guessed wrong and a mistake of fact or law does not turn an intentional act into an accident. Navigators had established that "Moorefield knew about and intended to perform defective work with the hope or mistaken belief the defect would not cause property damage. Although there was no evidence that Moorefield intended to cause property damage, under California law, '[t]he insured's subjective intent is irrelevant.' (Citation.)" Since there was no property damage caused by an occurrence, the Navigators policies did not cover the loss.
Moorefield also argued that the trial court erred in finding it had failed to show that a portion of the settlement was for amounts falling within the supplementary payments provision of the Navigators policies. The appellate court agreed. First, the appellate court noted that attorneys fees and costs owed pursuant to contract are allowable as costs of suit and therefore fall within the supplementary payments provisions of the policies. Also, it was determined that Navigators did owe a duty to defend the underlying suit because the trial court denied a motion for summary judgment filed by Navigators and therefore a potential for covered liability was established and a duty to defend owed . Next, the appellate court found that the trial court erred in placing the burden on Moorefield to establish which portion of the settlement amount was for the contractual attorneys fees and costs claim. Instead, Navigators had the burden of proving which portion of the settlement amount was allocable to claims not actually covered by the policy. This was reversible error only if prejudicial, meaning only if there was insufficient evidence to support the implied finding of the trial court that none of the $1 million paid was allocable to the contractual attorneys fees and costs claim. The appellate court determined that the evidence indicated some portion of the settlement was for the attorneys fees and costs claim as the actual property damage claim totaled $377,404 while the case settled for an amount exceeding $1 million. Thus, the matter was remanded for a new trial limited to the question of the amount, to be proven by Navigators, that Moorefield must reimburse from the $1 million paid by Navigators toward settlement, with such amount to be limited to damages for property damage as opposed to attorney fees and costs qualifying as covered supplementary payments.
EFFECTS OF THE COURT'S RULING
This case follows established California law to the effect that an insured's intentional act, even under the insured's mistaken belief that damage will not result, is not an occurrence under a general liability policy. Had the insured been unaware of the moisture test results, potentially a different result would have been reached. But here, the insured was aware of the high moisture content and made a deliberate decision to install the flooring nonetheless following a cost/benefit analysis. This is not the type of loss that should be covered under an occurrence-based liability policy. This case also stands for the proposition that supplementary payments are owed by an insurer that is found to have owed a duty to defend, even when it is ultimately determined that there is no coverage for indemnity purposes. Furthermore, when there is a duty to defend and the action settles, the appellate court concluded it is the insurer's burden to prove which portion of the settlement amount is allocable to uncovered versus covered loss, citing Buss v. Superior Court (1997) 16 Cal. 4th 35. However, Buss dealt with allocation of defense costs between covered and uncovered claims. Therefore, the court treated supplementary payments as essentially costs of defense as opposed to amounts owed for indemnity. Therefore, it is important when an underlying action is settling for an insurer to make certain it develops evidence that will support a proper allocation between uncovered damages and amounts paid to settle any claim falling within the supplementary payments provision of its policy.