News - April 2007

• Subcontractors’ Insurers Who Defend Developer as “Additional Insured” Can Recover Portion of Defense Costs from Developer’s Excess Insurer
• Coverage for Property for Which Insured is “Legally Liable” Applies to Bailed Property, and Is Not Liability Insurance
• Two Insurers Must Share UM/UIM Loss on Pro Rata Basis

< Return to News page

Top of Page

Subcontractors’ Insurers Who Defend Developer as "Additional Insured" Can Recover Portion of Defense Costs from Developer's Excess Insurer

The California Court of Appeal has held that subcontractors’ insurers who defended a developer as an “additional insured” were entitled to recover a portion of the developer’s defense costs from the developer’s own excess insurer. (Transcontinental Ins. Co. v. Insurance Co. of the State of Pennsylvania (2007) WL 604372)

Facts

Barratt American, Inc. acted as developer of a housing project. Barratt hired numerous subcontractors to work on the project, and several of the subcontractors’ insurers named Barratt as an additional insured for claims “arising out of” the subcontractors’ work.

After the project was completed, the homeowners association sued Barratt for alleged construction defects, false advertising and breach of fiduciary duty. Barratt initially obtained a defense from its own primary carrier, United National Insurance Company, but United National soon exhausted its policy (apparently on other claims).

Barratt next tendered the defense to its own excess insurer, Insurance Company of the State of Pennsylvania (ISOP), and to various insurers who had named Barratt as additional insured, including Transcontinental Insurance Company and related insurers (collectively Transcontinental). ISOP initially paid $600,000 in defense costs on behalf of Barratt, but then asserted that it had no duty to defend Barratt and demanded reimbursement from Transcontinental.

Transcontinental reimbursed ISOP for the defense costs ISOP had already paid on behalf of Barratt, and then proceeded to pay an additional $1.2 million in defense costs on behalf of Barratt. Transcontinental made all payments under a reservation of rights to seek reimbursement from ISOP.

Transcontinental later brought an equitable subrogation/contribution action against ISOP, claiming that ISOP had a duty to pay a share of Barratt’s defense costs. The trial court ruled in favor of Transcontinental, finding that ISOP was obligated to pay a portion of Barratt’s defense costs. ISOP appealed.

Holding

The Court of Appeal affirmed. The court acknowledged that under Presley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal.App.4th 571, Transcontinental had a prophylactic duty to defend its additional insured, Barratt, against all claims asserted in the underlying action. However, under Buss v. Superior Court (1997) 16 Cal.4th 3, Transcontinental was also entitled to reimbursement from Barratt of defense costs for claims that did not potentially arise out of work performed by the subcontractors insured by Transcontinental. Moreover, according to the court, the claims against Barratt that were not potentially covered by Transcontinental’s policies were potentially covered by ISOP’s excess policy.

The court thus concluded that since Transcontinental had paid defense costs on behalf of Barratt for claims which were not potentially covered under the Transcontinental policies but which were potentially covered under the ISOP excess policy, Transcontinental was “equitably subrogated” to Barratt’s rights to recover those defense costs from ISOP. Transcontinental could thus recover a share of Barratt’s defense costs from ISOP.

Comment

This case illustrates that an insurer who has a duty to defend an insured in a “mixed” action must provide the insured with a full and complete defense against all claims asserted in the action. However, the insurer who discharges its duty to defend can then seek reimbursement of defense costs for the “uncovered” claims, either from the insured (directly) or another insurer (via subrogation).

Top of Page

Coverage for Property for Which Insured is "Legally Liable" Applies to Bailed Property, and Is Not Liability Insurance

The California Court of Appeal has held that employee dishonesty coverage for property for which an insured is “legally liable” applies when property has been bailed or entrusted to the insured, and is not third-party liability insurance. (Simon Marketing v. Gulf Ins. Co.(2007) 2007 WL 738975)

Facts

Simon Marketing, Inc. performed promotional and marketing services for McDonald’s Corporation. As part of these services, Simon designed promotional games for McDonald’s and its franchisees.

Jerome Jacobson, Simon’s director of security, was responsible for “seeding” high-value winning game tickets across the nation in McDonald’s giveaway contests. Unbeknownst to Simon, Jacobson organized a network of accomplices and co-conspirators to funnel high-value winning game tickets to specific individuals. According to Simon, Jacobson stole game pieces with a total redemption value of approximately $21 million, and received kickbacks from the putative “winners.”  When the “winners” presented the game pieces, McDonald’s (not Simon) issued payments. Jacobson ultimately was arrested, pled guilty and was sentenced to prison.

Federal Insurance Company and Gulf Insurance Company issued policies providing coverage for “direct” losses to property caused by theft or forgery committed by Simon’s employees. Federal’s policy included coverage for theft of property for which Simon was “legally liable.”

After Jacobson’s dishonesty was discovered, McDonald’s terminated its contracts with Simon. In addition, Simon became embroiled in various pieces of litigation with McDonald’s, consumers, and other third parties. McDonald’s ultimately held new giveaway contests, which McDonald’s and its insurers funded.

Simon sued its insurers, Federal and Gulf, essentially alleging that Simon had gone out of business as a result of Jacobson’s fraud. Among other things, Simon alleged (1) the complete loss of its business; (2) out-of-pocket expenses incurred in winding down its business affairs; (3) payments to settle lawsuits; and (4) defense costs incurred in some of the lawsuits. The trial court granted summary in judgment in favor of Federal and Gulf, and Simon appealed.

Holding

The Court of Appeal affirmed, rejecting Simon’s contention that coverage existed because Simon was “legally liable” for the theft of the game pieces. The Court noted that coverage in an employee dishonesty policy for theft of property for which an insured is “legally liable” does not transform the policy into a liability policy. Instead, coverage for theft of property for which an insured is “legally liable” is intended to apply to property for which the insured is a bailee or trustee. In any event, noted the Court, McDonald’s (not Simon) had paid for the stolen prizes by funding new giveaway contests.

The Court also noted that the litigation costs associated with the various lawsuits were not “direct” losses, but rather related to Simon’s liability for third party losses caused by the tortious acts of Jacobson. In addition, the Court held that the failure of Simon’s business because McDonald’s and others cancelled its contracts with Simon did not constitute physical loss or damage to insured property. Similarly, the Court held that payments to settle litigation, costs of defense and costs of winding up its business did not constitute physical damage to property.

Comment

The reasoning of this case is somewhat obscure, largely because the two policies contained insuring agreements and exclusions with somewhat differing language. Ultimately, the Court relied on the fact that both policies essentially were property insurance policies and that it was McDonald’s (not Simon) that paid to fund the new contests.

Top of Page

Two Insurers Must Share UM/UIM Loss on Pro Rata Basis

The Appellate Division has held that where two insurers provide UM/UIM coverage arising out of a loss, the insurers are obligated to share the loss on a pro rata basis, even though one policy specifically describes the vehicle in which the insured was riding. (State Farm Mutual Automobile Insurance Co. v. Progressive Marathon Insurance Co. (2007) 148 Cal.App.4th Supp. 1)

Facts

An uninsured motorist injured Julie Deam, who was a passenger in a Volkswagen Jetta that a third party owned. Progressive Marathon Insurance Company insured the Jetta pursuant to a policy that provided passengers like Deam with UM/UIM coverage limits of $15,000/$30,000.

At the time of the accident, Deam was a resident of her parents’ household and therefore qualified as an “insured” on a policy State Farm Mutual Automobile Insurance Company had issued to Deam’s parents. State Farm’s policy had UM/UIM coverage limits of $25,000/$50,000.

The two insurers agreed to settle Deam’s UM claim for $9,800. Progressive paid $3,626 and State Farm paid $6,174, representing each insurer’s pro rata share of the settlement amount based on policy limits. At the time of the settlement, State Farm reserved the right to seek reimbursement from Progressive.

After the settlement, State Farm filed a complaint against Progressive for equitable contribution and indemnity. In its complaint, State Farm asserted that Progressive’s UM coverage was “primary,” that Progressive should have borne the entire loss and that Progressive was obligated to reimburse State Farm for the amount State Farm paid on Deam’s claim. The trial court ruled in favor of Progressive, holding that Progressive and State Farm were liable for a pro rata share of the settlement amount based on their respective policy limits.

Holding

The Appellate Division of the Superior Court affirmed.

According to the Court, resolution of the dispute turned, in part, on the interpretation of Insurance Code section 11580.9 (d), which provides that “where two or more policies affording valid and collectible liability insurance apply to the same motor vehicle … in an occurrence out of which a liability loss shall arise, it shall be conclusively presumed that the insurance afforded by that policy in which the motor vehicle is described or rated as an owned automobile shall be primary and the insurance afforded by any other policy or policies shall be excess.” After an exhaustive review of various statutes, the Court held that the term “liability” insurance does include uninsured motorist coverage. However, the Court held that although the Progressive policy clearly did “apply” to the Jetta, the State Farm policy did not “apply” to the Jetta. Thus, since both policies did not “apply” to the Jetta, section 11580.9 (d) did not make Progressive’s policy primary.

The Court then noted that Insurance Code section 11580.2 (d) -- which specifically governs UM/UIM coverage -- states that “the policy…may provide that if the insured has insurance available to the insured under more than one uninsured motorist coverage provision, any damages shall not be deemed to exceed the higher of the applicable limits of the respective coverages, and the damages shall be prorated between the applicable coverages as the limits of each coverage bear to the total of the limits.” Here, each policy contained a pro rata “other insurance” clause, and each insurer paid a pro rata amount based on limits. Thus, State Farm was not entitled to reimbursement of the portion paid toward the settlement.

Comment

This is a case of first impression in California. The Court ultimately concluded that in light of the specific language of section 11580.2 (d) and the language of the policies themselves, the UM loss should be prorated between the insurers based on their respective policy limits.

Top of Page