News - August 2006

• "Auto" Exclusion Bars Coverage for Insured’s Negligence in Leaving Children in Parked Car
• In Contribution Action, If Participating Insurer Proves Potential for Coverage, Non-Participating Insurer Must Prove Absence of Actual Coverage
• Liability Insurer Entitled to Contribution from Coinsurer Who Had Obtained Release from Mutual Insured
• UM/UIM: California UM Claimant Can Recover Costs Allowed By C.C.P. § 998, Even If Award and Costs Exceed Policy Limit

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"Auto" Exclusion Bars Coverage for Insured’s Negligence in Leaving Children in Parked Car

The California Court of Appeal has held that a liability policy’s “auto” exclusion barred coverage for an insured’s alleged negligence in leaving her foster children in a parked car where they died from heat exposure. (Prince v. United National Insurance Company (2006) 2006 WL 2439858)

Facts

Leslie Smoot was the foster mother of Dakota Prince-Smith and Nate Prince-Smith. On a hot summer day, Smoot drove her car with the two foster children as passengers. Smoot then parked the car and left the children in the car for six hours. The children, who were strapped into their car seats, died from heat exposure.

The decedent children’s natural parents, Twila Prince and David Smith, filed a wrongful death action against Smoot. Smoot tendered defense of the wrongful death action to various liability insurers, including United National Insurance Company, which had issued a “Foster Parent Liability Policy.”  Although the United National policy apparently included Smoot as an insured, the policy contained an exclusion for bodily injury “arising out of the … use … of any … auto …owned … by … any insured.”  United National, citing the policy’s “auto” exclusion, refused to participate with the other insurers in defending and indemnifying Smoot in the wrongful death action.

The participating insurers eventually settled Smoot’s liability to Prince and Smith in the wrongful death action. As part of the settlement, the participating insurers assigned to Prince and Smith the participating insurers’ contribution rights against United National.

Armed with the assignment, Prince and Smith then sued United National. However, the trial court ruled that the United National policy’s “auto” exclusion applied, and that United National thus had no duty to participate in defending or indemnifying Smoot in the underlying wrongful death action. The trial court thus entered judgment in favor of United National.

Holding

The Court of Appeal affirmed, holding that Smoot’s “use” of her vehicle was a “predominating cause of” and “substantial factor in” the deaths of her foster children. According to the court, Smoot’s negligence in leaving the children in the hot vehicle was not “independent from” her use of the vehicle. To the contrary, it was Smoot’s negligence in leaving the children in the vehicle that subjected the children to the extreme temperatures causing their deaths. Under such circumstances, the United National policy’s “auto” exclusion applied and United National had no duty to defend or indemnify Smoot in the underlying wrongful death action.

Comment

The appellate court reiterated that under California law, injuries can be found to arise out of the insured’s use of a vehicle even if the vehicle is parked. However, the court also emphasized that in this particular case, the insured’s vehicle was not merely “the situs” of the injury; rather, the vehicle itself was “the instrumentality” of the injury.

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In Contribution Action, If Participating Insurer Proves Potential for Coverage, Non-Participating Insurer Must Prove Absence of Actual Coverage

The California Court of Appeal has held that in an equitable contribution action to recover settlement costs, a participating insurer must only show a potential for coverage under the non-participating insurer’s policy, and the burden then shifts to the non-participating insurer to prove the absence of actual coverage. (Safeco Insurance Company of America v. Superior Court (2006) 40 Cal.App.4th 874)

Facts

The insureds, a group of construction companies, purchased primary general liability policies from either Safeco Insurance Company of America or American States Insurance Company (collectively, Safeco), and later purchased additional primary general liability policies from Century Surety Company (Century). Numerous parties filed lawsuits against the insureds alleging property damage occurring during the Safeco and Century policy periods. Safeco defended the insureds and settled the suits. However, Century refused to participate in the defense or settlements, asserting that the Century policies had an “other insurance” provision which made the Century coverage “excess” to any other available coverage.

Safeco filed an equitable contribution action against Century to recover a portion of the defense costs and settlement costs Safeco had paid on behalf of the insureds. The trial court ruled in favor of Safeco and against Century on the “other insurance” issue. The trial court then ruled that in order to recover defense costs, Safeco only had to prove a potential for coverage under Century’s policies, but that in order to recover settlement costs, Safeco had to prove actual coverage under Century’s policies.

Holding

In subsequent proceedings in the Court of Appeal, the parties agreed that to obtain contribution toward defense costs, Safeco only had to establish a potential for coverage under Century’s policies. However, the parties disagreed about what showing Safeco had to make in order to obtains contribution toward settlement costs – with Safeco arguing that it only had to establish a potential for coverage under Century’s policies, and Century arguing that Safeco had to establish actual coverage under Century’s policies.

The Court of Appeal ruled in favor of Safeco, holding that in order for Safeco to recover a portion of the settlement costs from Century, Safeco only had to show a potential for coverage under Century’s policies. The court held that once Safeco established a potential for coverage under Century’s policies, the burden would shift to Century to establish the absence of actual coverage under its policies. The court reasoned that when a duty to defend is shown, a non-participating insurer waives its right to challenge the reasonableness of the amount of a settlement. The non-participating insurer retains the right to raise other coverage defenses as affirmative defenses in a contribution action, but the non-participating insurer has the burden of proof on those issues. Since it was clear that Century had a duty to defend, and since the underlying settlements were presumptively reasonable, the burden was on Century to prove that there was no coverage under its policies.

Comment

Generally speaking, the court’s ruling should make it easier for a participating insurer to recover contribution from a non-participating insurer when the underlying case was resolved by settlement. Once the participating insurer shows that there was a potential for coverage, the non-participating insurer will have to show that there was no actual coverage. In many cases, the non-participating insurer will have difficulty meeting that burden.

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Liability Insurer Entitled to Contribution from Coinsurer Who Had Obtained Release from Mutual Insured

The California Court of Appeal has held that a liability insurer may obtain equitable contribution from a coinsurer for defense costs paid on behalf of a mutual insured, even though the mutual insured had previously signed a release in favor of the coinsurer. (Employers Insurance Company of Wausau v. Travelers Indemnity Company (2006) 141 Cal.App.4th 398)

Facts

Beginning in 1958 and continuing for years thereafter, Whitman Corporation (Whitman) allegedly released hazardous contaminants into the environment. During some of these years, Whitman had liability policies through Employers Insurance Company of Wausau (Wausau); during other years, Whitman had liability policies through Travelers Indemnity Company and other insurers (collectively, Travelers). All of the policies provided for a substantially similar duty to defend.

In 1997 and 1998, Whitman and Travelers entered into settlement agreements to resolve coverage disputes arising from certain environmental contamination lawsuits. Pursuant to the settlements, Travelers paid Whitman $24 million. In exchange, Whitman released Travelers from any duty to defend or indemnify Whitman from any past, present and future environmental claims.

Later, in 1999 and 2001, several hundred plaintiffs filed new lawsuits against Whitman alleging bodily injury and property damage due to environmental contamination. Wausau defended Whitman in the new lawsuits; Travelers did not.

Wausau later sued Travelers seeking equitable contribution toward Whitman’s defense costs in the new lawsuits. Travelers argued that Wausau had no right to contribution because Whitman, as part of the earlier settlements, had released Travelers from any obligation to defend and indemnify Whitman against past, present or future environmental lawsuits. In addition, Travelers argued that its prior settlements with Whitman reflected Whitman’s and Travelers’ “mutual intention” that the Travelers policy limits would be exhausted, thereby eliminating any future obligation to defend. The trial court rejected Travelers’ arguments and held that Wausau was entitled to contribution from Travelers for the costs of defending Whitman in the new lawsuits.

Holding          

The Court of Appeal affirmed, holding that Travelers’ earlier settlements with Whitman did not extinguish any obligation Travelers might have to contribute with Wausau toward Whitman’s defense in the new lawsuits. According to the court, an insurer cannot avoid contribution to other insurers simply by settling with the insured. To allow such a result would frustrate the purpose of equitable contribution, which is to “accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of the others.”

The court also held that there was no showing that the Travelers policy limits had been exhausted. While Whitman and Travelers were free to agree as between themselves to “deem” the Travelers policy limits “exhausted,” there was no evidence that the earlier settlements had actually exhausted the Travelers policy limits. Whitman’s agreements with Travelers could not defeat Wausau’s contribution rights.  

Comment

The right to equitable contribution belongs to each insurer individually. It is not based on any right of subrogation to the rights of the insured, and is not equivalent to “standing in the shoes” of the insured. An insurer that otherwise has a right to contribution from other insurers will not lose that right by virtue of separate agreements or releases the insured makes with the other insurers.

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UM/UIM: California UM Claimant Can Recover Costs Allowed By C.C.P. § 998, Even If Award and Costs Exceed Policy Limit

In Pilimai v. Farmers Insurance Exchange Co. (2006) 39 Cal.4th 133, Isofea Pilimai was injured in an auto accident with an uninsured driver. Pilimai filed a petition to compel arbitration under the uninsured motorist provisions of an auto policy he had purchased from Farmers Insurance Exchange. The Farmers policy had UM limits of $250,000.

Prior to the arbitration, Pilimai served Farmers with an offer to settle for $85,000, pursuant to California Code of Civil Procedure § 998. Farmers rejected the offer. At the conclusion of the arbitration, the arbitrator awarded Pilimai damages of $556,972.

Pilimai and Farmers both filed petitions to confirm the arbitration award. Pilimai contended that he was entitled to recover the policy limits, plus the costs he was entitled to under CCP § 998 and prejudgment interest. Farmers contended that Pilimai was only entitled to recover the policy limits.

The California Supreme Court held that when a UM insurer rejects a CCP § 998 offer and the insured then obtains a more favorable arbitration award, the insured is entitled to recover costs authorized by that statute. This is true even though the costs plus the damages awarded to the insured exceed the policy’s maximum coverage.

The Court also held that an insured in a UM proceeding is not entitled to recover prejudgment interest. The Court reasoned that pursuant to California Civil Code § 3291, prejudgment interest is only recoverable in an action for personal injury caused by the tort of another. According to the Court, an arbitration proceeding brought by an insured against his insurer is not such an action.

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