News - July 2008

• Homeowners Insurer Must Defend Insured Whose Deliberate Act Allegedly Caused Claimant to Suffer Unintended Injury
• Property Insurer Did Not Assume Duty To Establish Adequate Coverage Limits, And Did Properly Notify Insured Of Elimination Of Guaranteed Replacement Cost Coverage
• Absent “Potential” for Coverage, General Contractor Not Entitled To Defense As “Additional Insured” Under Subcontractor’s Policy
• Indemnity Agreements: Indemnity Clause In Construction Contract Can Impose Duty To “Defend” Even In Absence Of Duty To “Indemnify”

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Homeowners Insurer Must Defend Insured Whose Deliberate Act Allegedly Caused Claimant to Suffer Unintended Injury

The California Court of Appeal has held that a homeowners insurer had a duty to defend its insured against allegations that the insured’s “deliberate act” caused the claimant to suffer an “unintended injury.” (State Farm Fire and Cas. Co. v. Superior Court (2008) WL 2524668)

Facts

Joshua Wright and Jeffrey Lint attended a party. During the evening, the two began to argue. Wright went outside and Lint followed him. Lint then grabbed Wright, picked him up and threw him into the shallow end of a swimming pool. Wright landed on the pool’s concrete step and suffered injuries. As a result of the swimming pool incident, Lint was charged with misdemeanor battery, to which Lint pled nolo contendere.

Wright presented a claim to Lint’s homeowners insurer, State Farm Fire and Casualty Company. In the course of investigating the matter, State Farm obtained a recorded statement from Lint in which Lint stated that “if I wanted to hurt [Wright] ... I would have just hit him, but I didn’t want to hurt him.” State Farm declined to defend or indemnify Lint against Wright’s claim, asserting that Lint’s alleged liability (1) did not result from an “occurrence” as required by the policy’s insuring clause, and (2) fell within the policy’s exclusion for “expected or intended” injuries or “willful and malicious” acts.

Wright filed a personal injury action against Lint, alleging various theories including negligence. During Lint’s deposition, Lint testified that when he followed Wright outside, he did not intend to hurt Wright and simply wanted to talk to Wright. Lint further testified that he threw Wright in the pool “[j]ust to get him wet,” as “horseplay” and as “something to laugh about.” Lint re-tendered his defense to State Farm, but State Farm again refused to defend Lint.

Lint stipulated to a judgment in favor of Wright for $60,000 and assigned his rights against State Farm to Wright. Wright then amended his complaint to include causes of action against State Farm for declaratory relief and breach of contract.

The trial court found that when Lint threw Wright into the pool, Lint only intended to get Wright wet and did not intend to injure Wright in any way. The trial court concluded that Wright’s injury arose from an “occurrence” and was not excluded from coverage, and that State Farm thus had a duty to defend Lint against Wright’s claim. State Farm sought appellate review.

Holding

The Court of Appeal upheld the trial court’s ruling that State Farm was obligated to defend Lint against Wright’s personal injury claim.

The appellate court first addressed whether Wright’s claim against Lint arose from an “occurrence,” or “accident.” The court noted that although Lint deliberately picked Wright up and threw him in the pool, Lint only intended to “get [Wright] wet” and did not intend for Wright to land on the pool step. The court recited the rule that “an ‘accident’ exists when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity.” The court then concluded that “Lint miscalculated one aspect in the causal series of events leading to Wright’s injury, namely, the force necessary to throw Wright far enough out into the pool so that he would land in the water.” Because Lint did not expect or intend that Wright would land on the pool steps where Wright could get injured, Wright’s injury arose from an “occurrence,” or “accident.”

The court next addressed State Farm’s policy exclusion for “bodily injury … (1) which is either expected or intended by the insured; or (2) which is the result of willful and malicious acts of the insured.” According to the court, Wright’s injury was not “expected or intended” by Lint and was not the result of a “willful and malicious act” by Lint. Thus, this exclusion did not relieve State Farm of the duty to defend Lint against Wright’s claim.

Because Wright’s claim against Lint was potentially covered under the State Farm policy, State Farm was obligated to defend Lint against Wright’s claim. 

Comment

Arguably the critical factor in this case is that when the insured threw the claimant into the pool, the insured did not expect or intend to cause any injury to the claimant. Presumably the result would have been different if the insured had performed a deliberate act with the expectation or intention of causing some injury to the claimant. For example, if the insured hit the claimant in the face intending to inflict a relatively minor injury (such as a bloody nose), but had instead inflicted a far more serious injury (such as a fractured skull), it would be more difficult under existing case law to see any potential for coverage.

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Property Insurer Did Not Assume Duty To Establish Adequate Coverage Limits, And Did Properly Notify Insured Of Elimination Of Guaranteed Replacement Cost Coverage

The California Court of Appeal has held that a property insurer did not assume a duty to establish adequate coverage limits, and that the insurer did properly notify the insured that a renewal policy would no longer provide guaranteed replacement cost coverage. (Everett v. State Farm General Ins. Co. (2008) 162 Cal.App.4th 649)

Facts

Agnes Everett purchased a residence and, at the same time, she purchased a homeowner’s policy from State Farm General Insurance Company through agent Bryan Hendry. The policy included an endorsement for guaranteed replacement cost coverage, which provided that State Farm would pay the full amount needed to repair the damaged or destroyed dwelling with like or equivalent construction, without regard to the policy limits.

Later, service of Everett’s policy was transferred to agent Desiree Sarnowski. However, Sarnowski did not inspect the property, nor did Everett request Sarnowski to inspect the property. Everett also never asked Sarnowski to review her policy or increase the limits.

Eventually, State Farm eliminated the guaranteed replacement cost coverage in its homeowner policies. To provide its insureds with warning, State Farm sent each policyholder a notice of the change in coverage. In the notice, State Farm informed its insureds that if they chose to renew their homeowners policies with State Farm, guaranteed replacement cost coverage no longer would be available. Portions of the notice contained red or bold-faced, large capital letters. The notice further specified the changes to the policy in a second boldfaced, capitalized heading entitled “REDUCTIONS OR ELIMINATIONS OF COVERAGE.” The notice explained that guaranteed replacement cost coverage had been eliminated, that the policy “now has a stated limit of liability under Coverage A that reflects the maximum that will be paid in case of loss” and that the “policy no longer provides a guarantee to replace your home regardless of the cost.”

Everett accepted the renewal policy with State Farm when her premium for the renewal policy was paid via a check from a lender’s impound account. In several subsequent years, State Farm sent a renewal certificate which stated the following: “The State Farm replacement cost is an estimated replacement cost based on general information about your home. It is developed from models that use cost of construction materials and labor rates for like homes in the area. The actual cost to replace your home may be significantly different. State Farm does not guarantee that this figure will represent the actual cost to replace your home. You are responsible for selecting the appropriate amount of coverage and you may obtain an appraisal or contractor estimate which State Farm will consider and accept, if reasonable. Higher coverage amounts may be selected and will result in higher premiums.”

In addition to the annual renewal certificate, every two years State Farm mailed to its California insureds, including Everett, a “California Residential Property Insurance Disclosure.” The disclosure was provided in compliance with Insurance Code section 10102. It explained the terms “replacement cost” and “extended replacement cost,” as written by the Legislature.

After her house was destroyed by fire, Everett submitted a claim to State Farm. State Farm paid the stated policy limit, which amount was insufficient to cover the cost of replacing the house. Everett initiated an action against State Farm and its agent, Sarnowski. Among other things, Everett alleged that State Farm had a duty to provide Everett with limits sufficient to pay for replacement of the dwelling. In addition, Everett alleged that State Farm failed to provide her with sufficient notice that State Farm had eliminated guaranteed replacement cost coverage and that, therefore, the guaranteed replacement cost coverage remained in effect at the time of the fire.

Holding

The Court of Appeal rejected all of Everett’s contentions. With regard to Everett’s contention that State Farm had a duty to provide Everett with limits sufficient to pay for replacement of the dwelling, the Court noted that each year that Everett had her insurance with State Farm, State Farm sent renewal certificates. These certificates reminded Everett that the replacement cost figure identified by State Farm was merely an estimate, and that it was her responsibility to determine whether her property was adequately insured. Thus, the Court held that “contrary to Everett’s contention that it was State Farm’s duty to maintain policy limits equal to replacement cost, Everett bore such duty.” 

With regard to Everett’s contention that State Farm failed to provide adequate notice of the elimination of the guaranteed replacement cost coverage, the Court held that State Farm’s notice of the policy changes (portions of which contained red or bold-faced, large capital letters) was “more than sufficient.”

Comment

 This appears to be the first reported decision in which a California appellate court has addressed the issue of whether a property insurer has a duty to establish adequate coverage limits. Based on the clearly-worded renewal certificates that State Farm sent to Everett, the Court concluded that Everett—not State Farm—had the duty to set appropriate limits for her property.

With regard to changes in coverage in renewal policies, Insurance Code section 678 provides that, when an insurer offers to renew a policy, the insurer must notify the insured of any “reduction of limits” or “elimination of coverage.” If the insurer’s offer to renew does not explain the coverage changes in plain, clear and conspicuous terms, then the broader coverage provided by the prior policy remains in force until the insurer satisfies the notice requirements. Here, State Farm satisfied the statutory requirements by issuing a notice that highlighted the changes red or bold-faced, large capital letters.

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Absent "Potential" for Coverage, General Contractor Not Entitled To Defense As "Additional Insured" Under Subcontractor’s Policy

The California Court of Appeal has held that, in the absence of a “potential” for coverage, a general contractor was not entitled to a defense as an “additional insured” under a subcontractor’s liability policy. (Monticello Insurance Company v. Essex Insurance Company (2008) 162 Cal.App.4th 1376)

Facts

Martina and Georgean Goldman hired Blumenfeld Construction Company to act as general contractor for the construction of the Goldmans’ residence. Blumenfeld in turn hired Dana Drywall to act as drywall subcontractor for the project.

Following completion of construction, the Goldmans filed a construction defect action against the general contractor, Blumenfeld. In their complaint, the Goldmans alleged that their house suffered from various defects, including “excessive cracking in the interior and exterior of the property,” “premature failure of painted surfaces” and “water damage to structure.” Blumenfeld tendered defense of the construction defect action to its own insurer, Monticello Insurance Company, and Monticello agreed to defend Blumenfeld in the action.

Blumenfeld filed a cross-complaint for indemnity against various subcontractors, including Dana Drywall. Dana Drywall tendered defense of the cross-complaint to its insurer, Essex Insurance Company, and Essex agreed to defend Dana Drywall against the cross-complaint.

Later, Blumenfeld tendered defense of the action to Dana Drywall’s insurer, Essex, on the ground that Blumenfeld was an “additional insured” on Dana Drywall’s policy through Essex. The Essex policy did contain an endorsement stating that Blumenfeld is “an additional insured under this policy, but only as respects negligent acts or omissions of [Dana Drywall] and only for occurrences, claims or coverages not otherwise excluded in the policy. It is further understood that where no coverage shall apply herein for [Dana Drywall], no coverage nor defense shall be afforded to [Blumenfeld].” Essex rejected Blumenfeld’s tender.

The construction defect action settled. Thereafter, Blumenfeld’s insurer, Monticello, filed a contribution action against Essex. Monticello essentially alleged that Monticello and Essex both had a duty to defend Blumenfeld in the underlying construction defect action, and that Monticello was therefore entitled to recover from Essex a share of Blumenfeld’s defense costs.

The trial court ruled that Monticello failed to prove it was entitled to contribution from Essex, and thus entered judgment in favor of Essex. Monticello appealed.

Holding

The Court of Appeal affirmed, holding that Monticello had failed to show that the Goldmans’ claims against Blumenfeld in the underlying construction defect action were potentially covered under Dana Drywall’s policy through Essex. The court reasoned that while the complaint in the underlying action did contain allegations of “excessive cracking,” “premature failure of painted surfaces” and “water damage to structure,” there were no allegations that those damages were in any way related to the work of Dana Drywall. According to the appellate court, Essex was “not required to speculate” that these damages might be attributable to the work of Dana Drywall.

The court also held that Monticello could not rely on the Goldmans’ “defect list” from the underlying construction defect action to establish that Essex had a duty to defend Blumenfeld in the underlying action. The court noted that while Monticello had introduced the defect list into evidence in the contribution action, Monticello failed to prove that the defect list was ever provided to Essex during the pendency of the underlying construction defect action. Because there was no proof that Essex ever had the defect list while the underlying action was pending, Monticello could not rely on the defect list to prove that Essex had a duty to defend Blumenfeld.

Nor was it sufficient that Blumenfeld’s cross-complaint against Dana Drywall contained allegations that Dana Drywall was negligent. According to the court, Blumenfeld’s cross-complaint for indemnity “does nothing to alter the fact that the Goldmans, the plaintiffs in the main action, the action for which a defense is sought, did not allege covered damages against Dana Drywall.”

Comment 

This case stands for the proposition that when a participating insurer sues a non-participating insurer for contribution of defense costs, the participating insurer must prove that the facts supporting a “potential” for coverage were known by the non-participating insurer during the pendency of the underlying lawsuit. Absent such proof, the participating insurer is not entitled to contribution from the non-participating insurer.

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Indemnity Agreements: Indemnity Clause In Construction Contract Can Impose Duty To "Defend" Even In Absence Of Duty To "Indemnify"

In a recent case arising in a noninsurance context, the California Supreme Court ruled that a contractual indemnity clause required a subcontractor to “defend” a developer against claims involving the subcontractor’s work, even though the subcontractor was later found not negligent and thus had no duty to “indemnify” the developer.

In Crawford v. Weather Shield Mfg., Inc. (2008) WL 2789215, a developer entered into a subcontract with a window manufacturer pursuant to which the window manufacturer supplied windows for one of the developer’s residential housing projects. The written subcontract contained a clause stating that the window manufacturer would (1) “indemnify … [the developer] against all claims … growing out of execution of the work, and (2) “defend any suit or action brought against [the developer] founded upon the claim of such damage.”

After the project was completed, numerous homeowners filed construction defect actions against the developer, the window manufacturer and other parties. Among other things, the homeowners alleged that the window manufacturer had improperly designed and manufactured the windows, causing them to leak and fog. The developer tendered its defense to the window manufacturer, but the window manufacturer refused to defend. The developer then filed a cross-complaint for contractual indemnity against the window manufacturer, seeking to recover the costs of any settlement or judgment in favor of the homeowners, plus the costs of defending against the homeowners’ claims.

The homeowners settled their claims against the developer. The homeowners then proceeded to trial against the window manufacturer, but the jury found that the window manufacturer was not negligent. In a subsequent bench trial on the developer’s cross-complaint for indemnity against the window manufacturer, the trial court ruled that even though the window manufacturer had been found not negligent and thus had no duty to “indemnify” the developer for its settlement with the homeowners, the window manufacturer had a separate duty to “defend” the developer and thus had to pay the developer’s defense costs related to claims involving the windows.

The California Supreme Court affirmed the trial court’s ruling requiring the window manufacturer to pay the developer’s defense costs related to window claims. The Supreme Court acknowledged that contractual indemnity clauses should be narrowly construed against the party seeking indemnification. However, the Supreme Court concluded that even construing the subject indemnity clause narrowly, the clause expressly and unambiguously required the window manufacturer to “defend” the developer against suits alleging window problems.

Thus, the window manufacturer had an obligation to “defend” the developer against the window claims, even though the window manufacturer was ultimately found not negligent and thus had no duty to “indemnify” the developer for amounts paid in settlement of the window claims. In the course of its opinion, the Supreme Court specifically overruled a prior Court of Appeal decision, Regan Roofing Co. v. Superior Court (1994) 24 Cal.App.4th 425, which had reached a contrary result.

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