News - June 2007

• In “Continuous Injury” Case, Presence of Other Available Insurance Relieves CIGA of Duty to Contribute
• In Reimbursement Claim, Whether Insured is “Made Whole” is Determined Without Deducting Attorney Fees and Costs
• Insurer Has No Duty to Defend Wife Against Claims Arising From Husband’s Molestation of Granddaughters
• Defense of Administrative Proceedings

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In "Continuous Injury" Case, Presence of Other Available Insurance Relieves CIGA of Duty to Contribute

The California Court of Appeal has held that in a “continuous and progressive injury” case, the presence of other available insurance relieved the California Insurance Guarantee Association of any duty to contribute toward a judgment against the insured. (Stonelight Tile, Inc. v. California Insurance Guarantee Association (2007) 150 Cal.App.4th 19)

Facts

Stonelight Tile, Inc. operated a tile manufacturing business. Beginning in 1988, Diversified Recycling Services, Inc. operated a recycling business at an adjacent property. Over the next six years, Diversified’s recycling generated significant amounts of dust, which interfered with Stonelight’s business operations and caused health problems to Stonelight’s personnel.

In July 1994, Stonelight and its president David Anson filed suit against Diversified for nuisance, negligence, battery, trespass to land, and intentional and negligent infliction of emotional distress. Prior to trial, the trial court issued a ruling that restricted Stonelight and Anson to proof of events within the applicable statutes of limitations. As a result, Stonelight and Anson were not allowed to offer evidence of (1) nuisance or trespass claims or damages arising before July 1991 or (2) personal injury tort claims or damages arising before July 1993. Following trial, the jury returned a general verdict totaling approximately $1.2 million in favor of Stonelight and Anson and against Diversified. The judgment was affirmed on appeal.

During the period of time for which damages were awarded (i.e., July 1991 through July 1994), Diversified had general liability coverage through four insurers:  Superior National Insurance Company, Transamerica Insurance Company, CIGNA Property and Casualty Company and Continental Insurance Company. The first insurer (Superior National) became insolvent and its claims were taken over by the California Insurance Guarantee Association (CIGA). The remaining three insurers (Transamerica, CIGNA and Continental) all remained solvent.

After the underlying action was concluded, Stonelight and Anson brought a “direct action” action against Diversified’s three solvent insurers and CIGA in an effort to collect the underlying judgment. Stonelight and Anson later settled with the three solvent insurers for amounts which neither exhausted the solvent insurers’ policies nor completely satisfied the underlying judgment. CIGA then moved for summary judgment asserting that since the three solvent insurers had each been obligated to pay the full amount of the underlying judgment, there was “other insurance” available to satisfy the judgment and, hence, no “covered claim” that CIGA could pay. The trial agreed and granted summary judgment in favor of CIGA.

Holding   

The Court of Appeal affirmed. It reasoned that under California’s “continuous injury” trigger of coverage, each insurer that covers a continuing or progressive loss claim has an independent obligation to respond to the loss in full. Thus, each of the three solvent insurers had been obligated to cover the full amount of the underlying judgment. Accordingly, because there was “other insurance” available to satisfy the underlying judgment, the underlying judgment did not qualify as a “covered claim” (see Ins. Code § 1063.1(c)(9),  and CIGA was thus prohibited from paying it. Under such circumstances, Stonelight and Anson could not recover the unsatisfied portion of the underlying judgment from CIGA.

Comment

It appears that Stonelight and Anson as judgment creditors may have settled “too cheaply” when they accepted amounts which were less than the solvent insurers’ policy limits and which did not cover the full amount of the underlying judgment. Since the three solvent insurers had in fact been obligated to pay the full amount of the underlying judgment, Stonelight and Anson could not rely on CIGA to make up the difference.

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In Reimbursement Claim, Whether Insured is "Made Whole" is Determined Without Deducting Attorney Fees and Costs

The California Court of Appeal has held that, when a first-party insurer asserts a claim for reimbursement, the issue of whether the insured has been “made whole” is determined without deducting the attorney fees and costs the insured incurred in pursuing recovery against a third-party tortfeasor. (Allstate Insurance Company v. Superior Court (2007) WL 1704017)

Facts

Tony Delanzo suffered injuries in an automobile accident with a third party. Delanzo’s own insurer, Allstate, paid Delanzo $4,203.36 in first-party medical payments benefits. Delanzo then settled his claim against the third-party tortfeasor for $11,000.00, but incurred attorney fees and costs of $5,926.84 in this process.

Allstate’s policy contained the following provision: “Subrogation Rights When we pay, your rights of recovery from anyone else become ours up to the amount we have paid. You must protect these rights and help us enforce them.” Allstate initially requested that Delanzo repay the entire $4,203.36 under this provision. However, Allstate offered to accept a reduced amount of $1,696.13. Allstate’s willingness to accept this reduced amount was based on the common-fund rule, which requires an insurer to reimburse a pro rata portion of the insured’s attorney fees and costs incurred to recover covered losses against a third party tortfeasor when the insurer had knowledge of, but did not participate in, the litigation against the tortfeasor.

Delanzo sued Allstate for (1) violation of Business and Professions Code section 17200, (2) conversion, (3) unjust enrichment, and (4) declaratory relief. Delanzo did not dispute that the $11,000.00 settlement amount constituted full compensation for his injuries from the third party, but alleged he was not “made whole” by this amount because his total gross recovery of $15,203.36 (i.e., $4,203.36 paid by Allstate plus $11,000.00 paid by the third party) minus $5,926.84 (the attorney fees and costs Delanzo incurred to obtain this settlement) was less than $11,000.00.

Allstate asserted that, on these facts, Delanzo had not stated any cause of action, but the trial court disagreed. Allstate then sought relief in the Court of Appeal, which found in favor of Allstate.

Holding

An insurer that pays benefits to its insured under a first-party policy generally is entitled to reimbursement from funds a third-party has paid. The right of reimbursement may arise by statute, by contract or by equity. If the insured incurs attorney fees and costs in pursuing recovery, and if the insurer does not participate in seeking that recovery, the common fund rule obligates the insurer to reimburse the insured a pro rata portion of those fees and costs. One exception to the rule in favor of reimbursement is the common law “made whole” doctrine, which provides that an insurer is not entitled to these funds unless the insured first has been made whole by the recovery from the third-party tortfeasor.

In this case, the Court of Appeal held that the issue of whether the insured has been “made whole” must be determined without regard to attorney fees and costs the insured incurred in obtaining the recovery against the third party. Because Allstate already had borne a pro rata portion of the fees and costs Delanzo incurred in obtaining the recovery, Delanzo had been made whole, and Allstate was entitled to reimbursement of $1,696.13.

Comment

Courts in many jurisdictions, including California, hold that parties may avoid the made-whole exception by contract. However, the contractual language must clearly specify that the parties intend to permit the insurer to obtain reimbursement even if the insured has not been made whole. Here, Allstate did not claim the reimbursement provision in Delanzo’s insurance contract was sufficiently clear and specific to negate the made-whole rule.

Additionally, the made-whole exception does not apply if the insurer participated in prosecuting the claim against the third party. Here, Allstate did not claim it had participated with Delanzo in the lawsuit against the third-party tortfeasor.

The Court of Appeal’s ruling in this case directly conflicts with a recent ruling by the Ninth Circuit Court of Appeals in Chong v. State Farm Mut. Auto. Ins. Co. (S.D. Cal. 2006) 428 F.Supp.2d 1136.

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Insurer Has No Duty to Defend Wife Against Claims Arising From Husband’s Molestation of Granddaughters

The United States District Court for the Southern District of California has concluded that an insurer did not have any duty to defend a woman against claims arising from her husband’s alleged sexual molestation of their granddaughters. (Miller v. Allstate Ins. Co. 2007 WL 1672134) 

Facts

David Combs repeatedly molested his young granddaughters, Alison and Cecilia, over the course of their childhood. Mr. Combs’ wife, Myriam Combs, allegedly stood by while the molestations occurred, either unaware of the conduct or unwilling to stop it.

Alison and Cecilia repressed memories of the molestation until adulthood. At that point, they filed suit against their grandfather, Mr. Combs, for sexual assault, battery and intentional infliction of emotional distress, and their grandmother, Mrs. Combs, for negligence.    

During the years of abuse, Mr. and Mrs. Combs were named insureds on four policies issued by Allstate Insurance Company: a homeowner’s policy, a landlord’s policy, a personal umbrella policy and an automobile policy. Mrs. Combs tendered defense of the molestation lawsuit to Allstate, but Allstate declined to defend her in the suit. Thereafter, Mrs. Comb entered into a settlement with Alison and Cecilia pursuant to which Mrs. Combs assigned all of her rights against Allstate to Alison and Cecilia.

Alison and Cecilia, armed with the assignment, then filed suit against Allstate for failing to defend their grandmother, Mrs. Combs, in the underlying action. Allstate moved to dismiss, asserting that the granddaughters’ claims against Mrs. Combs in the underlying action were not potentially covered under any of the Allstate policies.

Holding

The United States District Court in San Diego held that Alison’s and Cecilia’s claims against their grandmother, Mrs. Combs, were not potentially covered under the Allstate policies and, thus, Allstate had no duty to defend Mrs. Combs in the underlying action. San Diego lawyers and attorneys directory.

The court reasoned that the Allstate homeowner’s, landlord’s and umbrella policies all barred coverage for bodily injury or personal injury arising out of intentional or criminal acts of an insured person. Since Mrs. Comb’s alleged liability in the underlying action arose from the intentional acts (i.e., sexual molestation) by another insured person (i.e., Mr. Combs), Mrs. Comb’s alleged liability was barred from coverage under the Allstate homeowner’s, landlord’s and umbrella policies.Thus, Allstate had no duty to defend Mrs. Combs under those three policies.

As for the Allstate auto policy, it only covered Mrs. Combs for liability “arising out of the ownership, maintenance or use” of an insured vehicle. Although it was alleged in the underlying action that Mrs. Combs had negligently entrusted the family car vehicle to Mr. Combs who then used the car as a place to molest his granddaughters, Mrs. Combs’ alleged liability could not be said to have “arisen out of” Mr. Combs’ use of the car. Rather, according to the court, Mr. Combs’ use of the car was a “circumstance accompanying” the sexual molestations, not a “predominant cause of or substantial factor in” causing the granddaughters’ injuries.

Because there was no potential for coverage under the policies, the policies did not require Allstate to defend Mrs. Combs in the underlying action brought by her granddaughters.

Comment    

This case is generally consistent with other California cases involving similar policy language. Assuming the policy contains appropriate wording, an insurer will usually have no duty to defend an insured against claims that he or she negligently facilitated another insured’s intentional act of sexual molestation.

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Defense of Administrative Proceedings

Whether Insurer Has Duty to Defend and Indemnify Insured in Administrative Proceeding Depends on Policy Language (Ameron International Corporation v. Insurance Co. of the State of Pennsylvania (2007) 150 Cal.App.4th 1050)

A recent ruling from the California Court of Appeal emphasizes that whether a liability insurer has a duty to defend and indemnify an insured in an administrative proceeding depends on the precise language of the policy. 

In 1975, the United States Department of the Interior’s Bureau of Reclamation (Bureau) entered into a general contract with Peter Kiewit Sons’ Company (Kiewit) for the manufacture and installation of concrete siphons for an aqueduct project. Kiewit in turn entered into a subcontract with Ameron International Corporation (Ameron) to manufacture the siphons. The subcontract gave Kiewit indemnity rights against Ameron and Kiewit was listed as an insured under Ameron’s insurance policies.

After discovering defects in the siphons, the Bureau sought approximately $40 million in damages from Ameron and Kiewit. Ameron and Kiewit elected to challenge the Bureau’s claim in a lengthy administrative hearing before the United States Department of Interior Board of Contract Appeals (IBCA). Ameron notified various primary, excess and/or umbrella insurers of the Bureau’s claims, but the insurers failed to defend Ameron or Kiewit in the ICBA proceeding. During the course of the administrative proceeding, Ameron and Kiewit settled the Bureau’s claims for $10 million.

Ameron, in its own right and as an assignee of Kiewit’s rights, then sued the various insurers which had failed to defend and indemnify Ameron and Kiewit against the Bureau’s claims before the ICBA. After the insurers successfully demurred to Ameron’s complaint, the California Court of Appeal ruled as follows:

First, some of the insurers had issued policies requiring the insurer to defend the insured against any “suit” seeking “damages,” without defining either “suit” or “damages.” The Court of Appeal held that these insurers had no duty to defend or indemnify Ameron or Kiewit in the ICBA administrative proceeding. Specifically, citing Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 and related cases, the Court of Appeal held that unless the policy provides otherwise, the term “suit” means “a civil action commenced by filing a complaint” and the term “damages” means “money ordered by a court.” Since the IBCA proceeding was not a civil action commenced in a court of law, but rather was an administrative hearing, there was no potential for coverage under these policies, and hence no duty to defend.

Second, some of the insurers had issued policies requiring the insurer to defend the insured against any “suit” seeking damages, and specifically defining the term “suit” as a “civil proceeding... includ[ing] an arbitration proceeding alleging...damages.” The Court of Appeal found that these insurers did have a duty to defend Ameron and Kiewit in the ICBA administrative proceeding. Specifically, since these policies did define “suit” so as to include a “civil proceeding,” the term “suit” was reasonably susceptible to more than one interpretation, including the IBCA administrative proceeding. Further, since the policies’ definition of “suit” included an “arbitration proceeding alleging damages,” the term “damages” could not necessarily be restricted to money damages ordered by a court.

Third, some of the umbrella insurers had issued policies providing the insured with indemnity coverage for “loss.” Since these policies did not define “loss,” the Court of Appeal looked to common usage of “loss” and concluded that, in the insurance context, “loss” means “the amount of financial detriment caused by an insured person’s death or an insured property’s damage, for which the insurer becomes liable.” According to the Court of Appeal, this definition of “loss” is broader than the common meaning of “damages,” and is not limited to money damages ordered by a court. Thus, insurers issuing these policies could have a duty to indemnify Ameron and Kiewit in the ICBA administrative proceeding. 

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