News - May 2007

• Insurer Must Defend Insured in Assault and Battery Case Where There is Possibility That Insured Acted in “Self-Defense”
• In Continuous Injury Case, Insured Cannot Trigger Defense Under Early Excess Policy When Insured Has Later Primary Policy With SIR
• Rescission Is Proper Where Applications Mischaracterize Nature of Claims Against Insured

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Insurer Must Defend Insured in Assault and Battery Case Where There is Possibility That Insured Acted in "Self-Defense"

The California Court of Appeal has held that a homeowners insurer was required to defend its insured in an assault and battery case where there was a possibility that the insured had acted in “self-defense.”  (Delgado v. Interinsurance Exchange of the Automobile Club of Southern California (2007) WL 1519893)

Facts

Jonathan Delgado and Craig Reid got into a physical altercation. Delgado later sued Reid, asserting two causes of action. In the first cause of action for intentional tort, Delgado alleged that Reid, acting without provocation or justification, repeatedly “struck, battered and kicked … Delgado ….”  In the second cause of action for negligence, Delgado alleged that Reid “negligently and unreasonably believed … that [Reid] was engaging in self-defense when [Reid] negligently and unreasonably physically and violently struck and kicked … Delgado ….”

Reid tendered defense of the action to his homeowners insurer, Interinsurance Exchange of the Automobile Club (the Exchange), under a policy with liability limits of $100,000. The Exchange, allegedly without conducting any investigation, rejected Reid’s tender. The Exchange asserted that Reid’s alleged liability (1) did not arise from an “occurrence,” or “accident,” as required by the  policy’s insuring clause, and (2) fell within the policy’s exclusion for “intentional acts or omissions committed by … any insured that are (a) of a willful or malicious nature or (b) grossly negligent or reckless; and which could reasonably be expected to result in bodily injury.”  

After the Exchange rejected Reid’s tender, Delgado and Reid reached a settlement of the personal injury action. As part of the settlement, Delgado dismissed his intentional tort claim against Reid, and Delgado and Reid stipulated that Reid had negligently used excessive force in the exercise of self-defense. The trial court then entered a judgment of $150,000 on Delgado’s negligence claim against Reid. Thereafter, Reid paid Delgado $25,000 in partial satisfaction of the judgment and assigned to Delgado any rights Reid might have against the Exchange for its refusal to defend. In return, Delgado gave Reid a partial satisfaction of judgment and a covenant not to execute on the remainder of the judgment against Reid’s own assets.

Delgado (as assignee) then sued the Exchange for declaratory relief, bad faith and enforcement of the underlying judgment. However, the trial court dismissed Delgado’s complaint against the Exchange at the pleading stage, ruling that Delgado’s claims against Reid in the underlying action were not potentially covered under the Exchange policy.

Holding 

The Court of Appeal reversed. The appellate court reasoned that in the underlying action Delgado had alleged that Reid negligently acted in self-defense, which suggested the possibility that Reid had engaged in unintentional conduct. According to the appellate court, under prior case law, such unintentional conduct would qualify as an “occurrence” or “accident” within the meaning of the policy’s insuring clause, and would not fall within the policy’s “intentional acts” exclusion. Thus, the Exchange was obligated to defend Reid in the underlying action.

The appellate court further held that the Exchange could not claim there was any “genuine dispute” as to whether it had a duty to defend Reid in the underlying action. Specifically, in light of existing case law establishing that an insurer has a duty to defend an insured who may negligently have acted in self-defense, there could be no legal dispute that the Exchange had a duty to defend Reid in the underlying action. Further, to the extent that there was a factual dispute as to whether Reid had actually acted in self-defense, the very existence of that factual dispute would establish a potential for coverage and, hence, a duty to defend. The appellate court thus held that, as a matter of law, the Exchange had acted in bad faith (i.e., unreasonably) by failing to defend Reid in the underlying action. The appellate court remanded the matter to the trial court for further proceedings.            

Comment

Oddly, it was the plaintiff in the underlying action who claimed that the insured might have acted in “self-defense.”  Usually, of course, it is the insured who asserts that position. In any event, the appellate court concluded there was a factual issue as to whether the insured had negligently used excessive force while acting in self-defense. That factual issue was sufficient to trigger the insurer’s duty to defend.

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In Continuous Injury Case, Insured Cannot Trigger Defense Under Early Excess Policy When Insured Has Later Primary Policy With SIR

The California Court of Appeal has held that in a continuous injury case, an insured could not trigger a defense under an early excess policy as long as the insured had a later primary policy that applied to the loss—even though that primary policy was subject to a self-insured retention. (Padilla Construction Co., Inc. v. Transportation Ins. Co. (2007) WL 1404322)   

Facts  

Padilla Construction Co., Inc. was a plastering subcontractor for a residential housing project. In 2002, various homeowners filed a construction defect lawsuit against the project’s developer alleging, among other things, continuous mold and decay damage caused by foundation vents which were blocked with stucco. The developer filed a cross-complaint against Padilla, the subcontractor allegedly responsible for the work.

During the initial years in which mold and decay damage allegedly occurred, Padilla had a primary liability policy through Transcontinental Insurance Company and an excess liability policy through Transportation Insurance Company. During the later years in which damage allegedly occurred, Padilla had a primary liability policy through Steadfast Insurance Company, but that policy was subject to a $25,000 self-insured retention.

Padilla’s early primary insurer (Transcontinental) defended Padilla for a short period of time but exhausted its policy on other claims. Padilla then asserted that it was entitled to a defense from its early excess insurer (Transportation) and that it did not want its subsequent primary insurer (Steadfast) to participate in the defense—apparently because the Steadfast primary policy was subject to a $25,000 SIR. Transportation as excess insurer declined to defend Padilla on the ground that Padilla still had primary coverage available through Steadfast.

Padilla later sued Transportation asserting that Transportation as excess insurer had been obligated to “drop down” and defend Padilla. The trial court ruled in favor of Transportation, holding that Transportation as excess insurer had no duty to defend Padilla because Padilla had other available primary insurance in the form of the primary policy issued by Steadfast.     

Holding

The Court of Appeal affirmed.

The appellate court acknowledged that Padilla’s alleged liability in the underlying construction defect action was based on continuous property damage—some of which occurred during earlier years when the Transportation excess policy was in force, and some of which occurred during later years when the Steadfast primary policy was in force. However, Steadfast as primary insurer had a prophylactic duty to defend Padilla in the underlying action against all claims, whether covered or uncovered. And, under the terms of Transportation’s excess policy, Transportation had no duty to defend if there was any other available primary coverage, such as the primary policy issued by Steadfast.

Further, according to the appellate court, it made no difference that the Steadfast primary policy was subject to a $25,000 SIR. Although technically the $25,000 SIR was not “other insurance” within the meaning of the Transportation excess policy, the appellate court refused to treat the SIR as a period of “non-insurance” sufficient to trigger a defense obligation under the Transportation excess policy. Rather, at least for purposes of defense, Padilla would have to satisfy the $25,000 SIR and Steadfast would have to exhaust its primary policy before a defense could be triggered under the Transportation excess policy.  

Comment

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Rescission Is Proper Where Applications Mischaracterize Nature of Claims Against Insured

(U.S. Specialty Insurance Co. v. Bridge Capital Corporation (2007) WL 1138863)

A recent ruling illustrates that even where an insured discloses prior claims when applying for coverage, the insurer may rescind the policy if the insured mischaracterizes the nature of the prior claims.

Bridge Capital Corporation applied to U.S. Specialty Insurance Company for a directors and officers policy. The application requested disclosure of any claims made against Bridge Capital or any of its officers and directors in the past five years. Bridge disclosed one gender discrimination suit in response to the question, and stated that Bridge’s attorney believed the claim was “frivolous.”  The next year, when Bridge applied for a renewal of the policy, Bridge identified the same suit listed on the initial application, plus another suit for gender discrimination claim as well as a suit for unpaid commissions.

After issuing the renewal policy, and while defending Bridge in suit brought by a third party, U.S. Specialty learned for the first time that the three suits Bridge had disclosed on the applications also included allegations of wrongful termination, sexual harassment and retaliation. In addition, after issuing the renewal policy, U.S. Specialty learned of a fourth claim for harassment that Bridge had settled without litigation.

Upon learning of this information, U.S. Specialty asserted it was rescinding both policies. U.S. Specialty then filed an action for declaratory relief, seeking a determination that the rescission was proper, the policies were void and that U.S. Specialty had no obligation to defend Bridge against the third party’s suit.

The federal district court granted summary judgment in favor of U.S. Specialty. The evidence established that Bridge’s chief executive had personal knowledge of each prior claim, and that he had signed the two insurance applications. The evidence also established that U.S. Specialty relied on Bridge’s misrepresentations and omissions when U.S. Specialty issued the policies, and that U.S. Specialty would not have issued the policies if Bridge had disclosed the prior allegations of sexual harassment. Under the circumstances, U.S. Specialty’s rescission was proper, the policies were void from inception and the rescission applied to Bridge and all of its officers and directors.

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