News - May 2008

• “Cross-Suits” Exclusion Relieves Insurer of Duty to Defend Named Insured Against Suit Brought by Additional Insured
• Because Appraisal Panel Only Decided “Amount” of Loss, Court Could Confirm Amount of Award but Could Not Enter Money Judgment
• Third-Party Claimant Not Entitled to Intervene in Insurer’s Declaratory Relief Action Against Insured

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"Cross-Suits" Exclusion Relieves Insurer of Duty to Defend Named Insured Against Suit Brought by Additional Insured

The California Court of Appeal has held that a liability policy’s “cross-suits” exclusion relieved an insurer of any duty to defend its named insured against a suit brought by an additional insured. (Great Western Drywall, Inc. v. Interstate Fire & Casualty Company (2008) 161 Cal.App.4th 1033)

Facts

Roel Construction Co., Inc. (Roel) was the general contractor on a condominium project in San Diego. Roel entered into a subcontract with Great Western Drywall, Inc. (Great Western) whereby Great Western agreed to install drywall and perform other work on the project. The subcontract gave Roel certain express indemnity rights against Great Western, and also apparently required that Roel be listed as an additional insured on Great Western’s general liability policy.

Great Western sued Roel over a payment dispute. Roel cross-complained against Great Western for breach of contract, negligence, “money due for work and materials,” account stated, and money had and received. In its cross-complaint Roel alleged that: (a) Roel overpaid Great Western under the subcontract; (b) Roel was required to hire other subcontractors to finish and correct Great Western’s work after Great Western abandoned the project; and (c) in the course of its work, Great Western negligently caused property damage to other work (specifically window glass and tubs).

Interstate Fire & Casualty Company (Interstate) had issued a general liability policy identifying Great Western as named insured and Roel as additional insured. The Interstate policy included a “cross-suits” exclusion which stated that there was no coverage for “any claim or suit for injury or damage by one Insured against another Insured. This exclusion does not apply to ... actions to apportion liability between Insureds where any Insured has been sued for a covered loss.” Great Western tendered defense of Roel’s cross-complaint to Interstate. Although eventually Interstate agreed to defend Great Western against Roel’s cross-complaint, Interstate never did actually fund Great Western’s defense.

The Great Western/Roel litigation went to trial. The trial court awarded Great Western approximately $332,000 on its complaint against Roel, and awarded Roel approximately $321,000 on its cross-complaint against Great Western, for a net recovery to Great Western of approximately $11,000.

Great Western then filed a bad faith action against Interstate for failing to defend and indemnify Great Western against Roel’s cross-complaint in the underlying litigation. The trial court ruled that the Interstate policy’s “cross-suits” exclusion applied, and that Interstate thus had no duty to defend or indemnify Great Western against Roel’s claims. Great Western appealed.

Holding

The Court of Appeal affirmed, holding that the Interstate policy’s “cross-suits” exclusion relieved Interstate of any duty to defend or indemnify Great Western against Roel’s cross-complaint in the underlying litigation.

The appellate court began by noting that the first portion of the exclusion barred coverage for “any claim or suit for injury or damage by one Insured against another Insured.” This language precluded coverage for the cross-complaint which Roel as “additional insured” had filed against Great Western as “named insured.” 

The appellate court acknowledged that the exclusion had an exception for “actions to apportion liability between Insureds where any Insured has been sued for a covered loss.” However, according to the court, this exception was only intended to apply where a third party filed a lawsuit for covered damages against one insured, who then filed a cross-complaint for indemnity against another insured. Here, no third party ever filed a suit for damages against Roel. Thus, Roel’s cross-complaint against Great Western could not be characterized as an action “to apportion liability between Insureds where any Insured has been sued for a covered loss.”

Because the basic exclusionary language applied, and the exception did not, Interstate had no duty to defend or indemnify Great Western against Roel’s cross-complaint in the underlying litigation. 

Comment

The result in this case might have been different if the owner of the project (a third party) had filed a suit for covered property against the general contractor (as additional insured), who then cross-complained for indemnity against the subcontractor (as named insured). In that scenario, the cross-complaint for indemnity would presumably fall within the “cross-suits” exclusion’s exception, and the insurer would have had a duty to defend the subcontractor against the general contractor’s cross-complaint.

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Because Appraisal Panel Only Decided "Amount" of Loss, Court Could Confirm Amount of Award but Could Not Enter Money Judgment

The California Court of Appeal has held that, because an appraisal panel only decided the amount of a loss, a trial court had authority to confirm the amount of the award but did not have authority to enter an actual money judgment for the award. (Devonwood Condominium Owners Association v. Farmers Insurance Exchange (2008) WL 2102284)

Facts

After a fire damaged a unit located within the Devonwood condominium project, the Devonwood Condominium Owners Association (Devonwood) submitted a claim to its insurer, Farmers Insurance Exchange (Farmers). When the parties could not agree on the amount of the loss, Devonwood demanded appraisal. Each party selected an appraiser, and the two appraisers selected an umpire.

This appraisal panel issued a unanimous written appraisal award, which set forth two categories of replacement cost values. The first category, the “replacement cost value of fire-related structure damage, exclusive of floor coverings, ceiling coverings (including paint), and wall coverings (including paint) in the residential unit,” totaled $122,460.65. The second category, the “replacement cost value of interior painting of walls and ceilings due to fire-related structure damage,” totaled $7,479.22. The written award provided in relevant part: “Attached to this award is a breakdown which sets forth those items included herein. This breakdown sets forth the above award in detail and is made without consideration of … or any coverage or other provision of the above policy which might affect the amount of the insurer’s liability thereunder….”

Devonwood subsequently filed a petition in superior court to confirm the appraisal award. Farmers opposed the petition, arguing that it was not obligated under the policy to pay for painting interior areas. However, the superior court confirmed the appraisal award, and entered a money judgment against Farmers in the sum of $129,939.87. Farmers appealed.

Holding

The Court of Appeal vacated the judgment, and remanded the case to the superior court with instructions to enter a new judgment that conformed to the appraisal award. The Court of Appeal reasoned that the appraisers stated on the face of the award that the award was made “without consideration of … any coverage or other provision of the above policy which might affect the amount of the insurer’s liability thereunder….” 

In short, the Court of Appeal found that the appraisal panel merely determined the amount of the loss, and did not decide whether Farmers actually owed any amount under the policy. Thus, Court of Appeal held that the superior court’s statutory authority was limited to the issuance of a judgment which brought finality to the dollar amount of the replacement cost values—and nothing more.

Comment

This case illustrates several points. First, appraisal is a limited form of arbitration in which the appraisers decide only the amount of the loss, not whether the policy actually covers any part of the loss. Second, an insurer should always insist on an “itemized” appraisal award, as allowed by Insurance Code section 2071 and by most policies. Third, the appraisers generally should indicate right on the face of the award that they are not purporting to decide whether the policy does (or does not) actually cover the loss. Fourth, if either party files a petition in the superior court to confirm an appraisal award, it is important to ensure that any judgment the superior court renders does in fact provide that the court is only confirming the amount of the award, and not entering a money judgment for the amount of the award.

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Third-Party Claimant Not Entitled to Intervene in Insurer’s Declaratory Relief Action Against Insured

The California Court of Appeal has held that a third-party claimant did not have an absolute right to intervene in a liability insurer’s declaratory relief action against its insured. (Royal Indemnity Co. v. United Enterprises, Inc. (2008) 162 Cal.App.4th 194)

Facts

United Enterprises, Inc. (United) owned real property on which it operated a trap and shooting range. Flat Rock Land Company (Flat Rock) eventually acquired the property.

After Flat Rock acquired the property, Flat Rock apparently discovered that the property had become contaminated during the time that United owned the property. Flat Rock thus sued United, seek recovery of environmental cleanup costs incurred in connection with the property.

United tendered defense of the action to various liability insurers, including Royal Indemnity Company (Royal). Royal agreed to defend United under reservation of rights. Royal then filed a declaratory relief action against United, seeking a ruling that Royal did not have any duty to defend or indemnify United in the underlying action brought by Flat Rock.  Royal did not name the third-party claimant, Flat Rock, as a defendant in the declaratory relief action.

Flat Rock filed a motion to intervene in Royal’s declaratory relief action against United, claiming that Flat Rock had a “direct and immediate interest” in the outcome of the declaratory relief action and that Flat Rock should thus be allowed to participate in the declaratory relief action. The trial court denied Flat Rock’s motion and Flat Rock appealed.

Holding

The Court of Appeal affirmed the trial court’s order denying Flat Rock’s request to intervene in Royal’s declaratory relief action against United. According to the appellate court, Flat Rock “cannot show an adequately direct interest to obtain intervention in this insurance coverage action.” The appellate court emphasized that Flat Rock was not an insured under United’s policy through Royal, and thus Flat Rock had no direct rights under the policy. Moreover, as a mere potential (as opposed to actual) judgment creditor of United, Flat Rock did not yet have standing to bring a judgment creditor action against Royal under Insurance Code section 11580.9(b)(2). Nor was Flat Rock an assignee of any of United’s rights under the Royal policy. Since Flat Rock “does not yet have a protectable interest in the insurance proceeds,” the trial court did not abuse its discretion in denying Flat Rock’s request to intervene in the declaratory relief action.

Comment

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