Insurance Law News - May 2010

• Liability Policy's Self-Insured Retention Can Only Be Satisfied By Named Insured, Not Additional Insured
• Party Liable Under "Peculiar Risk" Doctrine For Independent Contractor's Use Of Vehicle Is "Legally Responsible" For Independent Contractor's Conduct And Hence An "Insured" Under Independent Contractor's Auto Policy

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Liability Policy's Self-Insured Retention Can Only Be Satisfied By Named Insured, Not Additional Insured

A general liability policy unambiguously provided that the policy’s self-insured retention could only be satisfied by the named insured, and not by someone else such as an additional insured. (Forecast Homes, Inc. v. Steadfast Ins. Co (2010) 181 Cal.App.4th 1466)

Facts

Forecast Homes, Inc. (Forecast) is a residential home developer which typically hires subcontractors to build the homes. The subcontracts give Forecast express indemnity rights against the subcontractors and require that Forecast be listed as an additional insured on the subcontractors’ policies.

Between 2001 and 2003, Forecast was served with five different construction defect lawsuits. Forecast was the only named defendant in the lawsuits; the subcontractors were not named.

After being served with the lawsuits, Forecast tendered its defense to various subcontractors’ insurers which had issued additional insured endorsements in favor of Forecast. Over a dozen of the subcontractors had policies through Steadfast Insurance Company (Steadfast), and each Steadfast policy had self-insured retention (SIR). Some of the Steadfast policies provided that “you [i.e., the named insured subcontractor] shall be responsible for payment of all damages and defense costs for each occurrence or offense, until you have paid self-insured retention amounts and defense costs equal to the per occurrence amount shown in the Schedule.” Other Steadfast policies contained similar language and further stated that “[p]ayments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.”

Steadfast denied Forecast’s tenders on the ground that the only the named insured subcontractor could satisfy the SIR requirement, and none of the subcontractors had satisfied the SIRs.

Forecast sued Steadfast for breach of contract and bad faith. The trial court ruled that only the named insured subcontractors (not an additional insured such as Forecast) could satisfy the SIR requirement. The trial court thus ruled that Steadfast’s duty to defend Forecast had not been triggered. Forecast appealed.

Holding

The Court of Appeal affirmed. The appellate court held that under both versions of the Steadfast policies, only the named insured subcontractor could pay the SIR and thereby trigger the duty to defend. The appellate court further held that this was not counter to public policy, noting that Forecast could have (1) required its subcontractors to list Forecast as a named insured on the policies or (2) insisted on policy language permitting an additional insured to satisfy the SIR. Because the named insured subcontractors had not satisfied the SIRs, Forecast was not entitled to a defense from Steadfast.

Comment

In this case, the appellate court confirmed that payment of an SIR is a condition precedent to triggering coverage under a policy. Further, if the SIR language clearly provides, only the named insured – not an additional insured – can satisfy this condition precedent.

The court specifically distinguished some prior cases in which courts had held that someone other than a named insured might be able to satisfy an SIR. According to the appellate court, those prior cases involved different, arguably ambiguous, policy language.

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Party Liable Under "Peculiar Risk" Doctrine For Independent Contractor's Use Of Vehicle Is "Legally Responsible" For Independent Contractor's Conduct And Hence An "Insured" Under Independent Contractor's Auto Policy

A party who was potentially vicariously liable under the “peculiar risk” doctrine for an independent contractor’s use of a vehicle was potentially “legally responsible” for the independent contractor’s conduct and thus qualified as an “insured” under the independent contractor’s auto policy. (American States Ins. Co. Progressive Casualty Ins. Co. (2009) 180 Cal.App.4th 18)

Facts

TRII LLC (TRII), a developer, hired Garden Communities (Garden) to act as general contractor for a construction project. Garden in turn retained Vinci Pacific Corporation (Vinci) to act as grading subcontractor. Vinci in turn hired Western Trucking LLC (Western) to haul dirt from the site. Western assigned a portion of the work to Victor Meza (Meza), a self-employed trucker.

There was only one entrance to the construction site. It required truckers entering the site to make a U-turn (while driving westbound in eastbound lanes), encroach on at least two pedestrian crosswalks, jump a curb, and drive across a sidewalk.

Meza was driving a truck that he owned and pulling a trailer that Western owned. As Meza tried to enter the construction site, the rear portion of the trailer ran over and severely injured a pedestrian, Yevdokia Bristman (Bristman). Bristman later filed a personal injury lawsuit against TRII, Garden, Vinci, Western and Meza. Bristman alleged among other things that TRII, Garden and Vinci (collectively the Vinci Parties) employed Western and Meza, and that the Vinci Parties failed to take necessary safety precautions at the construction site’s entrance.

The Vinci Parties were insured under a commercial auto policy issued by American States Insurance Company (American States). Western, owner of the trailer, was insured under a commercial auto policy issued by Wilshire Insurance Company (Wilshire). Meza, driver of the truck that was pulling the trailer, had a commercial auto policy through Progressive Casualty Insurance Company (Progressive). 

American States agreed to defend the Vinci Parties against Bristman’s lawsuit and then tendered the defense of the Vinci Parties to both Western’s insurer, Wilshire, and Meza’s insurer, Progressive. However, Wilshire and Progressive declined to defend the Vinci Parties on the ground that the Vinci Parties did not qualify as “insureds” on the Wilshire and Progressive auto policies. Both the Wilshire auto policy and the Progressive auto policy defined an “insured” so as to include parties who were “legally responsible” for the named insured’s or a permissive user’s operation of a covered vehicle.

American States later filed a coverage action against Wilshire and Progressive, seeking to recover from Wilshire and Progressive all or some portion of the costs of defending the Vinci Parties in the underlying personal injury action. The trial court ruled in favor of Wilshire and Progressive, finding that the Vinci Parties were not “insureds” on the Wilshire and Progressive policies. American States appealed.

Holding

The Court of Appeal reversed. The court observed that as a general rule, one who hires an independent contractor is not vicariously liable for the torts of the independent contractor. However, the general rule is subject to various exceptions, including the “peculiar risk” exception. Under the peculiar risk exception, one who hires an independent contractor to perform work involving a peculiar risk of harm is vicariously liable for injuries arising from the independent contractor’s performance of that work. Here, the facts suggested that under the peculiar risk exception, one or more of the Vinci Parties might be vicariously liable for Western’s and Meza’s operation of the tractor-trailer rig at the entrance to the construction site.

Further, Western’s auto policy through Wilshire and Meza’s auto policy through Progressive both defined an “insured” so as to include those who were “legally responsible” – i.e., vicariously liable – for the named insured’s or a permissive user’s operation of a covered vehicle. Since one of more of the Vinci Parties might be vicariously liable for Western’s and Meza’s operation of the tractor-trailer rig, and since Western’s policy through Wilshire and Meza’s policy through Progressive defined an “insured” so as to include parties who were vicariously liable for the operation of covered vehicles, the Vinci Parties were “insureds” on the Wilshire and Progressive policies.

Therefore, American States was entitled to recover from Wilshire and Progressive some portion of the costs of defending the Vinci Parties in the underlying action. The appellate court remanded the matter to the trial court for a determination as to how much American States was entitled to recover from Wilshire and Progressive.

Comment

The typical situation in which the “legally responsible” language is implicated is an employer-employee relationship, where the employer is alleged to be vicariously liable for the negligent driving of its employee. In that scenario, the allegedly vicariously liable employer is “legally responsible” for the employee’s negligence, and hence the employer qualifies as an “insured” under the employee’s auto policy.

The twist in this case is that it involved a hirer-independent contractor relationship. Although a hirer is generally not vicariously liable for the independent contractor’s negligence, that rule is subject to various exceptions, including the “peculiar risk” exception. Since under the peculiar risk exception the hirer was potentially vicariously liable for the independent contactor’s conduct in this case, the hirer was potentially “legally responsible” for the independent contractor’s negligence, and hence the hirer did qualify as an “insured” under the independent contractor’s auto policy.

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