News - October 2007

• Insurer Must Defend Insured in Assault and Battery Case Where Insured’s Agent Might Have Acted in “Self-Defense”
• Insurer Who Covers Property Manager as Additional Insured is Entitled to Contribution from Insurer Who Covers Property Manager as Named Insured
• Sums Paid In Settlement of Pollution Claims Are Not “Damages” Under Excess Policies
• California Wildfires: Declared “State of Emergency” Triggers Insurance Code Sections

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Insurer Must Defend Insured in Assault and Battery Case Where Insured’s Agent Might Have Acted in "Self-Defense"

The California Court of Appeal has held that a liability insurer had a duty to defend its insured in an assault and battery case where there was evidence that the insured’s agent might have acted in “self-defense.” (Jafari v. EMC Insurance Companies (2007) 155 Cal.App.4th 885)

Facts

Davar Jafari owned a tire and brake shop. Jafari employed Mark Mitchell as manager of the shop.

Farhad Nazemzadeh, a customer, came to the shop to pick up his car. When Mitchell, the shop manager, told Nazemzadeh that his car was not ready for pickup, Nazemzadeh allegedly became verbally abusive and threatened to kill Mitchell. Mitchell responded by punching Nazemzadeh in the face. When the police investigated the incident, Mitchell stated that he was "defending himself" against Nazemzadeh.

Nazemzadeh later sued Jafari (the shop owner) and Mitchell (the shop’s manager). Nazemzadeh’s complaint contained causes of action for assault, battery, negligence, intentional and negligent infliction of emotional distress, premises liability and negligent hiring.

Jafari tendered defense of the lawsuit to Jafari’s business liability insurer, EMC Insurance Companies (EMC). However, EMC refused to defend Jafari on the ground that Jafari’s alleged liability did not arise from an “accident” as required by the insuring clause of the policy.  

Jafari subsequently filed a suit for breach of contract and bad faith against EMC, alleging that EMC had wrongfully failed to defend and indemnify Jafari in the underlying lawsuit. The trial court ruled in favor of EMC, holding that Jafari’s alleged liability in the underlying lawsuit did not arise from an “accident” and that EMC thus had no duty to defend Jafari in the lawsuit. Jafari appealed.

Holding 

The Court of Appeal reversed and held that EMC did have a duty to defend Jafari in the underlying lawsuit. The appellate court reasoned that under existing case law, an “accident” can be found “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.” Citing that rule, the appellate court held that “acts in self-defense can be an ‘accident’ where the third party’s actions provoking the self-defense response were the unforeseen and unexpected element in the causal chain of events making the insured’s acts in self-defense unplanned and involuntary.” Because there was evidence that Jafari’s employee, Mitchell, had acted in self-defense, EMC had a duty to defend Jafari in the underlying lawsuit.

The appellate court also noted that while the EMC policy had an exclusion for bodily injury which was “expected or intended” by the insured, that exclusion contained an exception for bodily injury “resulting from the use of reasonable force to protect persons or property.” According to the appellate court, the exclusion’s exception bolstered the conclusion that the term “accident” in the insuring clause should be interpreted to cover “deliberate acts of self-defense in response to unexpected, unforeseen and unintended events by the third party….”  

Comment

The Court of Appeal’s decision in Jafari v. EMC is similar to the Court of Appeal’s recent decision in Delgado v. Interinsurance Exchange. In both cases, the Court of Appeal held that an insured’s alleged act of self-defense can qualify as an “accident” within the meaning of the insuring clause in a liability policy. Notably, the California Supreme Court has recently granted the insurer’s petition for review in Delgado, and we expect that the insurer in Jafari likewise will seek review by the Supreme Court.

Until the Supreme Court resolves this issue, insurers should proceed with caution in this area. Specifically, when faced with an alleged assault and battery incident in which the insured claims to have acted in “self-defense,” an insurer should broadly interpret the “accident” requirement.

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Insurer Who Covers Property Manager as Additional Insured is Entitled to Contribution from Insurer Who Covers Property Manager as Named Insured

The California Court of Appeal has ruled that a liability insurer whose policy covered a property manager as an additional insured was entitled to equitable contribution from another insurer whose policy covered the property manager as a named insured. (California Capital Insurance Company v. Farmers Insurance Group (2007) WL 3036735)

Facts

Lin Kwock owned an apartment complex and employed Edmondson Property Management to manage the complex. The management contract between Kwock and Edmondson required Kwock to indemnify Edmondson against claims connected with Edmondson’s management of the property, and further required Kwock to obtain liability insurance listing Edmondson as an additional insured.

A seven-year-old girl who resided at the apartment complex was injured when she fell off the roof of a storage shed at the complex. The girl subsequently filed a personal injury action against Kwock as property owner and Edmondson as property manager. There was evidence that prior to the girl’s fall, Edmondson knew the girl was playing on the roof and did nothing to stop her.

California Capital Insurance Company had issued a primary general liability policy listing Kwock as the named insured and Edmondson as an additional insured. Farmers Insurance Group had issued a primary general liability policy listing Edmondson as named insured, but containing an “excess” other insurance clause. California Capital defended both Kwock and Edmondson in the personal injury action. California Capital ultimately paid $550,000 in settlement on behalf of Kwock and Edmondson, with $50,000 apportioned to Kwock and $500,000 allocated to Edmondson. Farmers refused to contribute to the settlement, claiming that: (1) Farmers’ coverage for Edmondson was “excess” to California Capital’s coverage for Edmondson; and (2) in any event, Farmers’ named insured, Edmondson, was entitled to express indemnification from California Capital’s named insured, Kwock.

California Capital subsequently filed an action against Farmers in order to recover all or a portion of the $500,000 California Capital had paid on behalf of Edmondson to settle the underlying personal injury action. The trial court ruled that: (1) the Farmers policy covering Edmondson was not “excess” to the California Capital policy covering Edmondson; (2) Farmers’ named insured, Edmondson, was not entitled to express indemnity from California Capital’s named insured, Kwock; and (3) Edmondson’s $500,000 share of the underlying settlement should be shared equally by Farmers and California Capital. The trial court thus ruled that California Capital was entitled to recover from Farmers half of the amount for which Edmondson was liable. Farmers appealed.

Holding 

The Court of Appeal affirmed, holding that California Capital was entitled to contribution from Farmers.

The appellate court rejected Farmers’ argument that Farmers’ coverage for Edmondson was “excess” to California Capital’s coverage for Edmondson. The court emphasized that both the Farmers policy and the California Capital policy were written to provide “primary” coverage to Edmondson. Further, while the Farmers policy did contain an “excess” other insurance clause, the “modern trend” is to ignore an “excess” other insurance clause which is inserted into an otherwise primary policy. Thus, Farmers’ “excess” other insurance clause did not bar California Capital’s contribution claim against Farmers.   

The appellate court also rejected Farmers’ argument that Farmers’ named insured, Edmondson, was entitled to express indemnity from California Capital’s named insured, Kwock. According to the court, the indemnity provision in the property management agreement between Kwock and Edmondson was a “Type II” or “general” indemnity provision which only covered Edmondson for “passive” negligence. Further, because Edmondson knew that the child played on the roof of the shed unsupervised and did not act to stop the child, Edmondson’s alleged negligence was not merely “passive” but, rather, was “active.” Since Edmondson was “actively” negligent, Edmondson was not entitled to contractual indemnification from Kwock.

The appellate court held that under these circumstances, California Capital was entitled to equitable contribution from Farmers for Edmondson’s share of the underlying settlement. Further, according to the appellate court, the trial court properly allocated half of that settlement to California Capital and half to Farmers.    

Comment     

The result in this case apparently would have been different if the management agreement between Kwock and Edmondson had given Edmondson “Type I” or “specific” indemnity rights against Kwock. In that scenario, Edmondson would have been entitled to indemnity from Kwock even for Edmondson’s own “active” negligence. If in fact Edmondson had been entitled to indemnification from Kwock, then the entire loss would have been the responsibility of Kwock’s insurer, California Capital.

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Sums Paid In Settlement of Pollution Claims Are Not "Damages" Under Excess Policies

The California Court of Appeal has held that sums an insured agreed to pay in settlement of pollution claims are not “damages” within the meaning of the insured’s excess liability policies. (Aerojet-General Corporation v. Commercial Union Insurance Company (2007) 155 Cal.App.4th 132)

Facts

In 2000 and 2001, various California water agencies filed lawsuits against Aerojet-General Corporation alleging that Aerojet was responsible for the costs of remediating groundwater contamination in the San Gabriel Valley. Aerojet put its excess insurers on notice of the suits but no excess insurer accepted Aerojet’s request for defense and indemnity.

In 2002, the lawsuits were settled and dismissed. The settlement agreement obligated Aerojet to pay approximately $175 million, which exceeded the total amount of Aerojet’s primary and excess insurance coverage for the period of 1958-1970. Aerojet demanded payment pursuant to its policies, but the excess insurers all denied coverage.

Aerojet then sued its excess insurers to obtain indemnification for the remediation costs Aerojet incurred pursuant to the settlement agreement with the water agencies. The court ruled in favor of the excess insurers and Aerojet appealed.

Holding 

The Court of Appeal affirmed. The court reasoned that the excess insurers’ policies only covered “damages” that Aerojet became obligated to pay. Under Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945 (Powerine I), the term “damages” is limited to “money ordered by a court.”  Here, no court ever ordered Aerojet to pay money to the water agencies. Rather, Aerojet and the water agencies negotiated a settlement. Because the costs Aerojet incurred in implementing its settlement with the water agencies did not constitute “damages” (i.e., money ordered by a court), those costs were not covered by the excess insurers’ policies.

Moreover, the excess policies contained “attachment of liability” clauses which provided that the excess policies would attach only when the primary insurers admitted liability or a final judgment was entered against the insured. Neither of those events ever occurred.

Last, the excess insurers were not equitably estopped from relying on the terms of their policies. The excess insurers never led Aerojet to believe that it could settle with the water agencies and expect coverage from the excess insurers. To the contrary, the excess insurers all reserved their rights to contest coverage. Thus, there were no grounds for an estoppel.

Comment

This is the latest California case to address the circumstances in which a liability insurer might - or might not - have a duty to indemnify an insured for the costs of remediating environmental pollution claims. The excess policies in this case were very old and thus presumably did not contain “pollution” exclusions. As a result, the excess insurers were left to argue that coverage was barred by other provisions in the policies (e.g., the “damages” clause and the “attachment of liability” clause).

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California Wildfires: Declared "State of Emergency" Triggers Insurance Code Sections

As a result of the recent major fires in Southern California, Governor Schwarzenegger has declared that a state of emergency exists within the counties of Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara and Ventura. Because of the declared state of emergency, certain provisions of the Insurance Code now apply to insurance claims arising out of these fires, including the following:

• Additional Living Expense - An insurer must provide coverage for additional living expense for up to 24 months, if necessary. However, this time limit does not alter any dollar limit that the policy might contain. (Insurance Code Section 2051.5 (b) (2).)
• Replacement Cost - An insurer must allow an insured up to 24 months to collect replacement cost benefits. This time limit runs from the date that the insurer makes the first payment toward the actual cash value of the damaged property. (Insurance Code Section 2051.5 (b) (1).)
• Appraisal - Either the insurer or the insured can request that the other participate in the appraisal process, but neither can require that the other participate in the process. (Insurance Code Section 2071.)

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