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Insurance Law News - October 2015

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Property Insurer Had No Obligation to Reimburse Mitigation Expenses in Absence of Otherwise Covered Loss

A property insurer had no express or implied obligation to reimburse an insured for emergency mitigation expenses in the absence of an otherwise covered loss. (Grebow v. Mercury Insurance Company (2015) WL 6166610)

Facts

Arthur and Helen Grebow owned a house with an attached rear deck that extended over a patio. Because of evidence of water damage to the deck, the Grebows asked a general contractor and structural engineer to inspect the deck. The contractor and engineer discovered severe decay and corrosion in various steel beams, which, with steel poles, supported the deck and other parts of the house. The decay and corrosion previously had been hidden by the deck floor and patio ceiling.

Both the contractor and engineer concluded the beams and poles no longer could support the upper portion of the house, and that a large portion of the house was in danger of falling. The Grebows then arranged for installation of temporary shoring and arranged for completion of permanent repairs.

The Grebows submitted a claim for reimbursement to their insurer, Mercury Insurance Company (Mercury). The Mercury policy contained standard exclusions for corrosion, rust and deterioration. The policy also contained a standard provision that extended coverage for "collapse" caused by various risks, including "hidden decay."

The policy defined "collapse" as the "sudden and complete breaking down or falling in or crumbling into pieces or into a heap of rubble or into a flattened mass." The policy also stated that collapse did not include "a substantial impairment of the structural integrity of a structure or building, nor a condition of imminent danger of collapse of a structure or building." In addition, the policy contained a mitigation condition that provided that, "[i]n case of a loss to which this insurance may apply, [an insured must] protect the property from further damage."

Mercury denied coverage for the claim on the grounds that there had been no "collapse" within the meaning of the policy, and that the policy otherwise excluded the causes of damage (i.e., rust, corrosion and deterioration). Mercury also denied coverage for the costs of the temporary shoring and other mitigation measures the Grebows had undertaken to prevent further damage. The Grebows filed suit for breach of contract and bad faith, but the trial court granted summary judgment in favor of Mercury.

Holding

The Court of Appeal upheld the trial court's finding that there was no "collapse" within the meaning of the policy, which covered only actual collapse, not imminent collapse. Because there was no coverage for the damage, there was no coverage for the cost of the emergency mitigation measures the insureds undertook to prevent an actual collapse from occurring.

Although the policy provided the insureds had a duty to mitigate in case of a "loss to which this insurance may apply," the Court of Appeal held that this express duty to mitigate – and the insurer's duty to reimburse for mitigation expenses – arises only after a covered loss occurs. The Court further found there was no implied-in-law requirement that Mercury reimburse the Grebows for such mitigation expenses.

Comment

In this case, the insureds apparently prevented an actual collapse from occurring because they arranged for installation of temporary shoring. However, the Court ruled that the insurer had neither an express nor implied obligation to reimburse the insureds for their mitigation expenses, since no covered loss (i.e., no actual collapse) had ever occurred. The Court noted that requiring an insurer to reimburse an insured for mitigation expenses in the absence of an otherwise covered loss would essentially convert a property policy into a maintenance contract.

The Court's holding that no actual "collapse" occurred is consistent with various prior California appellate decisions regarding this issue. Very briefly, if a policy does not specifically require a "collapse" to be a "complete" or "actual" falling down, then an "imminent" (i.e., impending) collapse is sufficient to trigger coverage. (Doheny West Homeowners' Assn. v. American Guarantee & Liability Ins. Co. (1997) 60 Cal.App.4th 400.) However, if a policy does specifically require a "collapse" to be a "complete" or "actual" falling down, then an "imminent" collapse is not sufficient. (Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070; Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206.)

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"Escape" Type "Other Insurance" Clause Does Not Excuse Insurer from Contributing Toward Defense Costs Which Another Insurer Pays on Behalf of Mutual Insured

A so-called "escape" type "other insurance" clause did not excuse an insurer from contributing toward defense costs which another insurer paid on behalf of a mutual insured in an underlying construction defect case. (Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance Company (2015) WL 6437698)

Facts

Pacific Trades Construction & Development, Inc. (Pacific Trades) was a general contractor that constructed multiple single family homes. Following construction of the homes, numerous homeowners sued Pacific Trades alleging that Pacific Trades was responsible for construction defects in the homes. The litigation involved property damage that potentially occurred over several years.

Pacific Trades was an insured under commercial general liability policies issued by Underwriters of Interest Subscribing to Policy Number A15274001 (Underwriters) for the period of October 23, 2001 through October 23, 2003 and ProBuilders Specialty Insurance Company (ProBuilders) for the period of December 9, 2002 through December 9, 2004. Pacific Trades thus tendered the defense of the construction defect lawsuit to both insurers. Underwriters agreed to defend Pacific Trades in the lawsuit. ProBuilders, on the other hand, declined to participate in the defense of Pacific Trades because the ProBuilders policies contained "other insurance" clauses stating that ProBuilders would only defend Pacific Trades if "no other insurance affording a defense … is available to you [i.e., Pacific Trades]." ProBuilders asserted that since there was "other insurance" (i.e., the Underwriters policies) "available" for the defense of Pacific Trades, ProBuilders had no duty to participate in defending Pacific Trades.

Eventually, the underlying construction defect lawsuit was settled. Although ProBuilders did not contribute to Pacific Trades' defense costs, ProBuilders did contribute $270,000 on behalf of Pacific Trades toward the settlement.

Following the settlement, Underwriters filed an equitable contribution lawsuit against ProBuilders. In the equitable contribution lawsuit, Underwriters sought to recover from ProBuilders a portion of the defense costs that Underwriters had incurred on behalf of Pacific Trades in the underlying construction defect action. ProBuilders moved for summary judgment, asserting that ProBuilders' "other insurance" clauses excused ProBuilders from defending Pacific Trades in the underlying action because another insurer (i.e., Underwriters) had been obligated to defend Pacific Trades in that action. The trial court agreed with ProBuilders and thus entered summary judgment in favor of ProBuilders. Underwriters appealed.

Holding

The Court of Appeal reversed. The appellate court characterized ProBuilders' "other insurance" clause as an "escape" clause. That is, ProBuilders' "other insurance" clause provided that ProBuilders would be liable to pay defense costs on behalf of Pacific Trades, but then purported to extinguish that obligation when "other insurance affording a defense … is available to [Pacific Trades]." The appellate court emphasized that in California "escape" type "other insurance" clauses are "disfavored," and that "the modern trend is to require equitable contributions on a pro rata basis from all primary insurers regardless of the type of 'other insurance' clause in their policies."

The appellate court also noted that Underwriters and ProBuilders provided primary coverage to Pacific Trades at different times (i.e., Underwriters was on the risk from October 23, 2001 through October 23, 2003, while ProBuilders was on the risk from December 9, 2002 through December 9, 2004). In the underlying construction defect action, the homeowners had sought damages from Pacific Trades for property damage that potentially occurred during both insurers' policy periods. Thus, giving effect to ProBuilders' "other insurance" provision would unfairly impose on Underwriters the burden of paying "defense costs attributable to claims arising from a time when ProBuilders was the only liability insurer covering Pacific Trades…." Stated differently, ProBuilders could not rely on its "other insurance" clause to deny coverage during periods of time when there was no "other insurance."

Based on the above, the appellate court held that the trial court had erred in granting summary judgment to ProBuilders. The appellate court thus remanded the case to the trial court for further proceedings.

Comment

On appeal, ProBuilders also argued that Underwriters' equitable contribution lawsuit against ProBuilders was barred by the applicable two-year statute of limitations because Underwriters filed the lawsuit more than two years after ProBuilders' initial refusal to defend, and more than two years after the court in the underlying lawsuit confirmed that the settlement between the homeowners and Pacific Trades was a good faith settlement.

However, the appellate court rejected ProBuilders' statute of limitations argument, noting that Underwriters' equitable contribution lawsuit was filed less than two years after the insurers contributed their payments to fund the settlement, less than two years after the homeowners finally dismissed their suit as to Pacific Trades, and less than two years after Underwriters made its final payment to the defense counsel hired to represent Pacific Trades. According to the appellate court, "although an action for equitable contribution can accrue when the noncontributing insurer first refuses to participate in the defense of a common insured, the statute of limitations should be equitably tolled until the plaintiff insurer makes the last payment in the underlying suit for which the plaintiff insurer is seeking contribution."

 

 

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