In an equitable contribution action between liability insurers, once a participating insurer proves a “potential for coverage” under a non-participating insurer’s policy, the burden shifts to the non-participating insurer to prove the “absence of actual coverage” under its policy. ( St. Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut. Ins. Co. (2012) 210 Cal.App.4th 645)
Facts
FS Jackson Hole Development Company, LLC (FSJH) was the developer of a Four Seasons resort hotel near Jackson Hole, Wyoming that included 17 condominium units. FSJH hired Jacobsen Construction Company, Inc. (Jacobsen) to be the general contractor for the project. Jacobsen, in turn, hired Teton Builders, Inc. (Teton) to act as framing contractor for the condominium units.
FSJH later sued Jacobsen for construction defects at the project, including water intrusion damage arising from framing work done by Teton. Jacobsen sought a defense from its own insurer, St. Paul Mercury Insurance Company (St. Paul), which had issued a general liability policy that was in effect from April 1, 2003 through April 1, 2004. Jacobsen also sought a defense from Teton’s insurer, Mountain West Farm Bureau Mutual Insurance Company (Mountain West), which had issued polices listing Jacobsen as an additional insured for the period of June 12, 2002 through March 17, 2003. St. Paul agreed to defend Jacobsen, but Mountain West disclaimed coverage as to Jacobsen.
Eventually, the construction defect litigation was settled, with St. Paul contributing $3,070,000 on behalf of Jacobsen, and Mountain West contributing $100,000 on behalf of Teton. The settlement agreement released any contractual indemnity claims that Jacobsen had against Teton, but did not release any equitable contribution claims that St. Paul might have against Mountain West.
St. Paul then sued Mountain West for equitable contribution, alleging that Mountain West was obligated to pay a portion of the defense and settlement costs that St. Paul had paid on behalf of Jacobsen in the underlying construction defect action. The trial court ruled in favor of St. Paul, finding that St. Paul had proven a “potential for coverage” (i.e., a duty to defend) under the Mountain West policy, and that Mountain West had failed to prove an “absence of actual coverage” (i.e., no duty to indemnify) under its policy. Using a “time-on-the-risk” method of allocation, the trial court thus ordered Mountain West to pay St. Paul 43% of the defense and settlement costs that St. Paul had paid on behalf of Jacobsen in the underlying action, along with prejudgment interest. Mountain West appealed.
Holding
The California Court of Appeal affirmed in part and reversed in part.
The appellate court agreed that Mountain West had a duty to defend Jacobsen against the underlying lawsuit brought by FSJH. According to the appellate court, at least some of the claims FSJH had asserted against Jacobsen in the underlying construction defect action were potentially covered under the Mountain West policy, meaning that Jacobsen was entitled to a defense from Mountain West. Therefore, pursuant to Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal.App.4th 874, once St. Paul showed that Mountain West had breached its duty to defend, the burden shifted to Mountain West to prove the absence of actual coverage under its policy. Here, Mountain West had failed to carry its burden of proving lack of actual coverage under its policy.
Mountain West argued that since it had participated in defending its named insured, Teton, in the underlying action, Mountain West should be deemed to have participated in defending its additional insured, Jacobsen. The appellate court flatly rejected that argument, stating that Mountain West “cannot defeat equitable contribution merely because it contributed a portion of the settlement on behalf of Teton….” Mountain West owed separate duties to defend Teton as named insured and Jacobsen as additional insured, and Mountain West’s satisfaction of its duties to Teton did not satisfy Mountain West’s separate duties to Jacobsen.
Mountain West also argued that the settlement agreement in the underlying action extinguished St. Paul’s contribution rights against Mountain West. Again the appellate court disagreed. The language of the settlement agreement in the underlying action may have released Jacobsen’s indemnity rights against Teton, but it did not release St. Paul’s contribution rights against Mountain West.
Further, the trial court did not abuse its discretion in using a time-on-the-risk method to allocate Jacobsen defense and settlement costs between St. Paul and Mountain West. St. Paul provided coverage to Jacobsen as named insured for 12 months, and Mountain West provided coverage to Jacobsen as additional insured for nine months. Thus, St. Paul insured Jacobsen for 57% of the total time, and Mountain West insured Jacobsen for 43% of the total time. In a “continuous injury” case such as this, the trial court could properly conclude that time-on-the-risk was the most equitable way of allocating the defense and indemnity costs between the two insurers.
St. Paul’s damages were not certain until the trial court made a ruling as to the appropriate method of allocation. Thus, the appellate court held the trial court had erred in awarding prejudgment interest against Mountain West.
Comment
The decision in the above St. Paul case is consistent with the decision in the prior Safeco case. Both cases make it significantly easier for a participating insurer to recover indemnity contributions from a non-participating insurer. Under the reasoning of these cases, once the participating insurer shows a “potential for coverage” (i.e., a duty to defend) under the non-participating insurer’s policy, the non-participating insurer must show the “absence of actual coverage” (i.e., lack of duty to indemnify) under its policy. To the extent the non-participating insurer cannot prove a lack of actual coverage, the question simply becomes how the trial court will exercise its discretion to allocate the loss between the insurers.
Perhaps the most surprising aspect of the above case was Mountain West’s argument that, by defending its named insured, Teton, Mountain West should also be deemed to have defended its additional insured, Jacobsen. The appellate court quickly dismissed this argument, properly finding that Mountain West’s satisfaction of its duty to defend Teton as named insured was not a satisfaction of Mountain West’s separate duty to defend Jacobsen as additional insured.