A non-defending insurer’s alleged right to equitably offset settlement amounts paid by other non-defending insurers does not affect the amount of damages suffered by the insured, only the amount of damages that can be recovered by the insured at trial. ( McMillin Companies, LLC v. American Safety Indemnity Co. (2015) 233 Cal.App.4th 518)
Facts
McMillin Construction Services, L.P. (McMillin) served as the general contractor for a residential development in Temecula, California. Later, 117 homeowners from the development filed a construction defect lawsuit against McMillin. In response, McMillin sought defense and indemnity from its subcontractors’ commercial general liability insurers, arguing that it qualified as an additional insured on the subcontractors’ policies. However, the insurers denied coverage and McMillin thus defended itself in the construction defect action.
McMillin subsequently filed suit against the insurers alleging that their failure to defend constituted a breach of contract and a breach of the implied covenant of good faith and fair dealing. McMillin eventually settled with all of the insurers except one, American Safety Indemnity Company (ASIC). The settlements amounted to $690,154, of which $274,154 was allocated to defense expenses and $416,000 was unallocated. McMillin claimed that even with the settlements, it still had $309,957 in unreimbursed defense expenses.
In advance of trial, the parties filed motions in limine that addressed, among other issues, the admissibility of McMillin’s prior settlements. Specifically, ASIC argued that because McMillin had recovered more in settlement proceeds than it had incurred in defense fees in the underlying action, McMillin could no longer prove an essential element of its cause of action for breach of contract – namely, damages. ASIC further argued that because McMillin could not recover for breach of contract, McMillin could not recover for breach of the implied covenant of good faith and fair dealing.
The trial court granted ASIC’s motion in limine and, based on the effect of that ruling, entered judgment in ASIC’s favor. McMillin appealed.
Holding
The Court of Appeal reversed. With respect to the offset issue, the court held that the parties had demonstrated a “basic misunderstanding” of equitable offsets. The court clarified that an equitable offset does not affect the amount of damages suffered , but rather affects the amount of damages that can be recovered at trial. Thus, the court held that ASIC’s right to an equitable offset did not impact whether McMillin suffered damages as a result of ASIC’s alleged breach of contract and bad faith. Based on the foregoing, the court held that ASIC’s right to an offset did not defeat McMillin’s right to proceed to trial on its breach of contract and bad faith causes of action.
Comment
McMillin makes clear that an insurer may utilize an equitable offset to reduce or eliminate the amount of damages awarded to an insured at trial in an action for breach of contract and bad faith. However, the insurer cannot use an equitable offset as a complete defense to the action itself because an equitable offset does not affect whether the insured suffered damages in the first place.
The McMillin court distinguished the earlier case of Emerald Bay Community Assn. v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 107. According to the court, there is a difference between a situation where other insurers provide the insured with a complete defense and thus the insured suffers no damage at all (i.e., Emerald Bay ), and a situation where the insured is without a complete defense and thus suffers damage, but then, following litigation, recovers payments from other insurers which arguably compensate the insured (i.e., McMillin ).