The California Court of Appeal has held that when an insured pays statutory attorney fees to plaintiffs as part of a settlement, those statutory attorney fees qualify as costs “taxed” against the insured under a “supplementary payments” provision in a liability policy. (Employers Mut. Cas. Co. v. Philadelphia Indem. Ins. Co. (2008) 169 Cal.App.4th 340)
Facts
Louis Simpson owned and operated a mobile home park. In 2003, 188 residents of the mobile home park sued Simpson alleging that he had failed to maintain the mobile park in a habitable condition. The plaintiffs sought damages and statutory attorney fees from Simpson pursuant to California’s Mobilehome Residency Law (Civil Code section 798 et seq.).
Simpson tendered defense of the lawsuit to several general liability insurers, including Employers Mutual Insurance Company, Evanston Insurance Company and Philadelphia Indemnity Insurance Company. Employers and Evanston jointly provided a defense to Simpson through two separate “panel” law firms and a third law firm that acted as “independent counsel.” Philadelphia, on the other hand, denied coverage and refused to participate in Simpson’s defense.
Eventually, the plaintiffs settled their “failure to maintain” lawsuit against Simpson for a total of $3 million, with $1.2 million allocated to damages and $1.8 million allocated to statutory attorney fees. Employers and Evanston funded the entire settlement on behalf of Simpson. In addition, Employers and Evanston paid a total of $740,000 in defense costs to the two panel law firms and independent counsel that represented Simpson.
Evanston assigned its contribution rights to Employers. Employers then filed a contribution action against the non-participating insurers, including Philadelphia. The trial court ruled that Philadelphia did have a duty to defend and indemnify Simpson in the underlying lawsuit. The issue thus became what portion of the defense and indemnity costs should be allocated to Philadelphia.
With respect to plaintiffs’ damagesof $1.2 million, the trial court used a “modified” time on the risk method whereby the court multiplied the plaintiffs’ damages by Philadelphia’s time on the risk (22.2%) and the percentage of plaintiffs who resided in the park during Philadelphia’s policy period (58%). Thus, Philadelphia was responsible for $154,000 of the plaintiffs’ damages (i.e., $1.2 million x 22.2% x 58% = $154,000).
With respect to plaintiffs’ statutory attorney fees of $1.8 million and Simpson’s defense costs of $740,000, the trial court used a “straight” time on risk method whereby the court simply multiplied the plaintiffs’ statutory attorney fees and Simpson’s defense costs by Philadelphia’s time on the risk (22.2%). Thus, Philadelphia was responsible for $400,000 of the plaintiffs’ statutory attorney fees (i.e., $1.8 million x 22.2% = $400,000), and $164,000 of Simpson’s defense costs (i.e., $740,000 x 22.2% = $164,000). Philadelphia appealed the rulings as to Philadelphia’s responsibility for the plaintiffs’ statutory attorney fees and Simpson’s defense costs.
Holding
The Court of Appeal affirmed.
First, the appellate court held that the trial court properly required Philadelphia to contribute $400,000 toward the $1.8 million in statutory attorney fees which Simpson paid as part of the underlying settlement with the plaintiffs. The appellate court noted that the Philadelphia policy contained a “supplementary payments” clause which provided that Philadelphia would pay all costs (including statutory attorney fees) “taxed” against the insured in a lawsuit. Although the underlying lawsuit was settled without a trial, the policy’s coverage for costs “taxed” against the insured was not limited only to situations where a court ordered the insured to pay statutory attorney fees to the plaintiff after trial . Rather, the word “taxed” could also be construed to include situations where the insured agreed to pay statutory attorney fees to the plaintiff as part of a settlement . Further, while only 58% of the plaintiffs lived in Simpson’s mobile home park during the Philadelphia policy period, the trial court did not err in requiring Philadelphia to pay a simple 22.2% “time on the risk” share of the statutory attorney fees. The trial court was not required to multiply Philadelphia’s share of the $1.8 million in statutory attorney fees by bothPhiladelphia’s time on the risk (22.2%) and the percentage of overall plaintiffs who resided in the park during Philadelphia’s policy period (58%).
Next, the appellate court held that the trial court properly required Philadelphia to contribute $164,000 toward the $740,000 in defense costs which Employers (and its assignor, Evanston) had paid on behalf of Simpson in the underlying lawsuit. Although a portion of the $740,000 in defense costs was for “independent counsel” fees which were owed because Evanston defended Simpson under a reservation of rights, and although Philadelphia never defended Simpson under any reservation of rights, the court concluded that “Philadelphia stood to gain if Evanston successfully challenged coverage” and thus “it was equitable for Philadelphia to share in the cost of Simpson’s Cumis counsel.” Further, Philadelphia failed to establish that the two “panel” defense firms Employers and Evanston hired in the underlying lawsuit had performed “duplicate” work in defending the insured, Simpson.
Comment
Generally, when one insurer files a contribution action against another insurer, the trial court has broad discretion to allocate defense and indemnity costs in any number of “equitable” ways – e.g., equal shares, time on risk, policy limits, premiums collected, etc. Unless the trial court adopts an allocation approach that is manifestly unreasonable, the trial court’s decision will be upheld by an appellate court.
The most significant aspect of this case is the appellate court’s holding that when an insured (or one of its insurers) agrees to pay costs (including statutory attorney fees) to a plaintiff in settlement, those costs are deemed to be “taxed” against the insured for purposes of a “supplementary payments” clause. This ruling allows an insured (or one of its insurers) to settle with the plaintiff and then seek reimbursement of costs (including statutory attorney fees) from a non-participating insurer.