The California Court of Appeal has held that subcontractors’ insurers who defended a developer as an “additional insured” were entitled to recover a portion of the developer’s defense costs from the developer’s own excess insurer. ( Transcontinental Ins. Co. v. Insurance Co. of the State of Pennsylvania (2007) WL 604372)
Facts
Barratt American, Inc. acted as developer of a housing project. Barratt hired numerous subcontractors to work on the project, and several of the subcontractors’ insurers named Barratt as an additional insured for claims “arising out of” the subcontractors’ work.
After the project was completed, the homeowners association sued Barratt for alleged construction defects, false advertising and breach of fiduciary duty. Barratt initially obtained a defense from its own primary carrier, United National Insurance Company, but United National soon exhausted its policy (apparently on other claims).
Barratt next tendered the defense to its own excess insurer, Insurance Company of the State of Pennsylvania (ISOP), and to various insurers who had named Barratt as additional insured, including Transcontinental Insurance Company and related insurers (collectively Transcontinental). ISOP initially paid $600,000 in defense costs on behalf of Barratt, but then asserted that it had no duty to defend Barratt and demanded reimbursement from Transcontinental.
Transcontinental reimbursed ISOP for the defense costs ISOP had already paid on behalf of Barratt, and then proceeded to pay an additional $1.2 million in defense costs on behalf of Barratt. Transcontinental made all payments under a reservation of rights to seek reimbursement from ISOP.
Transcontinental later brought an equitable subrogation/contribution action against ISOP, claiming that ISOP had a duty to pay a share of Barratt’s defense costs. The trial court ruled in favor of Transcontinental, finding that ISOP was obligated to pay a portion of Barratt’s defense costs. ISOP appealed.
Holding
The Court of Appeal affirmed. The court acknowledged that under Presley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal.App.4th 571, Transcontinental had a prophylactic duty to defend its additional insured, Barratt, against all claims asserted in the underlying action. However, under Buss v. Superior Court (1997) 16 Cal.4th 3, Transcontinental was also entitled to reimbursement from Barratt of defense costs for claims that did not potentially arise out of work performed by the subcontractors insured by Transcontinental. Moreover, according to the court, the claims against Barratt that were not potentially covered by Transcontinental’s policies were potentially covered by ISOP’s excess policy.
The court thus concluded that since Transcontinental had paid defense costs on behalf of Barratt for claims which were not potentially covered under the Transcontinental policies but which were potentially covered under the ISOP excess policy, Transcontinental was “equitably subrogated” to Barratt’s rights to recover those defense costs from ISOP. Transcontinental could thus recover a share of Barratt’s defense costs from ISOP.
Comment
This case illustrates that an insurer who has a duty to defend an insured in a “mixed” action must provide the insured with a full and complete defense against all claims asserted in the action. However, the insurer who discharges its duty to defend can then seek reimbursement of defense costs for the “uncovered” claims, either from the insured (directly) or another insurer (via subrogation).