The California Court of Appeal has held that a liability policy’s “cross-suits” exclusion relieved an insurer of any duty to defend its named insured against a suit brought by an additional insured. ( Great Western Drywall, Inc. v. Interstate Fire & Casualty Company (2008) 161 Cal.App.4th 1033)
Facts
Roel Construction Co., Inc. (Roel) was the general contractor on a condominium project in San Diego. Roel entered into a subcontract with Great Western Drywall, Inc. (Great Western) whereby Great Western agreed to install drywall and perform other work on the project. The subcontract gave Roel certain express indemnity rights against Great Western, and also apparently required that Roel be listed as an additional insured on Great Western’s general liability policy.
Great Western sued Roel over a payment dispute. Roel cross-complained against Great Western for breach of contract, negligence, “money due for work and materials,” account stated, and money had and received. In its cross-complaint Roel alleged that: (a) Roel overpaid Great Western under the subcontract; (b) Roel was required to hire other subcontractors to finish and correct Great Western’s work after Great Western abandoned the project; and (c) in the course of its work, Great Western negligently caused property damage to other work (specifically window glass and tubs).
Interstate Fire & Casualty Company (Interstate) had issued a general liability policy identifying Great Western as named insured and Roel as additional insured. The Interstate policy included a “cross-suits” exclusion which stated that there was no coverage for “any claim or suit for injury or damage by one Insured against another Insured. This exclusion does not apply to … actions to apportion liability between Insureds where any Insured has been sued for a covered loss.” Great Western tendered defense of Roel’s cross-complaint to Interstate. Although eventually Interstate agreed to defend Great Western against Roel’s cross-complaint, Interstate never did actually fund Great Western’s defense.
The Great Western/Roel litigation went to trial. The trial court awarded Great Western approximately $332,000 on its complaint against Roel, and awarded Roel approximately $321,000 on its cross-complaint against Great Western, for a net recovery to Great Western of approximately $11,000.
Great Western then filed a bad faith action against Interstate for failing to defend and indemnify Great Western against Roel’s cross-complaint in the underlying litigation. The trial court ruled that the Interstate policy’s “cross-suits” exclusion applied, and that Interstate thus had no duty to defend or indemnify Great Western against Roel’s claims. Great Western appealed.
Holding
The Court of Appeal affirmed, holding that the Interstate policy’s “cross-suits” exclusion relieved Interstate of any duty to defend or indemnify Great Western against Roel’s cross-complaint in the underlying litigation.
The appellate court began by noting that the first portion of the exclusion barred coverage for “any claim or suit for injury or damage by one Insured against another Insured .” This language precluded coverage for the cross-complaint which Roel as “additional insured” had filed against Great Western as “named insured.”
The appellate court acknowledged that the exclusion had an exception for “actions to apportion liability between Insureds where any Insured has been sued for a covered loss.” However, according to the court, this exception was only intended to apply where a third party filed a lawsuit for covered damages against one insured, who then filed a cross-complaint for indemnity against another insured. Here, no third party ever filed a suit for damages against Roel. Thus, Roel’s cross-complaint against Great Western could not be characterized as an action “to apportion liability between Insureds where any Insured has been sued for a covered loss.”
Because the basic exclusionary language applied, and the exception did not, Interstate had no duty to defend or indemnify Great Western against Roel’s cross-complaint in the underlying litigation.
Comment
The result in this case might have been different if the owner of the project (a third party) had filed a suit for covered property against the general contractor (as additional insured), who then cross-complained for indemnity against the subcontractor (as named insured). In that scenario, the cross-complaint for indemnity would presumably fall within the “cross-suits” exclusion’s exception, and the insurer would have had a duty to defend the subcontractor against the general contractor’s cross-complaint.