A United States District Court held that a D&O insurer had no duty to advance 100 percent of the legal fees incurred by the insured to defend an underlying lawsuit, based on a policy provision giving the insurer power to allocate between covered and uncovered defense fees. (Commercial Capital Bankcorp, Inc. v. St. Paul Mercury Insurance Company (C.D. Cal. 2006) 419 F. Supp. 2d 1173)
Facts
A third party filed suit against various officers of Commercial Capital Bankcorp (CCB). In the suit, the third party alleged certain claims for various intentional torts.
CCB asserted that its D&O insurer, St. Paul, had a duty to advance on a current basis 100 percent of CCB’s costs to defend the officers. The St. Paul policy provided “[i]t shall be the duty of the Insureds and not the duty of the Insurer to defend any claim,” except that St. Paul had a duty to advance defense costs incurred by an insured.
The policy also contained an allocation provision that applied to suits alleging both covered and uncovered claims. The allocation provision stated “If there can be an agreement on an allocation of Defense Costs [between covered and uncovered claims], the Insurer shall advance on a current basis Defense Costs allocated to covered Loss. If there can be no agreement on allocation of Defense Costs, the Insurer shall advance on a current basis Defense Costs which the Insurer believes to be covered under this Policy until a different allocation is negotiated, arbitrated or judicially determined.” Based on these provisions and its contention that the intentional torts were not covered, St. Paul offered to advance payment for only 50 percent of CCB’s defense costs, thereby prompting CCB to file the suit for declaratory relief.
Holding
The Court held that St. Paul had no duty to advance payment of 100 percent of CCB’s defense costs. Generally, California law requires contemporaneous payment of all reasonable defense costs. (See Buss v. Superior Court (1997) 16 Cal.4th 35.) However, St. Paul and CCB contracted around the Buss rule with the policy language quoted above that included an allocation provision. The allocation provision in the policy was conspicuous based on its location in the policy, and its terms were unambiguous. The allocation provision applied since the underlying lawsuit against CCB’s officers alleged both covered and uncovered claims and because the parties could not agree on an allocation.
Comment
At least in the context of D&O policies, federal courts construing California law may enforce policy language allowing a liability carrier to allocate between covered and uncovered defense costs subject to a subsequent arbitration or court ruling on allocation. There was no conflict with Buss, which addressed the scope of a CGL insurer’s duty to defend a “mixed” case involving covered and uncovered claims, because the St. Paul D&O policy did not require St. Paul to do anything other than reimburse the insured for whatever defense costs St. Paul believed were covered, subject to a later allocation determination.