The California Court of Appeal has held that in an equitable contribution action to recover settlement costs, a participating insurer must only show a potential for coverage under the non-participating insurer’s policy, and the burden then shifts to the non-participating insurer to prove the absence of actual coverage. ( Safeco Insurance Company of America v. Superior Court (2006) 40 Cal.App.4th 874)
Facts
The insureds, a group of construction companies, purchased primary general liability policies from either Safeco Insurance Company of America or American States Insurance Company (collectively, Safeco), and later purchased additional primary general liability policies from Century Surety Company (Century). Numerous parties filed lawsuits against the insureds alleging property damage occurring during the Safeco and Century policy periods. Safeco defended the insureds and settled the suits. However, Century refused to participate in the defense or settlements, asserting that the Century policies had an “other insurance” provision which made the Century coverage “excess” to any other available coverage.
Safeco filed an equitable contribution action against Century to recover a portion of the defense costs and settlement costs Safeco had paid on behalf of the insureds. The trial court ruled in favor of Safeco and against Century on the “other insurance” issue. The trial court then ruled that in order to recover defense costs , Safeco only had to prove a potential for coverage under Century’s policies, but that in order to recover settlement costs , Safeco had to prove actual coverage under Century’s policies.
Holding
In subsequent proceedings in the Court of Appeal, the parties agreed that to obtain contribution toward defense costs, Safeco only had to establish a potential for coverage under Century’s policies. However, the parties disagreed about what showing Safeco had to make in order to obtains contribution toward settlement costs – with Safeco arguing that it only had to establish a potential for coverage under Century’s policies, and Century arguing that Safeco had to establish actual coverage under Century’s policies.
The Court of Appeal ruled in favor of Safeco, holding that in order for Safeco to recover a portion of the settlement costs from Century, Safeco only had to show a potential for coverage under Century’s policies. The court held that once Safeco established a potential for coverage under Century’s policies, the burden would shift to Century to establish the absence of actual coverage under its policies. The court reasoned that when a duty to defend is shown, a non-participating insurer waives its right to challenge the reasonableness of the amount of a settlement. The non-participating insurer retains the right to raise other coverage defenses as affirmative defenses in a contribution action, but the non-participating insurer has the burden of proof on those issues. Since it was clear that Century had a duty to defend, and since the underlying settlements were presumptively reasonable, the burden was on Century to prove that there was no coverage under its policies.
Comment
Generally speaking, the court’s ruling should make it easier for a participating insurer to recover contribution from a non-participating insurer when the underlying case was resolved by settlement. Once the participating insurer shows that there was a potential for coverage, the non-participating insurer will have to show that there was no actual coverage. In many cases, the non-participating insurer will have difficulty meeting that burden.