In an equitable contribution action, an insurer was only required to show a “potential” for coverage under a co-insurer’s insurer’s policy which had a self-insured retention that the insured paid as part of an underlying settlement. ( Axis Surplus Ins. Co. v. Glencoe Ins. Ltd. (2012) 204 Cal.App.4th 1214)
Facts
In September 2004, Pacifica Pointe L.P. (Pacifica) purchased the Carmel Pointe apartments. Pacifica subsequently converted the apartments into condominiums, and then sold the condominiums to individual owners. Following sale of the units, the Carmel Pointe Homeowners Association (HOA) filed a construction defect suit against Pacifica. In the construction defect action, the HOA sought damages from Pacifica for breach of warranties, negligence and misrepresentation arising out of the condominium conversion project.
Pacifica tendered defense of the lawsuit to Axis Surplus Insurance Company (Axis) under general liability insurance policies in effect from March 31, 2004 to March 31, 2006. The Axis policies contained an “other insurance” clause which provided for sharing a loss with a co-insurer by equal shares if the co-insurer also provided for sharing by equal shares. Axis accepted Pacifica’s tender subject to a reservation of rights.
Pacifica also tendered defense of the lawsuit Glencoe Insurance Ltd. (Glencoe) under a wrap-up/owner controlled insurance policy in effect from September 2, 2004 through September 2, 2007. The Glencoe policy stated that Glencoe had no duty to investigate or defend any claim until Pacifica satisfied a $250,000 self-insured retention (SIR). The Glencoe policy also contained an “other insurance” provision similar to the one in the Axis policy. Glencoe did not accept Pacifica’s tender, but rather reserved its rights and requested that Pacifica provide evidence that it had satisfied the SIR.
The HOA ultimately agreed to settle its construction defect lawsuit against Pacifica for a total of $1 million. Of the $1 million amount, Axis contributed $750,000, and Pacifica contributed the remaining $250,000 (thus satisfying the SIR under the Glencoe policy). Glencoe refused to participate in the settlement, but Glencoe approved of Pacifica contributing its SIR toward the settlement.
Axis then filed an equitable contribution action against Glencoe. In the contribution action, Axis sought a ruling that Glencoe was obligated to pay a portion of the $750,000 that Axis had paid toward settlement of Pacifica’s alleged liability to the HOA in the underlying construction defect suit.
The trial court ruled that Axis was entitled to recover from Glencoe a portion of the $750,000 that Axis had paid on behalf of Pacifica to settle the underlying construction defect suit. The trial court further concluded that the $750,000 amount should be allocated 60% ($450,000) to Glencoe and 40% ($300,000) to Axis. Glencoe appealed.
Holding
The Court of Appeal affirmed. The appellate court rejected Glencoe’s argument that Axis had to show that payment of the $1 million settlement amount generally – and the $250,000 SIR in particular – was for “property damage” covered by the Glencoe policy. Rather, the appellate court cited the general rule that in an equitable contribution action, the participating insurer only has the burden of showing a potential for coverage under the non-participating insurer’s policy, at which point the burden shifts to the non-participating insurer to show the absence of coverage under the non-participating insurer’s policy. These burdens of proof were appropriate even though Glencoe’s policy was not triggered until after settlement of the underlying action, when Pacifica actually paid its $250,000 SIR. Because Axis had proved a potential for coverage under the Glencoe policy, and because Glencoe had failed to prove the absence of coverage under the Glencoe policy, Axis was entitled to contribution from Glencoe.
The appellate court also rejected Glencoe’s argument that the trial court should have apportioned liability between Glencoe and Axis using the “equal shares” method found in the “other insurance” clauses in the Glencoe and Axis policies. According to the appellate court, the trial court was not bound by the other insurance clauses in the policies, but rather had discretion as to how to allocate liability between Glencoe and Axis. Here, Axis had paid $750,000 on behalf of Pacifica to settle the underlying construction defect action. Since Glencoe had insured Pacifica for three years and Axis had insured Pacifica for two years, the trial court could properly use a “time-on-risk” method to allocate liability between the two insurers. Thus, the trial court could properly find that Axis’ $750,000 settlement payment should be allocated 60% ($450,000) to Glencoe and 40% ($300,000) to Axis.
Comment
Glencoe’s primary argument on appeal was that, since Pacifica had not paid its SIR until after settlement was reached in the underlying construction defect suit, Glencoe had never breached a duty to defend Pacifica, and hence Glencoe should not be treated as a “non-defending” insurer who had to prove the absence of coverage under the Glencoe policy. The appellate court rejected that argument. The court stated that “[t]o allow Glencoe to defeat an equitable contribution claim merely based on the timing of the payment of the SIR would award Glencoe for its inaction and work an injustice. Glencoe appears to have been hiding behind the SIR requirement in its policy, gambling that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit. We decline to adopt a rule sanctioning such gamesmanship.”