A general liability insurer was entitled to reimbursement from an insured of sums the insurer paid in settlement of the insured’s alleged liability in an underlying “slumlord” suit. ( Axis Surplus Insurance Company v. Reinoso (2012) WL 2389324)
Facts
Edgar and Linda Reinoso co-owned various apartment complexes, including the J-3 apartment complex in Lancaster. The Reinosos’ management company, Proud American Investments, LLC, managed the properties.
In 2005, various tenants of the J-3 Apartments sued the Reinosos and Proud American for alleged habitability deficiencies at the apartment building. Specifically, the tenants sought damages for alleged cockroach infestation, inoperable heating and cooling systems, water leaks, mold, electrical deficiencies, and unsafe / unsanitary common areas. The tenants alleged that they repeatedly asked the defendants to correct the deficiencies, but that the defendants failed to take proper action.
The Reinosos and Proud American tendered defense of the lawsuit to their general liability insurer, Axis Surplus Insurance Company. Axis defended the Reinosos and Proud American under a reservation of rights. Following discovery, defense counsel came to the conclusion that the Reinosos and Proud American could not prevail against the tenants’ claims. In addition, defense experts estimated that the tenants could recover compensatory damages in the range of $3.5 to $30 million. Ultimately, the tenants settled their claims against the Reinosos and Proud American for over $3 million, with Axis contributing over $2 million under a reservation of rights pursuant to Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489.
Axis then sued the Reinosos and Proud American for reimbursement of defense and settlement costs, based on the policy’s exclusion for injuries that were “expected or intended from the standpoint of the insured.” The trial court denied Axis recovery of defense costs, finding that Axis failed to prove that the tenants’ claims were not potentially covered. However, the trial court awarded Axis recovery of its $2 million+ settlement contribution, concluding that Axis had proven that the tenants’ claims were not actually covered.
The Reinosos and Proud American all appealed from the judgment. However, Mr. Reinoso and Proud American later dismissed their appeals, leaving just Mrs. Reinoso to pursue her appeal.
Holding
The Court of Appeal affirmed the judgment allowing Axis reimbursement of its settlement contribution. The appellate court rejected Mrs. Reinoso’s argument that she was an “innocent” insured and that the exclusion for “expected or intended” injuries thus did not apply to her. There was substantial evidence from which the trial court could conclude that Mrs. Reinoso subjectively knew of the conditions at the apartment complex and how the apartments were being managed, and thus that Mrs. Reinoso “expected” the tenants to suffer injuries. Under such circumstances, the exclusion for “expected or intended” injuries barred coverage for Mrs. Reinoso’s alleged liability to the tenants.
The appellate court also rejected Mrs. Reinoso’s argument that the trial court erroneously failed to apportion the settlement among the insureds, effectively holding each insured “jointly and severally” liable for the entire judgment. The appellate court found that substantial evidence supported the trial court’s “implied finding” that Mrs. Reinoso was jointly and severally liable for the full amount of the settlement payment. As such, Axis could recover the full amount of the judgment from any one of the insureds, including Mrs. Reinoso. To hold otherwise would result in unjust enrichment to Mrs. Reinoso, who had faced millions of dollars in exposure in the underlying action and who had benefited from Axis’ payment of the settlement funds.
Comment
Here, the insurer was able to defeat coverage and obtain reimbursement by showing that the tenants’ injuries were “expected or intended” by the insured. Note that to prevail on this exclusion, the insurer must show that the insured actually knew his or her conduct would cause injury to the claimant (a subjective standard), not merely that the insured should have known his or her conduct would cause injury (an objective standard).