The California Court of Appeal held that an insurer’s obligation of equitable contribution for defense costs arises where, after receiving actual or constructive notice of the lawsuit, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution. ( OneBeacon America Insurance Co. v. Fireman’s Fund Insurance Co. (2009)2009 WL 1782979)
Facts
OneBeacon America Insurance Company (“OneBeacon”), Insurance Company of the West (“ICW”), and Fireman’s Fund Insurance Company (“FFIC”) were primary coinsurers under liability insurance policies of common insureds. These common insureds — the Mouren-Laurens Oil Company, along with its owners, directors, and officers (collectively “MLOC”) — were sued in 1998 for allegedly contaminating real property with petroleum products from the 1950s onward.
In 1999, OneBeacon agreed to defend MLOC in the underlying action. MLOC also tendered its defense to ICW and FFIC in 1999 under the belief that ICW and FFIC had insured MLOC during the period in question. As of 1999, however, MLOC did not have any physical evidence of the primary policies issued by FFIC and ICW. Thus, in their tender letters and supplementary correspondence, MLOC asked that ICW and FFIC locate and provide all policies they issued to MLOC. Both insurers denied coverage on the grounds that they did not issue any primary policies to MLOC.
Three years later, in 2002, MLOC provided ICW with copies of a number of ICW primary policies that MLOC was able to obtain through an ICW agent. MLOC also sent ICW a declaration from another ICW agent who attested that he sold a primary policy to MLOC in 1978. In 2002, MLOC also provided FFIC with a declaration from one of FFIC’s agents, who attested that he handled MLOC’s purchase of primary FFIC policies for the 1948-1962 policy years. Using the information from the declaration, FFIC was able to locate evidence of an FFIC primary policy within a matter of weeks. At that point, both ICW and FFIC agreed to defend MLOC under a reservation of rights.
OneBeacon demanded contribution from ICW and FFIC for the costs of defense from 1999 to 2002. ICW and FFIC refused payment, citing defects as to notice and tender. OneBeacon then filed the subject action for equitable contribution against FFIC and ICW. The trial court ruled against OneBeacon, and OneBeacon appealed.
Holding
The Court of Appeal found that OneBeacon was entitled to equitable contribution from 1999 forward. The Court first observed that under California law, tenders can be accomplished through constructive notice, which might be as simple as sending a copy of the complaint to the insurer without any tender letter. The Court then cited a number of public policy reasons for allowing constructive notice (as opposed to requiring formal notice by an insured): constructive notice clarifies the duties of the parties; it takes into account the greater knowledge and sophistication of the insurer; and although it places a burden on the insurer to ask the insured whether it is seeking a defense, that burden is not onerous.
Based on California’s recognition of constructive notice and the foregoing public policy considerations, the Court held that an insurer’s duty of equitable contribution for defense costs arises where, after receiving notice of the litigation, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution. The Court further observed that insurers are charged with knowledge of all information that a diligent inquiry would have revealed.
Applying this rule to ICW and FFIC, the Court then concluded that ICW and FFIC both had an equitable obligation to contribute to the costs of MLOC’s defense from 1999 forward. The Court held that neither ICW nor FFIC demonstrated that their search was diligent. In fact, there was no showing that the information available to ICW or FFIC in 2002 was any different from the information that would have been available to them upon a diligent inquiry in 1999. Rather, the record showed that ICW did not conduct any search whatsoever and instead placed the burden of discovering the policies on MLOC. Also, FFIC’s search was clearly inadequate, as there was no sufficient explanation for why FFIC was able to locate the policy in 2002 but not in 1999.
Thus, since ICW and FFIC received constructive notice of the lawsuit in 1999, and since a diligent inquiry would have revealed that they had in fact issued primary policies to MLOC exposing them to a claim for equitable contribution, both ICW and FFIC were equitably obligated to contribute to the defense from 1999 onward.
Comment
One of the reasons that the trial court ruled against OneBeacon was that it held that ICW and FFIC had no affirmative obligation to conduct a diligent inquiry into the existence of the policies. The Court of Appeal quickly dispelled with this notion and unequivocally imposed the burden on the insurer to locate policies. Insurers should be mindful of this burden whenever they receive correspondence from insureds or fellow insurers regarding missing policies.