The Duty to Defend is Broad but it is not Unlimited – Contractors Bonding and Insurance Company v. AmTrust International Underwriters Limited (AmTrust), No. 3:2020cv03248 – Document 37 (N.D. Cal. 2021)


I’ve been handling claims for almost 44 years now and have learned a thing or two. It is probably a good idea not to mention at a party, for example, that you are in the insurance business. If you do, immediately deflect by mentioning that your brother is a retired IRS agent.

I’ve learned a few axioms.  “The duty to defend is broader than the duty to indemnify.” “If there is a potential for coverage, there is a duty to defend.” “The defense obligation is immediate and complete.”

The broad defense obligation does have some caveats. Is the jurisdiction a four (eight) corner state or must/can extrinsic (to the suit) information be considered when determining the defense duty?  If there is a duty to defend, can the carrier seek reimbursement from the insured via a unilateral reservation of rights or specific provision in the policy itself, or at least seek equitable contribution from other insurers? What are the consequences of a reservation of rights while undertaking a defense?

A recent (June 9, 2021) U.S. District Court case, Contractors Bonding and Insurance Company v. AmTrust International Underwriters Limited (AmTrust), decided a contentious issue:

If the named insured (GC) is an additional insured on the sub’s policy, and the language of both policies supports the additional insured coverage as primary, is the additional insured coverage obligated to fund the entire defense even though the additional insured is sued for its own direct liability and/or vicarious liability of other parties, e.g., other subcontractors?

The court’s conclusion:

“CBIC cannot shift onto a subcontractor the burden to provide a complete defense for a suit including claims against only a general contractor. Each insurer must provide half of the defense costs in the underlying Wimmer matter and the civil case will be terminated. The parties are, of course, entitled to file a new case should one or both seek reallocation of defense costs after a determination of liability in the underlying matter.”

Here are the details, in a nutshell (includes quotes, in whole, in part, and paraphrased from ruling):

The construction defect lawsuit

  • Wimmer hired Whitney to provide foundation construction services and serve as the GC to remodel his home via a “limited scope” construction agreement.
  • Once foundation was complete, Whitney hired Grasshof, a framer, as a sub.
  • Whitney and Grasshof’s subcontract required Grasshof to name Whitney as an additional insured on his policy.
  • Due to disagreements between Wimmer and Whitney, Grasshof was removed from job and project was abandoned.
  • Wimmer sued Whitney, Grasshof, and another sub, Central Coast Welding.
  • Alleged defects include framing-specific deficiencies as well as foundation and general contracting issues. Whitney performed part of the deficient framing prior to hiring Grasshoff.

The policies

  • Whitney is the named insured on the CBIC policy.
  • Grasshof obtained insurance (two policies) from AmTrust.
  • Whitney is an additional insured on Grasshof’s policies.

Wimmer tender

  • Whitney tendered the Wimmer matter to AmTrust for defense and indemnification on June 3, 2016. Two years later, AmTrust agreed to participate in Whitney’s defense.
  • On November 7, 2018, CBIC requested reimbursement for defense fees incurred prior to AmTrust’s acceptance of coverage. CBIC made a second demand on December 7, 2018.
  • Almost a year later, AmTrust communicated to CBIC that it was only willing to provide a defense against issues related to its named insured, Grasshof. It claimed “[t]here are aspects of this claim that are not covered under our policy which include the negligence of [Whitney], and actions in the complaint that do not include [Grasshof]. Amtrust has always agreed to pay 50% of its share of defense. We never agreed to pay 100%.”

CBIC seeks equitable contribution, equitable subrogation, and declaratory reliefAmTrust argues that its carefully worded additional insured endorsement precludes defense of Whitney where any liability is solely the result of Whitney’s own negligence. Whitney is only entitled to a defense where the harm was “caused, in whole or in part” by Grasshof.

The additional insured and primary insurance endorsements do not make the subcontractor broadly responsible for all defects related to the remodel of Wimmer’s home. Rather, AmTrust is only responsible for liabilities traceable to the defects in Grasshof’s work. Because some of the claims in the Wimmer matter are unrelated to Grasshof’s work, AmTrust cannot be saddled with the entire defense obligation.

CBIC argues AmTrust is required to provide a full and complete defense because it has acknowledged a duty to defend. See Presley Homes, Inc. v. Am. States Ins. Co., 90 Cal.App.4th 571, 575 (2001) (“It is settled that where an insurer has a duty to defend, the obligation generally applies to the entire action, even though the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy.”).

By CBIC’s own admission, however, it has also undertaken to defend the Wimmer matter — it seeks reimbursement “for defense fees incurred by CBIC prior to AMTRUST’s agreement to defend.” In consequence of this Court’s determination that its policy is not purely excess, CBIC also has a duty to defend the Wimmer matter. Because each policy is primary as to some portion of the claims, and both policies contemplate contribution by equal shares where all other insurance so permits, each insurer is required to fund half of the defense of the Wimmer matter.

CBIC’s attempt to undermine this conclusion by characterizing its policy as excess is unavailing.

AmTrust’s additional insured endorsement specifies that its policy “will not apply to any claim, loss, or liability which is determined to be solely the result of [Whitney’s] negligence or solely [Whitney’s] responsibility.” To induce primary coverage, Whitney’s liability must be “caused, in whole or in part” by Grasshof.  Whitney is not even an additional insured with regard to the Wimmer claims alleging defects in Whitney’s independent work, let alone entitled to demand primary coverage from AmTrust.

It would be unreasonable to conclude that, by acquiring additional insurance by way of its contractors, a general contractor’s commercial insurance policy would never be triggered. For both interpretive and policy reasons, CBIC’s policy cannot be considered excess.

King’s Cove Marina v. Lambert Commercial Construction/MN Supreme Court

  1. A commercial general liability insurance policy does not cover property
    damage to an insured’s own completed work under the plain language of a “your work”
    exclusion, which applies to work included in the “products-completed operations hazard.”
  2. A Miller-Shugart settlement agreement that does not allocate between claims
    that are covered and not covered by the insurance policy is not per se unreasonable and
    unenforceable against the insurer.
  3. Determining the reasonableness of an unallocated Miller-Shugart settlement
    agreement is a two-part inquiry that first examines the overall reasonableness of the
    settlement and then determines how a reasonable person in the position of the insured
    would have valued and allocated the covered and uncovered claims at the time of the
    settlement.

Doull v. Foster/MA/Causation

The facts in this case involve medical malpractice but the ruling has ramifications beyond medical malpractice. It is instructive as to multiple causes, i.e. “but for” v. “substantial factor” standards, and legal (proximate) causation v. cause-in-fact.

…we conclude that the traditional but-for factual causation standard is the appropriate standard to be employed in most cases, including those involving multiple alleged causes.

SCOTTSDALE INSURANCE COMPANY v. PTB SALES, INC./July 16, 2020/Excerpts by Junfola

Issues/Concepts:

  1. No duty to defend
  2. Reservation of rights to seek reimbursement of defense and indemnity expenses
  3. California Civil Code Section 2860 – no duty to provide independent counsel
  4. No interference by Scottsdale in PTB’s counterclaim in underlying action

Facts:

  • PTB purchased CGL policy from Scottsdale in 2016.
  • In 2017, Scottsdale funded PTB’s defense in action between PTB and Brooks.
  • Scottsdale contributed to settlement.
  • Scottsdale sued PTB seeking declaratory relief and reimbursement of defense costs and settlement expenses.
  • PTB countered for breach of contract and bad faith.
  • Scottsdale moved for summary judgment on its claims and on PTB’s counterclaims.
  • PTB opposed Scottsdale’s motion but did not itself move for summary judgment.
  • District court granted Scottsdale’s motion.
  • PTB appeals.
  • Affirmed/not for publication

Ruling:

  • Scottsdale had no duty to defend PTB.
    • Underlying allegations either not potentially covered under the personal and advertising injury coverage, or were excluded.
    • Duty to defend when there is a potential for coverage.
    • PTB failed to show a potential for coverage.
  • Scottsdale properly reserved its rights to recoup its defense costs and settlement expenses.
    • An insurer “properly reserve[s] its rights” to recoup its defense costs by advising its insured that it would provide a defense under a reservation of certain rights, including “[t]he right to seek reimbursement of defense fees paid toward defending causes of action which raise no potential for coverage.”
    • It repeated that reservation of rights in three subsequent communications with PTB.
    • To recoup its settlement expenses, an insurer must make “a timely and express reservation of rights.”
    • After an unsuccessful attempt to settle during the first mediation, Scottsdale sent PTB a letter reserving “the right to seek reimbursement for any judgment or settlement paid.”
    • During the second round of settlement negotiations, Scottsdale twice offered to “contribute $300,000 toward settlement of this matter, subject to its reservation of rights,” in response to Brooks’ $850,000 settlement demand.
    • Brooks then reduced its demand to $725,000 and Scottsdale increased its settlement offer to $350,000.
    • A reasonable party in PTB’s position would have understood Scottsdale’s reservation of the right to seek reimbursement for “any settlement” to apply to its offer to contribute $350,000, as both were made during the second attempt at settlement negotiations.
  • Scottsdale did not breach a duty to fund independent counsel for PTB under California Civil Code § 2860.
    • Under Section 2860, an insurer must provide independent counsel to the insured “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises.”
    • District court properly concluded that this claim failed as a matter of law because Scottsdale owed no duty to defend.
    • There was no conflict of interest, which arises “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.”
    • Coverage depended simply on a comparison of the allegations in Complaint against the terms of the Policy. In this case, that is a solely legal issue, and the provisions of the Complaint and the Policy are fixed and not susceptible to manipulation by appointed counsel.
  • District court did not err in granting summary judgment in Scottsdale’s favor on PTB’s counterclaim for bad faith interference with the prosecution of PTB’s counterclaims against Brooks.
    • PTB voluntarily settled its counterclaims against Brooks in exchange for $250,000.
    • PTB entered into the settlement agreement with notice that Scottsdale had reserved its rights to recoup any settlement expenses, yet PTB asked Scottsdale to fund the settlement, which it did.
    • There is simply no evidence that Scottsdale interfered with PTB’s successful and self-initiated effort to settle its claims against Brooks for $250,000.
    • The district court properly granted Scottsdale’s motion for summary judgment on PTB’s counterclaims against Scottsdale.

South Carolina Supreme Court Ex Parte: Builders Mutual and Nationwide Mutual, Appellants In Re: Palmetto Pointe v. Island Pointe/May 13, 2020 Excerpts/Summary by Junfola

AFFIRMED

  • Insurers not entitled to intervene in construction defect trial as a matter of right.
  • In subsequent DJ, Insurers have right to determination of which portions of damages are covered under CGL policies between the Insurers and Insureds.      

CONSTRUCTION DEFECT ACTION

  • Insurers provided independent counsel to defend subject to ROR.
  • At end of discovery, Insurers motioned to intervene for limited purpose of participating in preparation of a special verdict form or a general verdict form accompanied by answers to interrogatories for submission to jury during trial.
  • Insurers hoped jury would determine which portions of the damages were covered, obviating need for the DJ.
  • Trial court denied motions; Insurers’ appeal was certified.

MOTION TO INTERVENE

  • Decision to grant or deny within discretion of the trial court.
  • Court will not disturb decision absent manifest abuse of discretion that results in error of law amounting to a deprivation of rights of the party.
  • Entity seeking intervention must:

(1) Timely application;

(2) assert an (real, material, substantial) interest;

(3) demonstrate that without intervention, disposition of the action may impair or impede ability to protect that interest;

(4) demonstrate that its interest is inadequately represented by other parties.

  • Insurers are not “real parties in interest” cannot satisfy the four-part test and have not met the requirements to intervene as a matter of right.
  • Insurers’ intervention would (1) unnecessarily complicate the action, including altering the Association’s burden of proof and possibly delaying the trial, and (2) create a conflict of interest for the Insureds’ counsel, who were supplied to them by the Insurers.
  • It was not the intent in Newman to categorically foreclose a subsequent DJ to resolve a coverage dispute.  To the extent Newman may be read to foreclose an insurer’s subsequent DJ to resolve the coverage dispute, we modify Newman accordingly.
  • Harleysville neither mandates intervention nor forecloses a DJ to resolve a coverage dispute.
  • The parties offer varying approaches on the specifics of how a subsequent DJ should be tried. 
  • A significant point of contention is the Insurers’ concern that any coverage decisions in the DJs will be bound by factual determinations made in the construction defect action.

HOW TO FAIRLY ALLOCATE COVERED AND NON-COVERED DAMAGES?

  • Insureds and the Insurers are not precluded from introducing evidence as to which damages are covered (or excluded from coverage).
  • The parties are bound by the jury verdict.
  • We reject the notion that, in a DJ, it is “improper and purely speculative” to allocate a general verdict into covered and non-covered damages.
  • We do not oppose the parties coming to an agreement on a framework for allocating damages, subject to the approval of the court.
  • Failing an agreement of the parties, we set forth a default approach that shall serve as the framework for use in DJs for allocating covered and non-covered damages. 
  • This default allows litigants in a DJ to use percentages, rather than exact dollar amounts, to determine the amount of covered and non-covered damages in a general verdict.
  • The primary source of evidence in the DJ should be the transcript of the merits hearing. 
  • In the discretion of the court, additional evidence may be presented that is relevant to the coverage dispute determination, such as expert testimony.
  • The additional evidence, if any, must be narrowly tailored to the coverage dispute question, as the transcript of the merits hearing will be the primary source of evidence. 
  • The trier of fact shall then make a determination allocating on a percentage basis what portion of the underlying verdict constitutes covered damages and what portion constitutes non-covered damages. 
  • Perfect precision in allocating damages is not always achievable. 
  • Where perfect precision is not achievable, a fair approximation must suffice. 
  • Our research persuades us that the percentage-based approach will best achieve a fair allocation of damages.

501 EAST 51ST STREET, LONG-BEACH-10 LLC, Plaintiff and Appellant v. KOOKMIN BEST INSURANCE CO., LTD., et al., Defendants and Respondents. Filed 4/2/20; Certified for Publication 4/16/20 IN THE COURT OF APPEAL OF THE STATE OF CA SECOND APPELLATE DISTRICT Excerpts/Concepts by Junfola 4/17/20

KEY CONCEPTS

  • Breach of covenant of good faith and fair dealing, aka bad faith
  • Efficient proximate cause
  • Genuine dispute doctrine

WHAT IS THIS CASE ABOUT?

  • Defendants denied plaintiff’s claim for damages to its apartment complex caused by a ruptured underground water main.
  • Experts hired by plaintiff and defendants provided conflicting reports on the cause of the damage.
  • Plaintiff sued for bad faith, breach of contract, etc.
  • Defendants argued: “genuine dispute doctrine” provided a complete defense to a finding of bad faith. Denial was based on expert opinions that the damage was caused by long-term settlement and earth movement, which was not a covered loss.
  • Plaintiff appeals judgment following summary adjudication of plaintiff’s claim for breach of the covenant of good faith and fair dealing in favor of defendants.
  • Ruling: there is no material dispute whether defendants denied the claim in good faith based on an expert report concluding the damage was not caused by the broken water main, and affirm the judgment.  

Supreme Court of the State of New York Appellate Division: Second Judicial Department Northside Tower Realty, LLC, respondent, v Admiral Insurance Company, appellant, et al., defendant. 2/5/20 Excerpts/summary by Junfola 4/15/20

Admiral is obligated to defend and indemnify the plaintiff in Vachon v Northside Tower Realty, LLC.

Issues/Concepts: additional insured

  • Northside sued, pursuant to a CGL policy issued by Admiral to nonparty Scorcia and Diana Associates, Inc.
  • Northside demonstrated that it qualified for additional insured status under the policy Admiral issued to Scorcia. 
  • “‘When determining whether a third party is an additional insured a court must ascertain the intention of the parties to the policy, as determined from within the four corners of the policy itself’”
  • The additional insured endorsement extended coverage to any person or organization Scorcia had agreed by written contract to name as an additional insured.
  • A written contract between Northside and Scorcia provided that “[p]rior to the commencement of any of the Work, [Scorcia] shall purchase and maintain, at its own expense, the following insurances as will protect it and [Northside]” and lists CGL insurance as one of the types of insurance that Scorcia must procure and maintain.  
  • The natural and intended meaning of the phrase “as will protect it and [Northside]” is that Scorcia and Northside were both intended to enjoy the coverage specified in the contract. 
  • The intent and meaning of the phrase “as will protect it and [Northside]” becomes clear when juxtaposed with the language of another provision of the contract that references “Additional Insureds” under the policy.  If Northside and Scorcia did not intend to confer additional insured status on Northside, the provision referencing “Additional Insureds” would be rendered meaningless or superfluous.  A court should not read an agreement so as to render any term, phrase, or provision meaningless or superfluous.

IN THE COURT OF APPEALS OF MARYLAND PATRICK ROSSELLO v. ZURICH AMERICAN INSURANCE COMPANY (Maryland Casualty) Filed: April 3, 2020 EXCERPTS/SUMMARY BY JUNFOLA 4/9/20

Damages from a continuous bodily injury judgment must be allocated on a pro rata, time-on-the-risk basis across all insured and insurable periods triggered by the plaintiff’s injuries.