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  • Affirmed/not for publication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. 

SUPREME COURT OF CALIFORNIA MONTROSE CHEMICAL CORPORATION OF CALIFORNIA, Petitioner, v. THE SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent; CANADIAN UNIVERSAL INSURANCE COMPANY, INC., et al., Real Parties in Interest. April 6, 2020 EXCERPTS/SUMMARY BY JUNFOLA 4 7 20

Reading the policy in light of principles of insurance law and the reasonable expectations of the parties, Montrose is entitled to access available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period.  A rule of vertical exhaustion is appropriate.  The insured has access to any excess policy once it has exhausted other directly underlying excess policies with lower attachment points, but an insurer called upon to indemnify the insured’s loss may seek reimbursement from other insurers that issued policies covering relevant policy periods.

ILLINOIS: CERTAIN UNDERWRITERS AT LLOYD’S LONDON, Subscribing to Certificate No. RTS000275-4 Plaintiff-Appellee and Cross-Appellant v. METROPOLITAN BUILDERS, INC.; and AIG PROPERTY CASUALTY COMPANY, as Subrogee of 1903 Schiller, LLC, Defendants (Metropolitan Builders, Inc., Defendant-Appellant and Cross-Appellee) December 18, 2019 EXCERPTS/SUMMARY BY JUNFOLA 4/6/20

CERTAIN UNDERWRITERS AT LLOYD’S LONDON, Subscribing to Certificate No. RTS000275-4

Plaintiff-Appellee and Cross-Appellant

 v.

METROPOLITAN BUILDERS, INC.; and AIG  PROPERTY CASUALTY COMPANY, as Subrogee of 1903 Schiller, LLC,  Defendants

(Metropolitan Builders, Inc., Defendant-Appellant and Cross-Appellee)

December 18, 2019

EXCERPTS/SUMMARY BY JUNFOLA 4/6/20

ISSUES

Duty to Defend

Occurrence

Property Damage

Economic Loss

Performance Bonds

CGL v. Surety

DAMAGE TO WORK OF THE INSURED CONTRACTOR THAT IS CURRENTLY BEING WORKED ON AND OTHER PARTS OF THE WORK THAT THE INSURED IS ALSO RESPONSIBLE FOR DO NOT CONSTITUTE AN OCCURRENCE OR PROPERTY DAMAGE.  DAMAGE TO PERSONAL PROPERTY OF THE OWNER OF THE PROPERTY IS AN OCCURRENCE CAUSING PROPERTY DAMAGE.

SUPREME COURT OF TEXAS JANET RICHARDS, MELVIN RICHARDS, AND AMANDA CULVER MEALS, APPELLANTS, V. STATE FARM LLOYDS, APPELLEE ON CERTIFIED QUESTION FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT Argued January 8, 2020 OPINION DELIVERED: March 20, 2020 EXCERPTS/SUMMARY BY JUNFOLA 4/5/20

ISSUES:

Duty to Defend

Eight Corners

Groundless, false, fraudulent

Insured exclusion

Motor vehicle exclusion

The Fifth Circuit certified the following question to this Court:

Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting Inc. a permissible exception under TX law?

No. State Farm did not contract away the eight-corners rule merely by omitting from its policy an express agreement to defend claims that are “groundless, false or fraudulent.”

US Court of Appeals First Circuit CLARENDON NATIONAL INSURANCE COMPANY, Plaintiff, Appellant v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant, Appellee April 1, 2020 (EXCERPTS/SUMMARY by Junfola – 4/4/20)

ISSUES:

Duty to Defend

Duty to Investigate

Waiver and Estoppel

Claims for contribution and for alleged violations of Massachusetts General Laws, chapters 93A and 176D

Clarendon appeals district court’s entry of summary judgment against its claim that Philadelphia breached its contract with Lundgren Management Group, Inc. when Philadelphia declined to tender a defense to Lundgren.  Lundgren assigned these claims to Clarendon.  The court determined that because the property damage allegations were excluded by the prior policy period exclusion, the complaint did not give rise to a duty to defend.  Furthermore, Clarendon challenges the summary dismissal of its additional claims for contribution and violations of MA General Laws, chapters 93A and 176D, which the court concluded should also be dismissed because they were premised on the incorrect notion that Philadelphia had breached its duty to defend.  Affirmed.

IT’S FUNDAMENTAL: THE DUTY TO DEFEND – The Anomaly of D.R. Horton-Tex., Ltd. v. Markel Inter’l Ins. Co.

It is well-established that the duty to defend is broader than the duty to indemnify.  Often touted as being “axiomatic”, if there is a potential for coverage under the CGL policy, there is a duty to defend a suit. The duty to indemnify, on the other hand, is narrower because it depends on the insured proving that a loss is actually covered.

Is it possible to have a duty to indemnify but not a corresponding duty to defend? Is the duty to indemnify without a corresponding duty to defend an anomaly, or at least a bit illogical?  Or is it perfectly logical in the context of an “eight-corners” state, like Texas? 

The analysis of the duty to defend begins with an examination of the facts and the policy. It is necessary to determine, however, what facts an insurer must, or can, review when determining its defense obligation in a particular jurisdiction. Is the examination of the facts limited to those stated in the lawsuit or can information extrinsic to the lawsuit be consulted?

While it is universally accepted that the duty to defend is broader than the duty to indemnify, jurisdictions differ as to what information can be used to determine that duty. For instance, in an “eight-corners” state, the decision to defend must be based on a review of the policy and the lawsuit. Use of information outside of the complaint is generally not permitted. In other states, information extrinsic to the complaint must be considered.  In some cases, this information can be used to defeat coverage as well as afford it. In other cases, the information can be used only to afford coverage.

So, while it appears that the defense duty is broad because only a potential for coverage need be established, an eight-corners state restricts the amount of information that can be examined.  Does this restriction detract from the axiom that the duty to defend is broader than the duty to indemnify when only limited information can be used?

Common rationale for rejecting the eight-corners rule can be persuasive. First, the denial of a defense based on information restricted to the lawsuit would appear to be contrary to the broad duty to defend which is universally recognized; and, second, the decision to defend, or not, would be based on the pleadings which could be limited in its recitation of the facts and be subject to “the pleading strategies, whims, and vagaries of third party claimants to control the rights of parties to an insurance contract.”[1]

On March 21, 2013, a federal district court in Texas ruled that the duty to defend and duty to indemnify are distinct duties under Texas law and that one can exist without the other.  Colony Ins. Co. v. Price, 2013 U.S. Dist. LEXIS 38952 (N.D. Tex. Mar. 21, 2013).

Citing the Supreme Court of Texas in D.R. Horton-Tex., Ltd. v. Markel Inter’l Ins. Co, 300 S.W.3d 740, 743, the Colony court stated that “although the duty to defend is ‘strictly circumscribed by the eight-corners doctrine, it is well settled that the facts actually established in the underlying suit control the duty to indemnify.’” Colony 13-14

Is the duty to defend truly broader than the duty to indemnify if determination of the duty to defend is “strictly circumscribed by the eight-corners doctrine?”  To answer this question, it is helpful to distinguish the “potential v. actual” criterion for determining duties from any constraints on the information to which this criterion can be applied.

When the duty to defend must be determined from the lawsuit only and not from extrinsic information, it is possible that no duty to defend exists given the way the lawsuit is drafted.  On the other hand, there may be a duty to indemnify because it can be determined based on information outside of the complaint.

In D.R. Horton-Texas, Ltd., the Court ruled that the defense and indemnity duties are independent of each other and that an indemnity duty can exist without a defense duty: “We hold that even if Markel has no duty to defend D.R. Horton, it may still have a duty to indemnify… That determination hinges on the facts established and the terms and conditions of the CGL policy. D.R. Horton 744.

Hence, the anomaly…the duty to defend is broader than the duty to indemnify, but in an eight-corners jurisdiction, the information used to determine the duty to defend is limited. And while the duty to indemnify is narrower, the information used to determine that duty is broad. Since the duties exist independent of each other, it is possible to have a duty to indemnify without a duty to defend.


[1] Randy Maniloff and Jeffrey Stempel quoting from M. Mooney Corp. v. U.S. Fid. & Guar. Co., 618 A.2d 793, 797 (N.H. 1992), General Liability Insurance Coverage/Key Issues in Every State (New York, NY: Oxford University Press, Inc. 2011) 71.