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.
- 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.
- 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.