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THE ADJUSTER - San Diego Insurance Adjusters
Association
February, 2006
 As we will see
below, the Court’s have been fairly even in finding for both
carriers and insureds. CARRIER WHICH PROPERLY RESERVES RIGHT MAY
SEEK EXPENSE REIMBURSEMENT FROM INSURED IN DEFENDING SUIT WHEN NO
COVERAGE AVAILABLE. In Scottsdale Insurance Company v. MV
Transportation (2005) 36 Cal.4th 643, the issue before the
California Supreme Court was whether an insurer that had properly
reserved its rights could obtain reimbursement of its expenses of
defending its insured against a third-party lawsuit where it was
determined, as a matter of law, that the policy never afforded any
potential for coverage and there was no duty to defend. The Court
held “yes.” In reaching its decision, the Court discussed at length
its prior holding in Buss v. Superior Court (1997)16 Cal. 4th 35.
Importantly, the carrier must make sure it properly issues its
reservation for reimbursement. This decision simply confirms what is
becoming well-settled California law.
NONSTANDARD UMBRELLA POLICY
LANGUAGE WHICH INDEMNIFIED INSURED “OBLIGATED TO PAY BY REASON OF …
PROPERTY DAMAGE … EITHER THROUGH ADJUDICATION OR COMPROMISE … AND
FOR LITIGATION, SETTLEMENT, ADJUSTMENT AND INVESTIGATION OF CLAIMS
AND SUITS ….” APPLIED TO ENVIRONMENTAL CLEAN UP COSTS ORDERED BY AN
ADMINISTRATIVE AGENCY. In Powerine Oil Co. Inc. v. Superior Court
(2005) 37 Cal.4th 377, which is really what we insiders call
“Powerine Too” because this is the second component of this very
lengthy case to reach the highest court of this great state, the
California Supreme Court evaluated the scope of coverage provided
under insuring agreements in non-standard umbrella policies issued
by Central National. The Court held that Central National’s
agreement to cover “all sums … the Insured shall be obligated to pay
by reason of the liability … imposed … by law for damages … and
expenses” was broad enough to extend to environmental cleanup costs
ordered by administrative agencies. The Court reasoned that Central
National’s insurance policies were broader than the standard primary
CGL insuring language at issue in Certain Underwriters at Lloyd’s of
London v. Superior Court (2001) 24 Cal.4th 945, which, yes, is what
we refer to as “Powerine Won,” because they incorporated the word
“expenses” and therefore provided coverage beyond courtordered money
“damages.”
In Powerine Won, the Supreme
Court held that an agreement to indemnify for “all sums that the
insured becomes legally obligated to pay as damages” is limited to
“money ordered by a court,” and does not extend to environmental
cleanup costs ordered by an administrative agency. Powerine Too also
relied on the fact the Central National policies incorporated the
phrase “ultimate net loss” defined as the total sum the insured
becomes “obligated to pay by reason of … property damage … either
through adjudication or compromise … and for litigation, settlement,
adjustment and investigation of claims and suits ….” The Supreme
Court reasoned that while “adjudication” implies a proceeding in
court, “compromise” does not necessarily implicate a suit commenced
by the filing of a complaint. Moreover, the Supreme Court determined
that by including the term “claim” in addition to “suit,” the
definition of ultimate net loss in the Central National policies
extended coverage to expenditures beyond those incurred as a result
of litigating an action brought in court.
If that were not enough,
Powerine Too also relied on the fact that the Central National
policies provided umbrella coverage that could apply to claims not
covered under the primary standard CGL policies at issue in Powerine
Won. The Court noted that the insured would have expected Central
National to provide broader coverage than that afforded under the
primary policies, such as coverage for environmental cleanup costs
order by administrative agencies. And so it goes.
NON-STANDARD “INDEMNITY ONLY”
UMBRELLA POLICY LANGUAGE WHICH INDEMNIFIED INSURED FOR MONEY DAMAGES
ORDERED BY A COURT DID NOT APPLY TO ENVIRONMENTAL CLEAN UP COSTS
ORDERED BY AN ADMINISTRATIVE AGENCY. In County of San Diego v. Ace
Property & Casualty Co. (2005) 37 Cal.4th 406, a case way close to
home, the California Supreme Court evaluated the scope of coverage
provided under a non-standard “indemnity only” excess policy issued
by ACE.
The Court determined that ACE’s
agreement to indemnify “all sums which the insured is obligated to
pay by reason of liability imposed by law” for “damages” did not
cover the County’s settlement of non-litigated claims including an
administrative order to remediate groundwater. In so doing, the
Court aligned the ACE policy language with the language at issue in
Powerine Won (discussed above) and distinguished it from the
language at issue in Powerine Too (also discussed above). The Court
relied on the fact that the insuring clauses in the nonstandard ACE
policy and the standard policy at issue in Powerine Won limited
coverage to “damages,” i.e., money ordered by a court, not “damages
and expenses.” The Court rejected the County’s argument that the ACE
policy’s reference to “claims” as well as “suits” in its definition
of “ultimate net loss” meant that ACE had a duty to settle
non-litigated claims.
Unlike the policy at issue in
Powerine Too, the ACE policy did not define its indemnity obligation
in terms of “ultimate net loss.” Rather, the phrase was used in
ACE’s “limits of liability” provision which operated only to define
ACE’s limits obligations. Importantly, the Court noted that nothing
in the ACE policy indicated coverage was to extend beyond money
damages ordered by a Court. Finally, the Court relied on the fact
that the ACE policy included a “no action” clause which allows a
suit against an insurer if there has been a judgment or, with the
insurer’s consent, a settlement as well as a “no voluntary payments”
provision. The Court determined that the inclusion of these
conditions “belie the notion that the term damages in the ACE policy
extends the indemnity duty to any settlement [of non-litigated
claims] entered into by the County.” And so it goes, the other way.
AN INSURER IS ENTITLED TO PURSUE
A SUBROGATION CLAIM AGAINST ITS OWN INSURED IF THE POLICY DOES NOT
COVER THE INSURED FOR THE PARTICULAR LOSS OR LIABILITY. In McKinley
v. XL Specialty Insurance Company (2005) 131 Cal.App.4th 1572, the
California Court of Appeal for the Third Appellate District affirmed
a judgment of the Nevada County Superior Court denying a claim for
bad faith against a subrogating insurer. The court concluded that
because Plaintiff was not insured under the policy for the damage in
question, the defendant insurer did not act in bad faith by bringing
an unsuccessful subrogation action against her.
Plaintiff McKinley rented a
plane from Todd Aero for the purpose of receiving advanced flight
instruction. The plane was damaged during landing, and Todd Aero’s
insurer, XL Specialty Insurance Company, paid the repair costs. XL
then brought a subrogation action against McKinley. The action was
referred to judicial arbitration and eventually dismissed when the
arbitrator concluded McKinley was not at fault for the damage.
McKinley then sued XL for bad faith, alleging XL should not to have
sued her in subrogation because she qualified as an insured under
Todd Aero’s policy.
The Court of Appeals held that
an insurer is entitled to pursue a subrogation claim against its own
insured if the policy does not cover the insured for the particular
loss or liability. The court found that while the XL Policy added
renter pilots (such as McKinley) as insureds under the policy’s
“third party” liability coverage, such pilots were not insureds
under the policy’s at-issue first party coverage
NO DUTY OF GOOD FAITH AND FAIR
DEALING TO A THIRD PARTY CLAIMANT, EVEN IF THE INSURER
COINCIDENTALLY INSURES THE THIRD PARTY CLAIMANT. In Coleman v.
Republic Indem. Ins. Co. of California (2005) 132 Cal.App.4th 403,
the Court of Appeal for the Second Appellate District, held that an
insurer owes no duty of good faith and fair dealing to a third party
claimant, even if the insurer coincidentally insures the third party
claimant.
Plaintiffs, who were insured by
Republic Insurance Company, were involved in a traffic accident with
Defendant Gonzalez, who was insured by Infinity Insurance Company.
Infinity is Republic’s parent company. While Infinity allegedly
advised Plaintiffs that the statute of limitations would expire one
year after the traffic accident, Infinity’s adjuster allegedly told
Plaintiffs that if they turned in all medical documentation before
the limitations period expired, then their claim would be processed
and settled regardless of the statute of limitations. Plaintiffs
submitted all the information on their personal injury claim, but
did not file suit within one year. After the statute of limitations
expired, Infinity rejected the claim because the statute had run.
Plaintiffs then filed suit against Gonzalez, Infinity and Republic
alleging negligence against Gonzalez and intentional and negligent
infliction of emotional distress, fraud, and breach of the implied
covenant of good faith and fair dealing against both Infinity and
Republic.
Plaintiffs alleged that Republic
was Infinity’s “alter ego” and, therefore, that Infinity and
Republic should be treated as one insurer. The Court of Appeal held
that Plaintiffs could not state a cause of action for breach of the
implied covenant of good faith and fair dealing because Infinity and
Republic (as Infinity’s alter ego) did not owe Plaintiffs a duty of
good faith and fair dealing. The court reasoned that the Plaintiffs
are in an adversarial relationship with the insurers despite being
coincidentally insured by Republic. Explained the Court, “Imposing a
duty of good faith and fair dealing running from the Insurer to the
[Plaintiffs] would ‘create a serious conflict of interest for the [I]nsurer’
by obligating it to safeguard both the [Plaintiffs’] and Gonzalez’s
interests.” Plaintiffs, as third party claimants, have no
contractual relationship with the insurer and cannot sue the insurer
for breach of the implied covenant of good faith and fair dealing.
James M. Roth is a
shareholder in The Roth Law Firm. Mr. Roth’s practice includes
representing TPAs and insurance carriers in coverage, SIU,
extra-contractual liability, and third party defense matters. Please
submit any questions or comments for future columns to Mr. Roth at
TheRothLawFirm.com.
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