Spring 2007

The San Diego Defense Lawyers Update

INSURANCE LAW: Broker's obligations with insurance coverage

James M. Roth, Esq., The Roth Law Firm

During 2006 the Courts in California issued many important and varied decisions affection policyholders and the insurance industry. This month’s edition shall discuss cases which were published in early 2006. Future editions shall bring you up to speed with recent developments.

INSURED’S BANKRUPTCY CONFIRMATION PROCEEDINGS WERE NOT AN ACTUAL TRIAL TRIGGERING THE (EXCESS) CARRIERS’ INDEMNITY OBLIGATIONS.
In Fuller-Austin Insulation Company v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, 38 Cal.Rptr.3d 716, the California Court of Appeal, Second Appellate District, reversed in part and remanded the judgment of the Los Angeles County Superior Court in favor of the insured and against its excess carriers. Fuller-Austin Insulation Company (Fuller-Austin) was involved in the installation and removal of building materials containing asbestos. It fi led an action against its excess insurers to establish coverage for past, present, and future asbestos bodily injury claims. Thereafter, it filed a bankruptcy petition, and the bankruptcy court confirmed the plan and established a trust for resolving asbestos claims against the company. In this appellate action, the Court concluded that the insured’s bankruptcy confirmation proceedings were not an actual trial triggering the excess carriers’ indemnity obligations. While the Court found that the bankruptcy plan amounted to a settlement, it ruled that the excess carriers could challenge the settlement on grounds of unreasonableness, fraud or collusion, where they had been precluded from participating in the bankruptcy plan’s confirmation hearing.

IN A MOTION FOR SUMMARY JUDGMENT BROUGHT BY AN INSURED AGAINST HIS CARRIER, A TRIABLE ISSUES OF FACT MAY EXIST AS TO WHETHER THE CARRIER INITIALLY THOROUGHLY INVESTIGATED AND OBJECTIVELY EVALUATED THE INSURED’S CLAIM, WHICH IT ULTIMATELY PAID IN FULL. [REVIEW GRANTED BY CALIFORNIA SUPREME COURT.]
In Wilson v. 21st Century Ins. Co. (2006) 38 Cal.Rptr.3d 514, the California Court of Appeal, Second Appellate District, reversed the Los Angeles County Superior Court’s order granting summary judgment in favor of a carrier in a breach of contract and bad faith action involving the adjustment of an underinsured motorist claim. The Court of Appeal concluded that triable issues of fact existed as to whether the carrier initially thoroughly investigated and objectively evaluated the insured’s claim, which it ultimately paid in full. As a side issue, the Court also found that discovery the insured wanted to conduct into the carrier’s use of a computer software program known as “Colossus,” used to evaluate bodily injury claims, might be relevant. On April 26, 2006, the Petition for Review was granted by the California Supreme Court.

INSURER COULD NOT BE HELD LIABLE IN TORT TO INSURED CONDOMINIUM OWNER FOR NEGLIGENT CLAIM INVESTIGATION UNDER FIRST PARTY ALL-RISK HOMEOWNER’S POLICY, WHERE INSURED’S LOSS WAS DUE TO DISCOVERY OF MOLD IN UNIT, WHICH WAS NON-COVERED LOSS, AND JURY FOUND THAT WATER LEAKAGE FROM NEIGHBOR’S UNIT, WHICH WAS COVERED PERIL, WAS NOT PREDOMINATE CAUSE OF LOSS.
In Benavides v. State Farm General Ins. Co., et. al. (2006) 136 Cal.App.4th 1241, 39 Cal.Rptr.3d 650, the California Court of Appeal, Second Appellate District, reversed a judgment of the Los Angeles County Superior Court in favor of an insured against her carrier arising out of a mold-related claim. Following State Farm’s denial of Ms. Benavides’s condominium owner’s claim under an all-risk homeowner’s policy, which claim was based on the discovery of mold in the unit, Ms. Benavides brought an action against State Farm, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent claim investigation. The Superior Court, Los Angeles County, entered judgment on a jury verdict finding no coverage under the policy, but awarding damages to Ms. Benavides on the negligent investigation claim. Both parties appealed. The Court concluded that since the mold-claim was uncovered, Ms. Benavides could not recover for negligent claim handling. The Court recognized that pursuant to it earlier ruling in Waller v. Truck Ins. Exchange (1995) 11 Cal.4th 1, 35-36, absent a covered loss, an insured could not maintain a claim for tortious breach of the implied covenant of good faith and fair dealing. The Court held that since State Farm’s investigation, adequate or not, resulted in a correct conclusion that Ms. Benavides’s losses were not covered, no tort liability could arise for breach of the implied covenant. Under the same logic, the Court concluded that, absent coverage, there was no tort liability for improperly investigating Ms. Benavides’s claim whether State Farm’s conduct was characterized as an implied covenant breach or negligence.

LIABILITY INSURER DID NOT BREACH ITS DUTIES UNDER DIRECTOR AND OFFICER PROVISION TO DEFEND OR INDEMNIFY INSURED CONDOMINIUM ASSOCIATION IN UNDERLYING ACTION AGAINST ASSOCIATION BY CONSTRUCTION COMPANY, WHICH AROSE AFTER ASSOCIATION REFUSED TO PAY ALL MONEY OWED TO CONSTRUCTION COMPANY FOR REPAIRS MADE TO CONDOMINIUMS FOLLOWING EARTHQUAKE.
In Oak Park Calabasas Condominium Assn. v. State Farm Fire & Cas. Co. (2006) 137 Cal. App.4th 557, 40 Cal.Rptr.3d 263, the Court of Appeal, Second District, affirmed the Los Angeles County Superior Court’s entry of judgment in favor of State Farm finding that an insured’s voluntary refusal to pay a contractor does not constitute a “wrongful act” covered under a D&O liability policy. In January of 1994 the Northridge earthquake occurred. Oak Park structures suffered considerable damage. As a result, Oak Park made agreements with a construction company by the name of ECC to repair the damaged structures. Following several contractual modifications, Oak Park refused to pay the remaining amounts due under the contract. ECC recorded a mechanic’s lien on the Oak Park complex on June 1, 1995. In July 1995 ECC fi led an action against Oak Park and the owners of the condominiums containing causes of action for breach of written contract, foreclosure of mechanic’s lien, reasonable value of services rendered, failure to release retention proceeds in violation of Civil Code section 3260 and fraud. The insurance policy at issue defined “wrongful acts” as “negligent acts, errors, omissions or breach of duty directly related to the operation of the Condominium/Association.” The insured Association argued that the term “negligent” only applied to “negligent acts,” while State Farm contended that the term “negligent” applied to each and every act set forth in the “wrongful act” definition, including errors, omissions, or breach of duty. The Court sided with State Farm and concluded that the underlying contract dispute did not amount to a wrongful act covered under the D&O policy.

ALTHOUGH AMBIGUOUS, EMPLOYMENT- RELATED PRACTICES LIABILITY (EPL) EXCLUSION IN INSURED JANITORIAL SERVICES COMPANY’S CGL POLICY, WHICH EXCLUDED PERSONAL INJURY COVERAGE WHETHER INSURED WAS LIABLE AS EMPLOYER “OR IN ANY OTHER CAPACITY,” APPLIED ONLY WHERE THERE WAS EMPLOYMENT RELATIONSHIP BETWEEN INSURED AND THIRD PARTY CLAIMANT, AND DID NOT APPLY TO EXCLUDE COVERAGE FOR LAWSUIT AGAINST INSURED FOR FALSE IMPRISONMENT AND LABOR VIOLATIONS BROUGHT BY EMPLOYEES OF INSURED’S SUBCONTRACTOR.
In North American Building Maintenance, Inc. v. Fireman’s Fund Ins. Co. (2006) 137 Cal. App.4th 627, 40 Cal.Rptr.3d 468, the California Court of Appeal, Fifth Appellate District, reversed the Fresno County Superior Court’s decision and held that an employment-related practices exclusion did not preclude a duty to defend claims asserted against the insured by non-employees. The insured, North American Building Maintenance, Inc. (“NABM”) provided commercial janitorial services to other companies throughout California. One such company was Target Stores, with which NABM had a “Floor Maintenance Service Agreement.” NABM, in turn, subcontracted with California Building Management Services (“CBMS”) to perform the actual work at individual Target stores. It was employees of CBMS who brought the underlying lawsuit against NABM and, as well, Target and others. Fireman’s Fund denied NABM’s tender of the CBMS suit based on an employment-related practices exclusion. The Court determined that the denial was improper because the exclusion applied only to claims brought by the NABM’s employees, and the underlying suit was brought by the employees of CBMS. The Court interpreted the exclusion as being limited to situations of employment, former employment, or prospective employment, and determined that NABM could be found liable to plaintiffs regardless of whether or not it employed them.

SURPLUS LINES INSURANCE BROKER, WHICH ALLEGEDLY HAD FAILED TO PROCURE ERRORS AND OMISSIONS POLICY WHICH WOULD COMPENSATE MARKETING COMPANY FOR INADEQUATE SOFTWARE DEVELOPED IN INDIA, OWED DUTY OF CARE TO MARKETING COMPANY, AND SO WAS POTENTIALLY LIABLE TO COMPANY IN NEGLIGENCE FOR ITS ALLEGED LAPSE, DESPITE ABSENCE OF PRIVITY OF CONTRACT BETWEEN BROKER AND COMPANY.
In Business to Business Markets, Inc. v. Zurich Specialties, et al. (2006) 135 Cal. App.4th 165, 37 Cal.Rptr.3d 295, the California Court of Appeal, Second Appellate District, reversed and remanded the judgment of the Los Angeles County Superior Court, finding that a broker may have professional liability for failing to obtain necessary insurance coverage where a party qualifies as an intended beneficiary of the broker’s obligation. In July 2000, Business to Business Markets, Inc., also known as “B2B,” hired Tricon Infotech, an Indian software company, to write a custom-made computer program for B2B’s business. One term of their contract obligated Tricon to carry an errors and omissions insurance policy to compensate B2B if Tricon failed to deliver the promised software. B2B thereafter contacted Hoyla, a retail insurance broker. B2B informed Hoyla of Tricon’s insurance needs, and told Hoyla that Tricon was based in India. Hoyla contacted Professional Liability Insurance Services, Inc. (“PLIS”), a surplus lines insurance broker, to place the insurance policy and gave PLIS the information it had received from B2B. PLIS contacted Zurich Specialties London Limited, which issued a policy to Tricon. Although Tricon was an Indian company doing business in India, the policy excluded coverage for any claims arising from or related to work performed in India. Tricon failed to deliver usable software to B2B, so B2B sued Tricon for breach of contract. Based on the insurance policy’s exclusion for work done in India, Zurich Specialties refused to pay for Tricon’s defense or to indemnify Tricon against B2B’s claim. Tricon did not appear in the trial court to contest B2B’s complaint. After a prove-up hearing on damages, the trial court entered a default judgment against Tricon of $922,480. But without any insurance coverage, the judgment against Tricon was uncollectible. B2B thus sued PLIS for negligence in procuring a policy that did not cover work done in India. Pointing to the absence of any direct dealings or contact with B2B, PLIS demurred on the ground that it owed no duty of care to B2B. The trial court agreed and sustained PLIS’s demurrer without leave to amend. Relying upon factors outlined by the California Supreme Court in its 1958 opinion in Biakanja v. Irving, 49 Cal.2d 647, the Court of Appeal found that B2B satisfied the conditions to become an intended beneficiary of PLIS’s professional obligations. The Court pointed out that PLIS knew that the Zurich policy was expected to benefi t B2B by providing protection for Tricon’s failure to perform, even though the policy only named Tricon. Too, B2B suffered foreseeable harm from the PLIS mistake in obtaining the Zurich policy with the India exclusion, as Tricon bought the policy specifically to protect against the unlikely but foreseeable event of its failure to deliver the software. Additionally, B2B’s loss occurred with a reasonably close degree of certainty, given B2B’s proof of $922,480 in economic harm from Tricon’s breakdown in delivering the software. Finally, the Court found that “moral blame” attached to the PLIS neglect to meet the standard of care, because PLIS assumed the responsibility of obtaining the correct coverage and therefore had the obligation competently to discharge that duty.