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The Roth Report: Powerine Oil Co. Inc. v. Superior Court
James M. Roth, Esq., The Roth Law Firm
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.