Analysis of the Appellate Court’s Ruling in Navigators Specialty Ins. Co. v. Moorefield Const., Inc.

2016 Cal. App. Lexis 1132

Navigators was defending their general contractor for claims which primarily concerned failure of the flooring material. It turned out during discovery that the GC had moisture vapor emission tests conducted prior to installation of the flooring materials, as was required by the plans, specs and contract documents. Both tests failed and the developer made a business decision to go forward with the flooring installation as opposed to delaying the installation to allow the proper drying of the slab. The GC provided the flooring sub with a waiver as the GC was aware that the flooring sub would be doing the installation in violation of the requirements.

Based on these facts the court determined that the flooring failure was not a “covered occurrence” under their policies as the damages were not the result of an “accident”. It was due to the intentional acts of the GC as the GC instructed the flooring subcontractor to install the flooring despite their knowledge of the failed moisture tests which exceeded the concrete specifications.

The lawsuit settled for $1.3 million with Navigators paying their policy limits of $1 million to settle the case (along with some other contributions from others) and filed suit to recover the monies they paid toward defense claiming they had no defense obligation under the supplementary payments provision of the policy as the liability of their insured arose from a non-covered claim. This case proceeded to trial. There was no proof provided as to the amount that was paid in the underlying settlement for indemnity versus attorney fees and costs. While the evidence uncovered that the loss was not a “covered occurrence” with Navigators having no indemnity obligation for this “uncovered loss” they also took the position that no defense obligation was owed with reimbursement allowed to Navigators for the amount they paid in fees and costs. Additionally, they argued that it was the burden of the GC to show the amount of the settlement paid for fees and costs versus indemnity.

The Appellate Court noted significant points related to the standard supplementary payment provision of insurance policies1:

1. Costs of suits include attorney fees when they are or could be taxable as costs of suit even when a case settles even though a court has not formally “taxed” costs.
2. Supplementary payments are tied to the insurer’s obligation to defend.
3. An insured is entitled to recover costs of suit under the supplementary payment provision when the lawsuit settles if and to the extent the settlement includes costs of suit.

Obligations of insurer versus insured2:

1. It is the obligation of the insurer not the insured to show the amount of the settlement that was for payment of fees and costs as opposed to indemnity.
2. The insurer, not the insured, has the burden of proving by a preponderance of the evidence that “the settlement payments were allocable to claims not actually covered and the defense costs were allocable to claims not even potentially covered as the defense obligation is broader than the duty of indemnification.
3. The defense obligation being broader than the indemnification obligation, requires a liability insurer to defend its insured against claims that create a potential for indemnity. The insured need only show that the underlying claim may fall within the policy coverage, the duty is on the insurer to prove that it cannot. Once this defense obligation attaches, the insurer is obligated to defend against all of the claims in the suit, both covered and uncovered and can reserve their rights to seek reimbursement of costs advanced to defend claims that never were potentially covered by the policy. A defense obligation can be extinguished only prospectively, not retroactively. The insurer must absorb all costs it expended on behalf of its insured while the duty to defend existed, and prior to the insurer establishing that the duty ended. If a later determination that an insurer has no duty to indemnity would serve to extinguish the duty to defend retroactively allowing the insurer to seek reimbursement from their insured or all defense costs and fees paid this would abrogate the well accepted principle that the duty to defend is broader than the duty to indemnify.

The Appellate court found that In this case there were other potential causes for the flooring failure which were potentially covered causes. The defense obligation therefore did not cease with Navigators not entitled to reimbursement for attorney fees and costs of suit paid under the supplementary payment provision. The Trial Court misallocated the burden by requiring the insured to prove which part of the settlement went to fees and costs subject to the supplementary payment provision as opposed to indemnity. The Appellate Court remanded the case for a new trial on the issue of what portion of the settlement is attributable to attorney fees and costs of suit covered by the supplementary payments provision.

Jacqueline Stein is a partner with Fredrickson Mazeika & Grant, LLP. If you have questions about this matter or would like to contact Jackie, she may be reached at 858/642-2002 ext. 321 or via email to [email protected].

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1The Appellate court cited the following cases for these principles:
Employers Mutual Casualty Co. v. Philadelphia Indemnity Ins. Co. (2008) 169 Cal. App. 4th 340, 349 [86 Cal. Rptr. 3d 383]; Insurance Co. of North America v. National American Ins. Co. (1995) 37 Cal. App. 4th 195, 206-207 [43 Cal. Rptr. 2d 518]; State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal. App. 4th 274, 285-286 [95 Cal. Rptr. 3d 845]; Prichard v. Liberty Mutual Ins. Co. (2000) 84 Cal. App. 4th 890, 912 [101 Cal. Rptr. 2d 298]

2The Appellate court cited the following cases for these principles:
Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal. 4th 1076, 1081 [17 Cal. Rptr. 2d 210, 846 P.2d 792]; La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal. 4th 27, 44 [36 Cal. Rptr. 2d 100, 884 P.2d 1048]; Montrose Chemical Corp. v. Superior Court (1993) 6 Cal. 4th 287, 300 [24 Cal. Rptr. 2d 467, 861 P.2d 1153]; Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal. 4th 643, 656 [31 Cal. Rptr. 3d 147, 115 P.3d 460]

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