Within the last twelve months, the Second District California Court of Appeal has been busy clarifying the cost-sharing obligations of insurers , who in defending against long-tail claims, seek to bring their policyholder’s other insurers into the fray.
The Second District California Court of Appeal ruled last summer in One Beacon America Insurance Co. v. Fireman’s Fund Insurance Company (2009) 175 Cal. App. 4th 183, that an insurer’s obligation of equitable contribution for defense costs arose where, after notice of litigation, a diligent inquiry by the insurer would have revealed the potential exposure to a claim for equitable contribution.
This spring, the Second District once again weighed in on the duties of multiple insurers toward one another in defending a common insured against these types of claims. In Scottsdale Insurance Company v. Century Surety Company (2010) 182 Cal. App. 4th 1023, the Court held that an insurer seeking equitable contribution has the burden of proving that it paid more than its “fair share” of defense costs and can only recover from other insurers that which it paid in excess of its “fair share.”
Diligent Search for Policies Required with Constructive Notice
When Mouren-Laurens Oil Company (“Mouren-Laurens”) was sued for its alleged contamination of real property with petroleum products over a span of years, it tendered its defense to three insurance companies. Only one of these, One Beacon America Insurance Company (“One Beacon”) agreed to defend. In its initial tenders to the other two insurers, Insurance Company of the West (“ICW”) and Fireman’s Fund Insurance Company (“FFIC”), Mouren-Laurens had included no physical evidence of policies. Instead, it notified the insurers of the pending litigation and expressed the belief that primary insurance policies had been issued by them providing a duty of defense for this insured.
ICW and FFIC declined to defend for want of proof of the existence of the policies. Through insurance archeology efforts, Mouren-Laurens was able to retrieve certain of the lost policies and attest to the existence and terms of the remainder with affidavits from insurance agents. , ICW and FFIC were provided with this evidence in 2002. They located their policies and agreed to defend in under a reservation of rights.
At this point, One Beacon sought equitable contribution from ICW and FFIC. One Beacon demanded equitable contribution from these two insurers for the costs it had incurred in defending between 1999 and 2002. ICW and FFIC refused to contribute, asserting that Mourens-Laurens’ notice and tender in 1999 had been defective. When the trial court ruled against One Beacon, it appealed the ruling.
In its opinion, the Court of Appeals stated, “This case presents the issue of the notice required to trigger a claim for equitable contribution for defense costs brought by an insurer to other insurers of common insureds.” The Court stated that in California the general rule is that without actual presentation of claim by an insured in compliance with claim procedures contained in the policy, there is no duty imposed on an insurer to investigate the claim. However it looked to California Shoppers for the rule that in California, tenders can be made constructively. The Court found that just as in California Shoppers, where notice of claim was accomplished by sending a copy of the summons and complaint from litigation involving the insured, so in the Mouren-Laurens matter, the oil company’s letters in 1999 were adequate notice to cause the insurers duty of equitable contribution to arise. It found that at that point, the insurer had a duty to be duly diligent in making an inquiry into its potential exposure to a claim for equitable contribution.
The Court of Appeal stated, “We hold that an insured’s obligation of equitable contribution for defense costs arises where, after notice of litigation, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution, thus providing the insurer with the opportunity for investigation and participation in the defense in the underlying action.”
The Court determined that neither insurance carrier had demonstrated that upon receiving constructive notice of the existence of these policies in 1999, their search for them had been diligent as required. Hence, both insurers were required to make equitable contribution to One Beacon for its defense costs for the 1999 to 2002 period.
Burden of Proof and Recovery Limited by Allocation Agreements
When Century Surety Company declined to participate in the defense and indemnity of seventeen policyholders that were also insured by Scottsdale Insurance Company, Scottsdale entered into agreements with several other insurance carriers regarding their common insured. Claiming that it had paid more than its equitable share of these costs, Scottsdale brought suit against Century for equitable contribution and obtained a judgment that Scottsdale could recover from Century one half of the amounts it had paid on the various claims it had defended.
The Second District Court of Appeals, in hearing Century’s appeal against the lower court’s ruling, found that the lower court had erred in its application of the equity principle. The court reasoned that “no indemnitor should have any incentive to avoid paying a just claim in the hope the claimant will obtain full payment from another coindemnitor.” It added that an insurer seeking equitable contribution has the burden of proving it paid more than its “fair share” of defense and indemnity costs and cannot recover from other insurers any amount that would result in it paying less than its “fair share” of the total cost.
The Court reasoned that whereas Scottsdale and the other insurers had entered into allocation agreements relating to these long-tail claims, the lower court had not been within its discretion to supplant its own method of allocation. Scottsdale could only recover based on evidence that it paid more than its “fair share” under the allocation agreements it made with the other insurers and could not recover from Century any amount that would result in it paying less than its fair share under those agreements.
Possible Effects of These Rulings on Future Cases
The Second District’s opinions in these cases may be expected to influence future California court decisions. At the very least, the Scottsdale decision encourages allocation agreements among defending insurers and at the same time assures those non-participants in these cases that their portion, should the court have to determine it, will be limited by what the other insurers determine is their “fair share.”
Insurance defense counsel and policyholder’s counsel alike will be watching to see if the Second District’s One Beacon decision can be expected to change the a burden on the insurer to locate insurance policies when presented with tender supported by less than documentary evidence of their existence, terms and conditions.