The Facts:  A restaurant owner, and tenant to the property, negligently caused a fire which caused damage to property of the landlord.  The landlord was an additional insured under the policy at issue, which insured him from liability for acts caused by the restaurant.  The policy also contained an exclusion for claims asserted between two insureds.  After the fire, the landlord sought relief from the restaurant for damage to his property.  On a motion for summary judgment by the landlord’s insurer, the landlord argued that he was not an insured under the policy, and therefore the inter-insured exclusion did not apply.  The trial court granted the motion.

The rules are well established.  In interpreting an insurance policy, we follow the general rules of contract interpretation.  We give effect to the mutual intention of the parties, determined, if possible, from the written provisions of the contract.  The clear and explicit meaning of those provisions, interpreted in their ordinary and popular sense, controls (Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 779-780. ‘[E]xclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly.’  (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406.

The appellate court found that the inter-insured exclusion did not bar recovery by the landlord for damage to his property, but not because the landlord wasn’t an insured under the policy.  The court found that the inter-insured exclusion only barred recovery when the landlord (an additional insured) was being charged with liability as a result of the tenant’s (the named insured) negligence in causing the fire at the restaurant, and the landlord sought recovery directly from the tenant.  That was not the case.  The landlord only sought to recover for the damage to his property; no one sought to hold the landlord liable for the fire.  Since the intent of the additional insured provision was to protect the landlord from liability (not limit recovery for damage to property), he would not be considered an additional insured for purposes of his recovering for damage to his own property.  The court therefore looked past the literal interpretation of the policy to give effect to the parties’ intent based on a broad reading of the provision identifying coverage. 

The court of appeals further found that instances such as this, where a landlord insists on being added as an additional insured under a tenant’s liability policy, are common practice.  Thus, clearly, the landlord intended to be added to limit its liability for acts of the tenant, not to limit its recovery for damage to property.

The Ninth Circuit, in its amended opinion in Du v. Allstate Insurance Company et al., __ F.3d __ (9th Cir. 2012) U.S. App. LEXIS 20889 (apparently done to avoid an en banc hearing), deleted the policy holder friendly language regarding an insurer’s duty to settle, and replaced it with a discussion of current California law that states that an insurer cannot be held liable under a bad faith failure to settle claim in the absence of a demand within policy limits.  Thus, what once was a case – at least for a few months – being hailed as a victory for policy holders, has done very little to change the landscape of bad faith duty to settle cases.  The decision simply cited long standing authority that has held an insurer cannot be liable for bad faith failure to settle claim in the absence of a demand within policy limits, and then decided that the question needed not be answered for purposes of this case. 

The Ninth Circuit similarly chose not to decide the question of whether the genuine dispute doctrine applies to third-party cases.  The court found that the ultimate issue – whether the trial court gave a proper jury instruction that the jury could consider the insurer’s failure to effectuate a settlement in determining whether the insurer breached the implied covenant of good faith and fair dealing – did not require the expansive discussion of the issues found in its earlier opinion.  However, it is likely that what was once a very policyholder friendly decision is no longer. 

On appeal, the Ninth Circuit found that the District Court legally erred in holding that, as a matter of law, bad faith liability could not be premised on an insurer’s failure to effectuate settlement in the absence of a reasonable demand.  In so finding, the Court noted the long standing principal that the duty of good faith and fair dealing “requires the carrier to consider in good faith the interests of the assured equally with its own and evaluate settlement offers within policy limits as though it alone carried the entire risk of loss.” See Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858 (1973).  The Court, however, affirmed the District Court’s judgment and found that the District Court did not abuse its discretion in refusing to give the requested instruction in this case because there was no evidentiary foundation for the victim’s assertion that the insurer should or could have made an earlier settlement offer to the insured.  The Court found that the requested jury instruction was proper, however, the facts of this case did not warrant such an instruction.

Despite the Court’s ultimate finding in this case, this decision by the Ninth Circuit reaffirms the courts’ willingness to extend bad faith liability under a multitude of circumstances wherein an insurer acts unreasonably and places its own interests ahead of its insured. 

Second, the court addressed the “dishonest acts” exclusion, and considered whether it barred, as a matter of law, coverage for all of the otherwise covered claims in the underlying actions. The court concluded that, while the “dishonest acts” exclusion was triggered with respect to the underlying actions, the exclusion barred coverage only for those claims alleging dishonest acts, not the entirety of the underlying actions.  As some claims for indemnity and defense costs relating to the two underlying actions at issue remained, the court reversed the summary judgment.

Because the court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some, but not all, of the underlying claims, some of which might potentially allege a covered loss, it remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others.  In June 2008 some of the cattle die suddenly.  By September and October 2008 cattle begin dying at an alarming rate.  Gaylord suspects feed poisoning.  Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed.  There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners. 

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008.  One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims.  Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed.  But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care.  Gaylord tenders his defense to Nationwide in October 2009.  Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010.  Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims.  Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose.  Judge  Ishii articulates the standards in clean, non-legalese prose.  Cut and paste this.  Not that.

Insurance Contract Interpretation

Ditto.  Cut and paste this.  Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim.  The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim.  The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.” 

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling.  Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim.  The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.”  Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous.  Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord.  But… 

Gaylord says the agent told him that poisoned cattle were covered.  The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it.  The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy.  If Gaylord is believed, he wins.  If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages.  The district court point out, however, that "bad faith" implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a "genuine issue" or "genuine dispute" as to the "insurer's liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute." McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994).  In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, "Because [the insurer] investigated the insureds' claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim." Id. at 656. 

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period.   The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable.  So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.

James Dobbas (Dobbas) owned a ranch and livestock in Sierra County.  Fred Vitas (Vitas), his insurance agent, obtained a $1 million primary liability policy and a $3 million excess liability policy for his ranch operations with Cal Farm Insurance Company (Cal Farm).  Dobbas also owned a railroad emergency response company.  American Guarantee and Liability Insurance Company (American) insured Dobbas as a sole owner of the company under a $7 million excess liability insurance policy.  Vitas allegedly cancelled the Cal Farm $3 million excess policy or failed to renew it.

American moved to intervene in the agent malpractice action against Vitas on a theory of equitable subrogation.  The trial court denied American’s motion to intervene on the grounds that American could never prove that the agent caused or was responsible for the loss—a necessary element of an equitable subrogation claim.  The California Third Appellate District affirmed, and expanded the basis for denying American’s motion to intervene. 

“An insurer bringing an action based upon a claim of equitable subrogation must establish the following elements: ‘(1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires  that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer's damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable.’"  (quoting Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506, 509 (1967))

The appellate court took aim at the fifth element.  It equated the insurance agent’s duty to obtain excess insurance covering the risk with American’s duty to indemnify against the risk.  The appellate court pointed out that since both Vitas and American contracted to protect Dobbas from the same risk, neither could claim a superior equitable right against the other under California law.

"’In subrogation litigation in California, the doctrine of superior equities is critical in determining whether a right of subrogation exists.’ [citation]. The issue is addressed by the fifth element of equitable subrogation, i.e., whether justice requires that the loss be entirely shifted from the insurer to the third party. The equities do not permit recovery where the insurer and the third party promised the same thing, to provide insurance. [citation].”

The appellate court explained that American’s right of recovery, if any, against Vitas was more akin to the right of equitable contribution—not equitable subrogation: 

“Because the obligation of both American Guarantee and Vitas was to provide insurance to Dobbas to indemnify the same loss, American Guarantee's rights against Vitas parallels those of two equally situated insurers when one fails to pay a claim. The appropriate resolution of such facts is by application of the rules of equitable contribution. Equitable contribution apportions costs among insurers that share the same level of liability on the same risk. [citation].  It arises when one insurer has paid more than its share of the loss that several insurers are obligated to indemnify.  [citation]. Equitable subrogation, on the other hand, allows an insurer that paid a loss to be placed in the insured's position to recover from another insurer who was primarily responsible for the loss. [citation].  Under the rules of equitable contribution, an insurer can recover only when it has paid more than its fair share with regard to other insurers who are obligated to pay the same claim. If it has not paid more than its fair share, it cannot recover, even though the other insurer has paid nothing. [citation]. “

Applying the rules of equitable contribution, the appellate court concluded that American paid no more than it would have paid had the Cal Farm excess policy been in place.  Accordingly, the appellate court sent American away empty handed. 

It isn’t immediately intuitive that an insurance agent’s duty to obtain insurance against a risk is co-extensive with an insurer’s duty to indemnify against the risk.  But for purposes of equitable subrogation under California law, it is.  It will be interesting to see whether the appellate court’s expansive holding leads to unintended consequences in future cases. 

In an important vindication of a California policyholder’s right to a jury trial to enforce an insurer’s duty to defend, the California Fourth Appellate District recently held that a liability insurer that fails to promptly acknowledge its insured’s right to independent counsel and begin funding that defense forfeits its rights to binding arbitration under Civil Code section 2860.  Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company), __ Cal.App.4^th __, 2010 WL 1052745 (March 24, 2010).  In Intergrulf, the court ruled that the insured may proceed first to a jury trial, and, if successful, recover contract and tort damages against the insurer.

Under California law, a liability insurer must defend its insured if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy or if the complaint might be amended to give rise to a liability that would be covered under the policy.”  Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 299 (1993).  The duty to defend arises at the time the insured tenders defense of the third party lawsuit to the insurer.  Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. Montrose Chem. Corp., supra, 6 Cal. 4th at 295; Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal. 4^th 35, 49 (1997) (“To defend meaningfully, the insurer must defend immediately”); 10 Cal. Code Regs., section 2695.7(b).  On occasion, an insurer will delay its decision to defend outright, defend under a reservation of rights, or deny coverage altogether while it “investigates” coverage, leaving the insured to its own devices.

An unreasonable delay in paying policy benefits or paying less than the amount due is an actionable withholding of benefits which may constitute a breach of contract, as well as bad faith, giving rise to tort damages. Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 720, 723 (2007);  Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 1209 (2009).  The general measure of damages for breach of the duty to defend consists of the insured’s cost of defense in the underlying action, including attorney fees.  Major v. Western Home Ins. Co., 130 Cal. App. 4th 1078, 1088-1089 (2005).  Breach of the duty to defend also results in the insurer’s forfeiture of the right to control defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in Civil Code section 2860.  Fuller-Austin Insulation Co. v. Highlands Ins. Co., 135 Cal. App. 4th 958, 984 (2006); Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 426 F.Supp. 2d 1039, 1047 (N.D. Cal. 2005).

An Insurer’s Right to Invoke Civil Code Section 2860 Fee Arbitration

Under Civil Code section 2860, when a liability insurer reserves its rights to contest coverage for a third party’s suit against its insured, and defense counsel could manipulate the suit in a way that could impair the insured’s coverage, section 2860 requires the insurer to pay for independent counsel to defend the suit.  For example, defense counsel may be in a position to hire expert witnesses with particular perspectives, and guide their testimony on issues such as when damage occurred or whether particular damage was expected or intended—steering claims in or out of coverage.  Notably, section 2860(c) limits the hourly rates that the insurer must pay independent counsel, and requires the insured to submit any fee dispute to binding arbitration.

An Insurer’s Unreasonable Delay Forfeits its Right to Invoke Civil Code Section 2860

In Intergulf, Intergulf developed a condominium project in San Diego, California. Intergulf was an additional insured on policies issued to one of its subcontractors by Interstate Fire & Casualty Company, a division of Fireman’s Fund Insurance Company.  The policies provided that Interstate had the right and duty to defend any lawsuit seeking damages because of property damage.  While Interstate’s policies were in effect, the homeowners association sued Intergulf for alleged construction defects.   

Intergulf promptly tendered its defense to Interstate.  Two weeks later, Interstate responded, not with an acknowledgment of its defense obligation, but by requesting information and reserving all of its rights.  Interstate wrote that, if it determined it had a duty to participate in Intergulf’s defense, it would impose “litigation handling guidelines,” and it would typically not pay hourly rates of more than $ 150 for partners, $135 for associates, and $ 75 for paralegals.  Intergulf defended with its own counsel—Luce, Forward, Hamilton & Scripps, LLP—billing at a blended rate of $250 per hour.

Seven months later, Interstate finally informed Intergulf that Interstate recognized a “potential” for a defense obligation, but did not actually acknowledge either a duty to defend or coverage.  Interstate offered to “participate” in the defense of Intergulf through the firm of Wood, Smith Henning & Berman.  Intergulf objected that Interstate’s reservation of rights created a conflict of interest for the Wood Smith firm, and demanded the appointment of its own independent counsel under section 2860.   

Intergulf then asked Interstate to reimburse its out-of-pocket defense fees and costs.  No response.  About a month later, Intergulf asked again.  No response.  Approximately one year after it had tendered its defense, Intergulf had neither a commitment to defend with conflict-free counsel nor any reimbursement for outstanding defense fees and costs from Interstate.  Intergulf then sued Interstate for breach of the duty to defend, bad faith, and declaratory relief.  Two months after Intergulf filed suit, Interstate made a first payment of approximately $ 140,000; nine months later, Interstate made a second payment of approximately $ 98,000.

Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what it characterized as a section 2860 fee dispute.  Intergulf responded that the case was about the contract and tort damages that Interstate owed for breaching its duty to defend—not about a fee dispute.  It argued that because the questions of Interstate’s duty to defend, conflict of interest, and bad faith had not been resolved, Interstate did not satisfy the prerequisites for arbitration under section 2860(c).  The trial court, however, granted Interstate’s petition to compel arbitration and continued the trial, pending completion of  arbitration.

Intergulf challenged the trial court’s ruling by filing a petition for writ of mandate.  The appellate court summarily denied the petition. The Supreme Court granted Intergulf’s petition for review and transferred the matter back to the appellate court with directions to vacate the order denying mandate and issue an order to show cause why the relief sought should not be granted.

The appellate court agreed with Intergulf that the gravamen of the complaint was bad faith and breach of contract, not a dispute over the amount Interstate should pay independent counsel under section 2860(c).  By filing the action for breach of contract, bad faith, and declaratory relief, Intergulf gave Interstate notice that it was treating Interstate’s failure to acknowledge Intergulf’s right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend.  Intergulf  at *2-3, citing  Coughlin v. Blair, 41 Cal. 2d 587, 599 (1953) (filing suit gave defendant notice that plaintiff viewed its failure to perform as a total breach of contract); and Sackett v. Spindler, 248 Cal. App. 2d 220, 229-230 (1967)(seller could treat persistent delay in payment for stock as total breach of the purchase agreement).

Intergulf’s entitlement to damages for breach of contract and bad faith turned on (i) whether Interstate owed Intergulf a duty to defend in the first instance; and (ii) whether Interstate breached that duty by failing to defend Intergulf “immediately” and “entirely” on tender of the defense.  Intergulf  at *3, citing  Buss v. Superior Court, supra, 16 Cal. 4th at 49; and Montrose Chemical Corp., supra, 6 Cal. 4th at 295.  Neither of these questions had been resolved at the time the court granted Interstate’s petition to compel binding arbitration of the purported fee dispute pursuant to section 2860(c). 

As the appellate court noted, ordering fee arbitration under section 2860 under these circumstances puts the cart before the horse. If Intergulf proves that Interstate breached the duty to defend or committed bad faith by failing to acknowledge Intergulf’s right to independent counsel or failing to immediately and fully fund its defense, Interstate forfeits its right to limit defense fees and costs under section 2860(c) fee arbitration.  Instead, a jury could award contract and tort damages in the trial court.  Intergulf at *4.  The appellate court issued a peremptory writ of mandate directing the trial court to vacate its order granting Interstate’s petition to compel arbitration under section 2860(c), and to enter an order denying the petition to compel arbitration.

Sound Public Policy

The appellate court’s decision is based on sound public policy.  If an insurer could delay a full and immediate defense for its insured, and then run for cover under section 2860’s rate limits and binding arbitration, it would have an incentive to fabricate a Cumis conflict, comforted by the knowledge that the attorney fee element of its insured’s damages would be limited by Cumis rates, claim management protocols, and binding arbitration, instead of being tried to a jury.  The insured’s right to have a jury determine breach and damages is fundamental to enforcing the insurer’s duty to provide a full and immediate defense.