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September 2012

Federal Insurance Co. v. Steadfast Ins. Co. et al. ? Excess Insurer Solely Responsible for Duty to Defend

Insurer Has Duty to Defend Under Umbrella Policy's Discrimination Coverage Where No Discrimination Coverage Available In Primary Policies.

(September 25, 2012) __ Cal.App4th. __ ; 12 C.D.O.S. 11014

The Court of Appeal for the Second Appellate District affirmed the trial court’s denial of summary judgment to Federal Insurance Company (“Federal”), holding that Federal had the sole duty to defend pursuant to its umbrella coverage for discrimination.

Federal issued polices to the Sterling defendants (“Sterling”) which contained following form excess liability coverage and umbrella liability coverage.  The umbrella liability provided coverage for personal injury, including “discrimination, harassment or segregation based on a person’s age, color, national origin, race, religion or sex.”  Sterling’s primary policies did not contain a coverage provision for discrimination.

The United States filed suit against Sterling under the Fair Housing Act (42 U.S.C. § 3601, et seq.).   The complaint alleged the Sterling defendants refused to rent to various ethnicities or families with children; created a hostile rental environment; misrepresented the availability of units; and made statements and published rental notices or advertisements that expressed ethnic preferences.  In discovery responses, the United States asserted that the discriminatory practices included entering a tenant’s apartment without notice and evicting tenants with children. 

Sterling tendered the action to its primary insurers, Steadfast Insurance Company and Liberty Surplus Insurance Corporation, as well as to Federal. Steadfast and Federal both provided a defense at different times under reservations of rights. 

The Steadfast, Liberty and Federal policies all provided coverage for personal injury arising from wrongful eviction, wrongful entry, and invasion of the right of private occupancy.  Pursuant to its umbrella coverage, the Federal policy also insured against claims for discrimination based on a person’s age, color, national origin, race, religion, or sex.  Neither the Steadfast nor Liberty policies covered claims for discrimination.

Federal moved for summary judgment seeking a determination it had no duty to defend and claiming a right to reimbursement for defense fees and costs from Steadfast and Liberty.  Federal asserted the government’s contentions that Sterling defendants created a hostile environment for some of their tenants amounted to constructive eviction, thus falling under the personal injury definitions.  Federal argued that, under the following form coverage, it had no duty to defend until the primaries had exhausted their policy limits.  Under the umbrella coverage, Federal had no duty to defend where another insurer had a duty to defend.  The trial court denied Federal’s motion and the Court of Appeal affirmed.

The Court of Appeal first distinguished between excess follow form coverage and umbrella coverage, “Umbrella insurance provides coverage for claims that are not covered by the underlying primary insurance.  An umbrella insurer ‘drops down’ to provide primary coverage in those circumstances.  Thus, a policy that provides both excess and umbrella insurance provides both excess and primary coverage.”  Id. at 11018 (citations omitted).

The Court next turned to the duty to defend.  “In determining whether an insurer has a duty to defend under the terms of its policy, we look both to the allegations in the complaint and to the extrinsic facts known to the insurer that suggest a claim might be covered.”  Id. (citations omitted).  If, as a matter of law, there in no potential for coverage based on the allegations in the complaint or the extrinsic facts known to the insurer, then there is no duty to defend.  Id.

Federal argued the complaint and discovery triggered the primary insurers’ duty to defend because the claims arose in the context of a landlord tenant relationship and alleged misconduct culminated in the landlord interfering with the tenants’ quiet enjoyment of the premises through their discriminatory conduct.  Federal relied on Martin Marietta Corp. v. Insurance Co. of North America (1995) 40 Cal.App.4th 1113 (Martin Marietta) to argue that, because the non-party tenants could bring a common law cause of action against Sterling for wrongful eviction and interference with the enjoyment of the property, the claims were potentially covered by the personal injury coverage of the primary policies.

The Court declined to apply the Martin Marietta holding, noting that Martin Marietta’s reference to the idea that it should not matter who the plaintiff is (government or individual) for purposes of insurance coverage is not applicable to this situation because only the federal government can bring suit under the Federal Housing Act for specific acts of discrimination as delineated by the Act.  “Coverage in this action does not turn on who is the plaintiff.  Rather the lack of coverage under the Steadfast and Liberty policies is based on the allegations in this case that are for discrimination under the Federal Housing Act.”  Id. at 11020 (citations omitted).  These allegations do not involve common law claims.

The Court also addressed whether the claims were clearly excluded under the intentional acts exclusion and Insurance Code section 533 which bar intentional and willful acts.  The Court explained, “the Sterling action complaint included allegations that the Sterling defendants could be found liable on a theory of vicarious liability as well as for their own acts.”  Id. at 11018.  Neither precluded an insurer “from indemnifying an employer held vicariously liable for an employee’s willful acts.”  Id. (citation omitted).

The Court upheld judgment against Federal holding that it had a sole duty to defend the Sterling action and awarded Steadfast recovery of fees and costs that Steadfast expended in its defense of the action.

Click here for the opinion. 

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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