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November 2012

St. Paul Mercury Insurance Co. v. Mountain West Farm Bureau Mutual Insurance Co. ? A non-participating insurer is required to prove absence of coverage in an equitable contribution action

After failing to defend or indemnify an additional insured, the insurer bore the burden of proving the absence of coverage in a subsequent contribution action by the additional insured's own insurer.

(October 25, 2012) __ Cal.App.4th __ ; 12 C.D.O.S. 12171

The California Court of Appeal, Second Appellate District, affirmed a trial court judgment awarding a time-on-the-risk share of defense and indemnity to a co-insurer in a contribution action.  The court concluded the insurer that defended and settled an underlying action met its initial burden of proving a potential for coverage under the non-participating insurer’s policy.  The court further found that the non-participating insurer did not meet its burden of demonstrating the absence of coverage as an affirmative defense.  The court also reversed an order awarding prejudgment interest, concluding the damages were not certain as required by statute.

The insurance dispute relates to an underlying construction defect action arising from development of a Four Seasons resort in Teton Village, Wyoming.  St. Paul Mercury Insurance Company (“St. Paul”) insured the project’s general contractor, Jacobsen Construction Company (“Jacobsen”).  Mountain West Farm Bureau Mutual Insurance Company (“Mountain West”) insured Teton Builders, Inc. (“Teton”), the framing subcontractor on a portion of the project.  Teton added Jacobsen as an additional insured on the Mountain West policy for approximately nine months.

The developer fired Jacobsen before the project was completed.  Jacobsen sued for breach of contract, and the developer filed a cross-complaint alleging construction defects relating to framing and other work.  Jacobsen tendered its defense as an additional insured to Mountain West and other insurers of involved subcontractors.  Mountain West declined the tender.

The underlying action settled in two phases.  St. Paul contributed $1 million on behalf of Jacobsen to a settlement resolving siding and drywall issues, and it paid $1,265,000 toward a second settlement, which primarily involved roofing issues.  Mountain West did not participate in the first settlement.  It contributed $100,000 on behalf of its named insured, Teton, to the second settlement involving roofing claims.

St. Paul then filed an action for equitable contribution against a group of subcontractors and insurers, including Teton and Mountain West.  After various dispositive motions, only Mountain West remained in the action.  The trial court granted summary adjudication on the duty to defend.  It found that allegations relating to framing created a potential for coverage, obligating Mountain West to defend.  At trial on the remaining issues, the court found that Mountain West failed to prove the absence of indemnity coverage.  Thus, the court held Mountain West was liable for a time-on-the-risk share of the defense and indemnity St. Paul paid on behalf of Jacobsen.  Mountain West appealed. 

The Court of Appeal affirmed the damages award.  The court noted that equitable contribution apportions costs among insurers covering the same insured at the same level of risk, where one insurer has paid more than its share.  The purpose is to equalize responsibility among co-insurers and prevent one from benefitting at the expense of another.

St. Paul and Mountain West disagreed about the burden of proof, but the court concluded that Safeco Ins. Co. v. Superior Court (2006) 140 Cal.App.874 controls.  In a contribution action against a non-participating insurer, the participating insurer only must show a potential for coverage under the non-participating insurer’s policy.  The burden then shifts to the non-participating insurer to prove that no indemnity coverage exists.  The lack of indemnity coverage is an affirmative defense.

Mountain West acknowledged a duty to defend, but contended it satisfied this obligation by defending Teton and contributing to the roofing settlement. But Mountain West had a separate duty to defend Jacobsen as an additional insured.  It did not fulfill that obligation, thus shifting the burden of proof under Safeco.

Mountain West argued the underlying roofing settlement precluded St. Paul’s contribution claim, but the court disagreed.  Neither insurer was a party, and the agreement explicitly reserved Jacobsen’s insurers’ rights to seek equitable contribution from other insurers.  Mountain West also argued the additional insured endorsement limited coverage to damage “arising out of” Teton’s work for Jacobsen.  The court noted this wording is broad, and Mountain West did not meet its burden of proving this, or any other, limitation on indemnity coverage under the endorsement.  Mountain West’s coverage applied to “property damage” during the policy period, and Mountain West failed to prove the absence of damage in that time frame. 

In its action for equitable contribution, St. Paul was only required to prove it paid more than its fair share.  Mountain West could not challenge the reasonableness of defense or settlement payments on behalf of Jacobsen because Mountain West did not participate in Jacobsen’s defense.  Therefore, the Court of Appeal concluded the trial court did not abuse its discretion by ordering Mountain West to pay 43% of defense and indemnity based on time on the risk.  

Finally, the court reversed the trial court’s award of prejudgment interest under Civil Code Section 3287, which authorizes interest where damages are certain.  The court was required to determine allocation of responsibility, so St. Paul’s damages were not certain until the judgment.  Thus, the Court of Appeal held the award of prejudgment interest was error.

Click here for the opinion.

This opinion is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

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Christopher R. Wagner