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February 2015

Denial of Summary Judgment Does Not Automatically Establish Duty To Defend

In McMillin Companies, LLC v. American Safety Indemnity Co., a California appeals court found a trial court erred in ruling the denial of an insurer’s motion for summary judgment on the duty to defend meant the insurer’s duty to defend was established as a matter of law.  Overruling the trial court, the court of appeals noted the basis for the denial was because the insurer had failed to meet its initial burden to show no triable issues of material fact, not that there was a factual dispute necessarily establishing a possibility of coverage. 

McMillin Companies, LLC was the general contractor for a series of residential construction projects in Temecula, California.  After the projects were completed, McMillin was named in a construction defect lawsuit that arose out of the projects.  McMillin tendered its defense to the insurers of allegedly implicated subcontractors, including American Safety Indemnity Company (ASIC), contending it was an additional insured.  None of the insurers accepted McMillin’s tender.

McMillin sued ASIC and other insurers for breach of contract and bad faith based on their alleged failure to defend.  After numerous settlements, ASIC was left as the sole remaining defendant.  ASIC submitted a motion for summary judgment, arguing, inter alia, that it did not owe any duty to defend because its policy only covered  liability arising out of its named insured’s “ongoing operations” which had ceased prior to the occurrences alleged in the litigation.  This motion was denied on the basis ASIC had not met its initial burden of proof to show no triable issue of material fact. 

At trial, the parties submitted motions in limine.  McMillin moved to exclude argument disputing ASIC’s duty to defend, and ASIC moved to preclude McMillin from arguing the amounts it had received from the other insurers in settlement were not offsets to McMillin’s alleged damages against ASIC.  The trial court granted McMillin’s motion, finding the prior denial of ASIC’s motion for summary judgment demonstrated the existence of a disputed issue of material fact which necessitated a finding of a duty to defend.  The trial court also granted, without explanation, ASIC’s motion as to the settlement offsets.  Given the ruling on the offset issue and the fact that McMillin had collected in settlement more than it had incurred in defense of the underlying construction defect action, the parties agreed McMillin could not prove contract damages and consented to judgment in favor of ASIC.  Each party then appealed. 

The California court of appeal reversed, holding the trial court erred in granting the motions in limine.  The court noted that by granting McMillin’s motion as to the duty to defend, the trial court essentially granted a summary adjudication motion on one of the elements of McMillin’s breach of contract claim – that ASIC had a duty to defend.  Disagreeing with the trial court’s conclusion, the appeals court reasoned that the denial of an insurer’s motion for summary judgment because it failed to meet its initial burden of proof was not the same as denying the motion based on an unresolved factual dispute.  As such, the appeals court held the trial court erred in precluding ASIC from providing additional evidence at trial showing there was no duty to defend.

As to the offset issue, the appeals court concluded the trial court’s granting of ASIC’s motion essentially equated to granting a motion for nonsuit without procedural safeguards.  Turning to the merits of the motion, the appeals court concluded McMillin’s settlements with the other insurers were not potential offsets to damages but rather would only affect McMillin’s right to recover any damages awarded at trial.  In so holding, the appeals court reasoned the settlements McMillin entered into with other insurers did not affect whether ASIC breached its duty to defend or committed bad faith, nor the amount of fees and/or costs McMillin incurred in its own defense of the underlying action.  Instead, such settlements would only reduce, by way of offset, the amount McMillin might ultimately seek to collect from ASIC.  As a key distinction from other cases involving offset, the appeals court noted McMillin had not been provided a full defense by any insurer and that the settlements with the other insurers occurred after the underlying litigation was complete.  Finding the trial court erred in granting a nonsuit on this issue, the appeals court remanded the entire case for further trial.

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This opinion is not final.  It may be modified on rehearing.  This event would render the opinion unavailable for use as legal authority.