Court Extends Insurer Rights to Equitable Contribution

In Underwriters of Interest v. ProBuilders Specialty Ins. Co. (No. D066615; filed 10/23/15), a California appeals court refused to enforce an “escape” other insurance clause in an insurer versus insurer contribution action, refused to enforce a Contractors Special Conditions endorsement and found that equitable tolling applied to rule that a nondefending insurer was obligated to reimburse defense costs incurred defending the two insurers’ common insured.

Certain Underwriters provided CGL insurance to Pacific Trades Construction & Development in effect between October 23, 2001 and October 23, 2003. ProBuilders Specialty insured Pacific Trades from December 9, 2002 to December 9, 2004. When Pacific Trades was sued in construction defect actions arising out of the development and construction of single family homes, Underwriters provided a defense, while ProBuilders declined to participate. The case was ultimately settled and when Underwriters sued ProBuilders for contribution to the defense costs, the trial court granted summary judgment for ProBuilders, finding its other insurance clause precluded any obligation to contribute or reimburse Underwriters.

The ProBuilders other insurance clause stated that ProBuilders had “the right and duty to defend [Pacific Trades] against any suit seeking . . . damages [to which the insurance applied] provided that no other insurance affording a defense against such a suit is available to you.” In addition, the ProBuilders policy attached a Contractors Special Conditions (“CSC”) endorsement that provided, as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” Pacific Trades must have: (1) obtained valid written indemnity agreements from the subcontractors it hired to build the homes, and (2) obtained Certificates of Insurance from the subcontractors it hired showing Pacific Trades was an additional insured under the subcontractors’ insurance policies, and (3) maintained records evidencing compliance with those obligations.

The appeals court held that the ProBuilders other insurance clause was a disfavored escape clause, saying “the courts have considered this type of ‘other insurance’ clause as an ‘escape’ clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance. . . . Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.” (Quoting Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204.) Among other things, the ProBuilders court noted that the two insurers’ policies provided overlapping, but not identical, coverage, and to impose the duty to defend solely on Underwriters would have been forcing Underwriters to defend claims covered by ProBuilders but outside of Underwriters’ coverage. Consequently, the ProBuilders court refused to enforce the other insurance clause.

The appeals court also refused to find that the CSC endorsement excused ProBuilders from contributing to the defense. The court noted that the CSC provision applied only to claims against Pacific Trades “in whole or in part based on work performed by independent contractors,” but did not purport to apply to claims against Pacific Trades for its own negligence or other misfeasance. The court held that ProBuilders had not conclusively shown that all of the claims against Pacific Trades were limited to work performed by independent contractors and in fact there were allegations of Pacific Trades’ own negligence. Further, although there was evidence of incomplete compliance with the CSC requirements, the ProBuilders court found that evidence of only one subcontractor indemnity agreement or certificate of additional insured coverage was sufficient to preclude summary judgment in favor of ProBuilders.

The court also rejected ProBuilders’ argument that Underwriters’ contribution claim was time-barred. While agreeing that a two-year statute of limitations applies to an action by an insurer seeking equitable contribution from another insurer, and acknowledging that more than two years had elapsed since ProBuilders initially refused to contribute or participate in the defense, the court noted that less than two years had passed since the final settlement of the underlying action. Finding no California case law in point, the court cited Lambert v. Commonwealth Land Title Ins. Co. (1991) 53 Cal.3d 1072, which held that an insured’s action against its own insurer is equitably tolled until the underlying action is terminated by final judgment. The ProBuilders court said there was no reason why the same rule should not apply to insurer versus insurer contribution actions, and several reasons why it should. For example, holding that the statute begins to run on a refusal to defend might force the defending insurer to file its contribution action prematurely, before all damages could be ascertained. That would require multiple amendments or filing of multiple actions as damages accrued and “[n]either scenario would promote judicial economy or the orderly resolution of claims.” Thus, the ProBuilders court stated:

“We conclude Lambert is sufficiently analogous to require that we import the same approach into contribution actions among co-insurers. We hold the limitation period for a contribution action accrues when the noncontributing insurer first refuses the demand to contribute, but that the two-year statute of limitations is tolled until all of the defense obligations in the underlying action are terminated by final judgment in the underlying action.”

Finally, the ProBuilders court refused to agree that Underwriters’ alleged refusal to produce the defense bills during discovery supported summary judgment for ProBuilders. The court said that summary judgment was not an alternative to seeking terminating sanctions: “We conclude ProBuilders’ remedy, if any, for Underwriters’ alleged ‘refusal’ to produce certain documents is to pursue the discovery statutes’ incremental approach to discovery sanctions.”

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October 26, 2015