Court Rejects Efforts to Limit Scope of Judgment Creditor’s Direct Action Under Insurance Code Section 11580

In Ins. Co. of St. of PA v. Amer. Safety Indemnity Co. (No. B283684, filed 3/1/19) (“ICSOP”), a California appeals court rejected one insurer’s efforts to limit the scope of another insurer’s direct action as a judgment creditor under Insurance Code section 11580(b)(2).

In ICSOP, homeowners filed a claim in arbitration against their general contractor alleging damages from subsidence. While the arbitration was pending, the general contractor filed suit against the grading subcontractor seeking indemnity and contribution. The complaint attached the homeowners’ complaint in arbitration pleading damages of $2.3 million, and alleged that the subcontractors had a duty to indemnify for those damages. The arbitrator awarded the homeowners $1.1 million.

The general contractor was insured by plaintiff ICSOP, which paid the arbitration award. A default judgment was entered against the grading subcontractor for $1.5 million, that included both the arbitration award plus $356,340 for the general contractor’s attorney’s fees. American Safety insured the grading subcontractor but refused to indemnify ICSOP. ICSOP then sued American Safety on the default judgment, pursuant to Insurance Code section 11580(b). The trial court granted summary judgment for ICSOP and the appeals court affirmed.

American Safety argued that the default judgment against the grading subcontractor was void as a matter of law because it did not specify the amount of damages sought. In addition, American Safety argued that ICSOP’s action was not authorized under Insurance Code section 11580, because the arbitration award, having been based on diminution in value, was for economic loss, not property damage, whereas section 11580 only permits a direct action against the insurer when the judgment against the insured is “in an action based upon bodily injury, death, or property damage.” (Citing Ins. Code, § 11580(b)(2).)

The ICSOP court disagreed on both counts. While acknowledging that under Code of Civil Procedure section 580 the relief granted to a plaintiff in a default judgment “cannot exceed that demanded in the complaint,” the ICSOP court pointed out that the homeowners’ arbitration claim was attached to the complaint and incorporated by reference, specifically alleging that the homeowners’ “total current damages are at least $2,347,592.” The ICSOPcourt cited the recent decision in Yu v. Liberty Surplus Ins. Corp. (2018) 30 Cal.App.5th 1024, for the proposition that incorporation of damages by reference can suffice where it is “clear and unequivocal.” Although the Yu court had rejected that theory, the ICSOP court found Yudistinguishable:

“Unlike Yu, the arbitration claim was attached as exhibit A to the complaint, describing in detail the property damage and related claims of loss, and stating the Moghadams sought to recover ‘at least $2,347,592.’ And unlike Yu, the complaint expressly alleged that ‘the damages claimed by the Moghadam Claimants’ involved damages to the Moghadam property caused by the defendants and for which they had a duty to indemnify NMH. These allegations were ‘clear and unequivocal’.”

The ICSOP court then rejected the argument that the judgment was not based on “property damage” within the meaning of Insurance Code section 11580(b): “Defendant contends the judgment here was not for property damage, but rather was for indemnity of an arbitration award that awarded ‘economic loss for diminution in property value,’ and that, ‘[a]s a matter of law, diminution in value is economic loss, not property damage.’ We decline to adopt this constricted view of section 11580.”

The ICSOP court pointed out that the claim for indemnity against the grading subcontractor was “plainly” based on the homeowners’ claim for subsidence damage. And “the fact that the arbitrator measured the damages by diminution in value, rather than by the cost of repair, changes nothing.” The ICSOP court pointed out that in construction defect actions, the homeowner is limited to the cost of repair or the diminution in value, whichever is less, and the arbitrator had merely used diminution in value because the homeowners’ cost of repair was higher. (Citing Civ. Code, §§ 895, 943.)

The ICSOP court also rejected American Safety’s reliance on New Hampshire Ins. Co. v. Vieira (9th Cir. 1991) 930 F.2d 696, for the proposition that “diminution in value is not ‘physical damage’ to ‘tangible property’” – saying “that is not the issue here, where there was physical damage to the property, and diminution in value was necessarily used as the measure of damages.” (Citing Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500.)

Nor did the fact that the arbitration award had included attorneys’ fees change the result: “The statute on its face does not require every element of the damages in that judgment to be property damage; it requires the judgment to be ‘in an action based upon . . . property damage.’ Here, all the components of the Moghadam arbitration award – the ‘diminution in value,’ the attorney fees, the costs, the interest – were the result of property damage that was ‘due to differential settling resulting from improper soil compaction.’”

The ICSOP court then proceeded to dismiss American Safety’s argument that a deemer clause in its policy put all continuous damage in the prior policy period, because the arbitration award cited damage manifesting during the policy period, and there was no evidence it had commenced any sooner. The ICSOP court also rejected American Safety’s argument that the grading contractor’s SIR had not been satisfied, because the policy specified payment of the SIR “at our request,” but there was no evidence that American Safety had ever requested payment of the SIR.

The ICSOP court then rejected a number of American Safety’s other arguments based on its failure to raise them in the trial court. This included an argument that a “wrap-up” exclusion barred coverage, which was rejected for failure to raise it in the trial court. For the same reason, the ICSOP court declined to reduce the award against American Safety, which was for $1.5 million and exceeded American Safety’s $1 million per occurrence limit because the issue of number of occurrences had not been raised in the trial court. And the ICSOP court also declined to eliminate the award’s component of $356,340 for attorney’s fees plus interest on theories that they were neither “property damage” nor “supplementary payments,” saying that those defenses “suffer from the same defect as defendant’s claims about the wrap-up exclusion and policy limits: They were not made during the summary judgment proceedings. Defendant raised these assertions only after the trial court’s summary judgment ruling.”

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March 15, 2019