Court Upholds Full Reimbursement of Uncovered Settlement From Jointly and Severally Liable Insureds

In Axis Surplus Insurance Co. v. Reinoso (No. B228332, filed 6/26/12), the appeals court affirmed a judgment for complete reimbursement of uncovered settlement payments, rejecting an argument by one coinsured that she was innocent of the intentional and non-accidental conduct that voided coverage, and, therefore, entitled to an allocation for part of the settlement as covered damages.

The insureds were husband and wife co-owners of numerous rental properties in the Palmdale area, which they held as community property. The tenants of one complex brought a habitability action against the owners and their management company, alleging claims for breach of contract; breach of implied warranty of habitability; negligence; nuisance; negligent and intentional infliction of emotional distress; and violation of Business and Professions Code section 17200.

Axis had issued general liability insurance covering the property, and the insurer agreed to defend the owners under a reservation of rights. The insurer ultimately settled the case for several million dollars and sued the insureds for reimbursement, on a theory that the slum conditions at the property were caused by intentional and nonaccidental conduct on the part of the insureds.

At trial of the coverage action, extensive evidence showed that the management of the property was based on a purposeful business model of performing maintenance and repairs cheaply, even if that resulted in substandard living conditions at the property. Among other things, this included a plan to rent to new illegal immigrants from Central America because they were not aware of their rights and could be threatened with deportation if they complained about conditions.

The trial court found that the insurer failed to carry its burden of showing that the claims were not potentially covered, as required for recovery of defense costs under Buss v. Superior Court (1997) 16 Cal.4th 35. However, the court noted that a potential for covered damages does not obligate the insurer to indemnify for settlements or damages, and found that there was no coverage, citing Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9. Accordingly, the court entered judgment for reimbursement of the full settlement paid by the insurer.

On appeal, the wife contended that the trial judge should have allocated the amount of the settlement as between individual insureds, arguing that she was not involved in day-to-day operations at the property and, therefore, an innocent coinsured entitled to coverage for a share of the settlement. The appeals court disagreed, finding that although the judgment was silent on the issue, it could be implied that the trial court had rejected an innocent coinsured defense. The appeals court found substantial evidence in the record that the wife was intimately involved in the rental operations, including knowledge of her husband’s repeated criminal citations on habitability charges. According to the appeals court, the fact that the judgment was entered reflected the trial court’s conclusion that the wife was not entitled to coverage.

The Axis court distinguished LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, which had allocated between insureds in a reimbursement action on the principle that the right to reimbursement only runs against the person who benefits from unjust enrichment “to the extent the person actually benefits.” But the Axis court said that the LA Sound court had found it “implausible” that the insureds all shared identical liability. By contrast, the appeals court pointed out that as a co-owner of the property, along with her active participation in management, the wife in Axis was jointly and severally liable for all of the causes of action alleged by the tenants.

Thus, the Axis court found no error in the judgment for reimbursement of the entirety of the settlement paid by Axis.

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June 28, 2012