Insurance Law Client Alert: Court of Appeal Confirms Additional Insured Carrier Burden of Proof for Contribution Claim

In St. Paul Mercury Ins. v. Mountain West Farm Bureau Mut. Ins. Co. (No. B229345, filed 10/25/12), the Court of Appeal relied on Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal.App.4th 874 (Safeco), to uphold an equitable contribution claim by a general contractor’s insurer against a framing subcontractor’s insurer.

St. Paul had insured the general contractor, who was also named as an additional insured on the framing subcontractor’s policy issued by Mountain West. In a lawsuit for construction defects, St. Paul defended the general contractor and based on a list of defects, tendered the general contractor’s defense and indemnity to all insurers that had issued additional insured endorsements for subcontractors in the involved trades. Mountain West admitted issuing an additional insured endorsement, but declined to participate in the general contractor’s defense, and ultimately contributed to a settlement solely on behalf of its named insured framing subcontractor.

In the ensuing equitable contribution case, Mountain West argued that there was no evidence showing the framing subcontractor was actually negligent; no evidence showing what portion of the damages were caused by the framer; and no occurrence during the policy period. But the appeals court said this was the incorrect burden of proof. Under the Safeco case, St. Paul did not have to prove actual coverage, only the potential for coverage, at which point the burden had shifted to Mountain West to affirmatively prove the absence of coverage, which it did not do.

The appeals court also rejected Mountain West’s argument that contributing to a settlement on behalf of the framing subcontractor had satisfied its obligation to defend the general contractor, stating that the duties to defend and indemnify are separate obligations, and the duty to defend extends to the entirety of an action until the insurer proves otherwise.

Mountain West then tried to argue that the settlement on behalf of the framing subcontractor had released it from any obligation to contribute, claiming to be a third party beneficiary of the release in the agreement. However, the appeals court read the settlement agreement and found that it had expressly carved out any insurance claims. The court noted that the agreement had only released the named parties, did not release insurers as a class, and had expressly excepted contribution claims relating to additional insureds.

The St. Paul v. Mountain West court also rejected a claim that the “arising out of” language in the additional insured endorsement put the burden on St. Paul of proving the framing subcontractor’s actual negligence. The court cited Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 321, for the principle that only a minimal causal connection is required for the “arising out of” wording. The appeals court noted that the trial court had considered evidence of defects concerned with framing, and said that the mere fact there was some evidence to the contrary would not negate the trial court’s findings on appeal.

The appeals court then held that the continuous trigger applicable to Mountain West’s policy was not affected by the fact that St. Paul’s policy had an endorsement modifying that policy to a manifestation trigger.

Finally, the appeals court upheld application of a time on the risk formula for allocation of the defense and indemnity payments.

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October 29, 2012