Monday, January 08, 2007

Requirement of Manifestation Changes Occurrence Based Policy to Claims Made Policy

Under the continuous injury trigger rule, continuous or progressive property damage is deemed to occur over the entire process of the continuing injury. The damages suffered can begin as early as the time of the negligent construction and continue through manifestation, even though a lapse of time exists between the initial negligent act and the occurrence of the ultimate damage. Pepperell v. Scottsdale Insurance Company (1998) 62 Cal. App. 4th 1045, 1053.

The Court in Montrose II rejected any attempt to deny a defense or coverage based on a “manifestation” trigger of coverage theory and adopted the continuous injury trigger for defining the trigger of coverage under a third party liability policy. The Montrose II Court based its decision on the rationale that the insurer was attempting to transform an “occurrence” based policy into a “claims made” policy. The Court held that utilizing a manifestation trigger of coverage in a third party liability policy would contravene public policy. The Court reasoned that it would not adopt the Manifestation Trigger analysis to third party liability policies, as it already had done with first party policies, based on the fact that the premiums charged for an occurrence based policy are much higher than a claims made policy, and due to the fact that different risks are involved (first party
policy being the property damage itself, wherein third party policy would be the named insured’s liability to a third party). Finally, legal scholars have questioned whether a policy modification requiring manifestation of property damage or bodily injury during the policy period in an “occurrence” based policy is enforceable due to public policy concerns.

In a third party liability policy, the insured party does not have first hand knowledge of damages until a claim is made by a third party. Therefore, the insured has no control to protect its interest in a policy of insurance by providing adequate notice of the date that damage first “manifested.” The third party plaintiff has no requirement to provide notice of the damage caused by the alleged negligence of the named insured until the statutory limit for commencement of an action against the named insured has passed. Furthermore, the third party claimant has no obligation to prove the date of manifestation of damages beyond the scope of the statute of limitations.

Saturday, January 06, 2007

The Mere Potential of Coverage Triggers the Duty to Defend

The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Montrose Chemical Corp. v Superior Court, 6 Cal.4th 287, 295 (1993). Facts extrinsic to the complaint also give rise to the duty to defend when they reveal a possibility that the claim may be covered by the policy. The carrier must defend a suit which potentially seeks damage within the coverage of the policy. Gray v Zurich Insurance Co., 65 Cal.2d 263 (1966). A liability insurer owes its insured a broad duty to defend its insured against claims that create a potential for indemnity. Horace Mann Ins. Co. v Barbara B., 4 Cal.4th 1076 (1993). The duty to defend may exist even where the coverage is in doubt and ultimately does not develop. Montrose I citing Saylin v California Ins. Guarantee Assn., 179 Cal.App.3d 256, 263 (1986).

The Court in Montrose II held that coverage may be sought for continuous or progressively deteriorating property damage or bodily injury losses insurable under a third party CGL policy, as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured, and no legal obligation to pay third party claims has been established. Montrose Chemical Corp. v Admiral Insurance Company, 10 Cal. 4th 645, 677-678 (1995).

Travelers Casualty and Surety Company v Employers Ins. of Wausau held that an insurer is liable for defense fees from the date of tender if the potential for coverage was present. 130 Cal. App. 4th 99 (2005). The burden of proof shifts to the nonparticipating insurer to prove the absence of actual coverage once a prima facie showing of coverage is established by the settling insurers. Safeco Ins. Co. of America v The Superior Court of Los Angeles County, 140 Cal. App.4th 874 (2006).

Monday, July 17, 2006

Crawford, Kirk, et. al. vs. Weather Shield

California Court of Appeal, Fourth Appellate District
Filed January 31, 2006

A subcontractor who promises to "defend claims growing out of [its] work" must pro­vide a defense to the developer/general contractor when the developer/general con­tractor is sued based upon such derivative claims - even if it is determined that the subcontractor did not act negligently.

This decision requires a subcontractor to provide a legal defense to a developer/ general contractor regardless of whether the trier of fact ultimately determines that the subcontractor was at fault. In fact, the court clarified that no current decision stands for a per se rule that the absence of negligence retroactively excuses a defense obligation undertaken by a subcontractor. This decision then necessarily framed the important distinction between defense and indemnity.
By this holding, the court underscores the importance of the defense and indemnity language in a subcontract agreement, and adds significance to the breadth of allega­tions in a plaintiffs complaint. Indeed, as we will discuss in further detail below, this court highlighted the importance of speci­ficity within a contract by its pronounce­ment that the intention of the parties con­trols a defense/indemnity obligation.

Bottom Line: Even in the context of in­demnity, where parties tend to (mistakenly) rely on equitable principles, this case illuminates the importance of a carefully drafted subcontract agreement. With respect to defense fees and costs (as opposed to sums paid to satisfy a settle­ment judgment), if a contract sufficiently outlines a subcontractor's responsibility to provide a defense at the outset, then fault becomes irrelevant. Undoubtedly this deci­sion will focus subcontractors, developers and their attorneys on drafting and negoti­ating subcontract agreements, understand­ing that it is these documents that ulti­mately will determine the rights and obliga­tions between the parties.

A group of approximately 200 homeowners in the Huntington Place housing develop­ment in Huntington Beach, California, brought a construction defect action against the developer of the project, as well as against the project's window manufacturer and window framer. The homeowners sued the window manufacturer on theories of strict products liability, negligence, and breach of warranty alleging that the win­dows were defectively designed and manu­factured, causing them to leak and fog.

The developer filed a cross-complaint against the window manufacturer and the window framer, seeking its attorney fees incurred in defending against the home-owners' suit, as well as indemnification (i.e., money paid to satisfy a judgment or settlement of that suit).

The homeowners eventually entered into a Sliding scale "Mary Carter" agreement with the developer, in conjunction with which all complaints and cross-complaints were dis­missed except as to the window manufac­turer and the window framer, who did not settle.

While the trial court instructed the jury not to concern itself with the developers' claim for attorneys' fees, the jury found in favor of the window manufacturer on both the homeowner negligence and breach of warranty actions, and on the developer's contractual indemnity claim. The jury, however, ruled in favor of plaintiffs and developer against the window framer, who even­tually settled with plaintiffs.

A, Developer's Claim for Defense Fees
By its interpretation of the four corners of the sub­contract agreement, the trial court concluded that the window subcontractor had agreed to defend lawsuits for claims of damage growing out of the execution of the window manufacturer's work. Therefore, he ordered the window manufacturer to pay for the developer's attorney fees attributable to the window problems experienced by the homeowners.

Because the window framer also was responsible for those problems, an allocation was needed. The developer's risk manager had allocated seventy (70) percent of the devel­oper's settlement payment to window problems. Accord­ingly, the trial court allocated seventy (70) percent of the developer's total defense costs to window problems. The trial court then split the amount equally between the window manufacturer and the window framer, and ordered the manufacturer to pay that amount to the developer.

B. The Judgment
The final result of the trial court proceedings yielded a judg­ment comprising zero liability on the part of the window manufacturer to the homeowners, and zero liability on the part of the window manufacturer to the developer for the developer's causes of action for breach of contract and ex­press indemnity, but provided a determination entitling the developer to indemnity in the amount equal to half of the attorneys fees allocated to window problems.
The window manufacturer subsequently appealed this deci­sion.

The window manufacturer basically relied on the common-law rule, which states that an indemnitor-subcontractor may not be required to indemnify an indemnitee-general contrac­tor without an ultimate finding of negligence.

In short the court held that the trial court did not rule in error, stating that the decision was consistent with the sub­contract, and the obligations it created between the parties, "considered apart from any template otherwise imposed by law."

First, the court provided some context wherein it noted the two ways that general contractors protect themselves from construction defect lawsuits: (1) insist that their subcontrac­tors maintain commercial general liability insurance, and that they be named as an additional insured; (2) insist on a sepa­rate agreement pursuant to which a subcontractor (itself) agrees to indemnify and defend claims against the developer related to the subcontractor's work. Next, the court clarified that while most litigation in this context comprised actions between insureds and contractors, this case deals only with the relationship between the subcontractor and developer.

The controlling citation was as follows: The question of whether an indemnity agreement applies to a particular case primarily turns on contractual interpretation; it is the intent of the parties which controls. Rossmoor v. Sanita­tion, Inc. v. Pylon, Inc., (1975) 13 Cal.3d. 622, 633 (citations omitted).

Here the contract provided in pertinent part: "Contractor does agree to indemnify and save harmless against all claims-growing out of the execution of the work, and at his own expense to defend any suit or action..."

The court stated that while unlike insurance contracts, indemnity agreements usually are take it or leave it, and so these agreements must be construed against the drafter. As such, an indemnity provision between a con­tractor and its subcontractor should be interpreted nar­rowly. Despite these strict rules, the court found that the contract at issue unequivocally imposed a duty upon the subcontractor to defend claims arising out of its work. The court found instructive, the contract's use of the sepa­rate words, "indemnify" and "defend," which the court pointed out, have two very different meanings. The court used the definition of indemnity provided by Civil Code section 2772, which states that indemnity occurs where one party saves another from the consequences of the conduct of another party. The obligation to defend, how­ever, is more specific, and was defined in Buss v. Sup. Ct, (1997) 16 Ca!.4th 35, 46, as the rendering of a ser­vice, [mounting and funding of defense] in order to avoid or at least minimize liability." The court explained that by the existence of these two words, one can naturally pre­sume that the "subcontract contemplated two different actions from the promisor subcontractor."

Further, the court rejected the argument that the duty to defend somehow could be contingent on a subsequent indemnity obligation, or finding of negligence. Indeed, the court found that the contract promised the rendering of a present service, and not just the reimbursement of costs; therefore, by definition it could not be contingent on a future determination.Finally the court clarified the narrow effect of its decision, and proclaimed that it does not provide that a subcontractor is responsible for a "complete defense;" but a subcontractor must only provide those defense costs, which are reasonably attrib­uted to its work.

(Courtesy of Wood, Smith, Henning & Berman)