Insurance Policy’s Promise to Advance Claims Expense for Covered Claims Does Not Create a Duty to Defend

Christopher Kendrick and Valerie Moore | Haight Brown & Bonesteel | May 7, 2019

In United Farm Workers of America v. Hudson Insurance Company, (E.D. Cal.) 2019 WL 1517568, the United Farm Workers of America union (UFW) sued Hudson Insurance Company for breach of contract and bad faith arising out of a former employee’s wrongful termination and wage and hour lawsuit.

Hudson provided UFW with Labor Professional Liability Insurance that included employment practices liability coverage. Hudson reserved its rights and agreed to pay an allocated share of the defense costs, citing the terms of its policy. UFW and Hudson agreed to a 50-50 allocation and, defending itself, UFW moved to compel arbitration of the employee lawsuit pursuant to its collective bargaining agreement. However, the trial court found that the only claim subject to arbitration was the employee’s wrongful termination claim, which Hudson contended eliminated the sole covered cause of action.

The employee’s complaint was amended to include class action allegations for the statutory wage and hour claims and the case proceeded to trial, resulting in an adverse judgment of $1.2 million. Hudson paid UFW for the allocated share of the defense costs incurred through the dismissal of the sole covered claim, and disclaimed any obligation for the wage and hour award.

Hudson retained Haight, Brown & Bonesteel to defend the company against the subsequent bad faith lawsuit brought by the UFW, which alleged that Hudson wrongfully failed to defend or indemnify the union for the employees’ lawsuit. Besides the $1.2 million wage and hour award, UFW claimed in excess of $800,000 incurred defending itself as damages.

UFW and Hudson brought cross-motions for summary judgment, with UFW seeking summary adjudication on the duty to defend. UFW argued that Hudson had a duty to defend the entirety of the employee lawsuit based on the mere potential for coverage, which was not extinguished by the partial grant of UFW’s motion to compel arbitration. (Citing Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263; Montrose Chem. Corp. v. Super. Ct. (1993) 6 Cal. 4th 287; and Buss v. Super. Ct. (1997) 16 Cal.4th 35.) UFW argued that Hudson’s failure to do so amounted to a bad faith breach of contract, exposing Hudson to the full amount of the defense costs, the resulting judgment, UFW’s own attorney’s fees for suing Hudson under Brandt v. Super. Ct. (1985) 37 Cal.3d 813, and other damages.

Hudson’s cross-motion for summary judgment asserted that there was no duty to defend under the terms of its policy, which expressly stated that UFW had the duty to defend. Under the policy, Hudson was only obligated to advance defense expenses for covered claims, subject to an allocation based on the respective liabilities and further subject to reimbursement in the event of an uncovered result, none of which translated into a duty to defend. (Citing Jeff Tracy, Inc. v. United States Spec. Ins. Co. (C.D. Cal. 2009) 636 F.Supp.2d. 995; and Petersen v. Columbia Casualty Company (C.D. Cal.) 2012 WL 5316352.) Further, although the employee’s original claim for wrongful termination was a covered claim under the Hudson policy’s definition of Wrongful Employment Practices, Hudson argued that none of the statutory wage and hour claims that remained after wrongful termination was ordered to arbitration came within the policy’s Wrongful Acts, Wrongful Offenses or Wrongful Employment Practices coverages. (Citing California Dairies v. RSUI Indem. Co. (E.D. Cal. 2009) 617 F.Supp.2d 1023.)

Consequently, Hudson contended that its payment after the entry of judgment, limited to an allocated share of the defense expense, and its disclaimer of coverage for the wage and hour award, were entirely proper and not in breach of the contract. In addition, Hudson uncovered the existence of misrepresentations in UFW’s application for the insurance during discovery, which Hudson argued voided the policy. (Citing Imperial Cas. Co. v. Sogomonian (1988) 198 Cal.App.3d 169; and Thompson v. Occidental Life (1973) 9 Cal.3d 904.) Without coverage or a breach of contract, Hudson argued that there could be no bad faith.

The district court agreed with Hudson, denying UFW’s motion for summary adjudication on the duty to defend and granting Hudson’s cross-motion for summary judgment. The court found that there was no duty to defend under the terms of the policy, which imposed the duty to defend on the insured and not the insurer. The court agreed that Hudson’s obligation was limited to payment for the cost of defending claims actually covered by the policy, and the award for wage and hour violations did not come within any of the policy’s coverages. Additionally, the court found that UFW made material misrepresentations in its application for insurance, holding that the contract was void. Because there was no coverage there was no breach of contract, and the cause of action for breach of the implied covenant of good faith and fair dealing had to fail as well, entitling Hudson to summary judgment.

This document is intended to provide you with information about insurance law related developments.The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

CGL Insurer’s Duty to Defend Broader Than Duty to Indemnify and Based on Allegations in Underlying Complaint

David Adelstein | Florida Construction Legal Updates | February 9, 2019

The duty to defend an insured with respect to a third-party claim is broader than the duty to indemnify the insured for that claim.  The duty to defend is triggered by allegations in the underlying complaint. However, an insurer is only required to indemnify its insured for damages covered under the policy.   A recent case example demonstrating the duty to defend is broader than the duty to indemnify can be found in Southern Owners Ins. Co. v. Gallo Building Services, Inc., 2018 WL 6619987 (M.D.Fla. 2019).  

In this case, a homebuilder built a 270-unit condominium project where the units were included in 51-buildings.  Upon turnover of the condominium association to the unit owners, the condominium association served a Florida Statutes Chapter 558 Notice of Construction Defects letter. There was numerous nonconforming work spread out among various subcontractor trades including nonconforming stucco work.  The homebuilder incurred significant costs to repair defective work and resulting property damage, and relocated unit owners during repairs.  The homebuilder then filed a lawsuit against implicated subcontractors.  One of the implicated subcontractors was the stucco subcontractor.

The stucco subcontractor’s insurer filed an action for declaratory relief claiming it had NO duty to defend or indemnify the subcontractor in the underlying action because the subcontractor had a stucco/EIFS exclusion through an endorsement in its policy, referred tp as the “Exterior Finishing System and Stucco Exclusion.”  The subcontractor’s policy also did not contain a subcontractor exception to the “your work” exclusion.

Regarding the elimination of the subcontractor exception to the “your work” exclusion, the Court noted that the elimination of the subcontractor exception was largely irrelevant since the stucco subcontractor was a subcontractor so its work was not the entire project (unlike the homebuilder or general contractors’ work). Rather, the stucco subcontractor’s work was its scope of work and the underlying complaint referenced damages beyond the stucco subcontractor’s own work to other building components.  Thus, based on the allegations in the underlying complaint, the “your work” exclusion was not a basis to deny the duty to defend.

Regarding the stucco exclusion, the homebuilder argued that the subcontractor performed work outside of stucco work and the underlying complaint contained allegations unrelated to the application of stucco including framing work, miscellaneous work, and wrapping the buildings.  In other words, the Court did not have sufficient evidence that each allegation of nonconforming work related to the stucco subcontractor related to or arose out of the installation of stucco to trigger the full application of the stucco exclusion. Thus, this was not a basis to deny the subcontractor the duty to defend.

At this time, it is uncertain the magnitude of covered damages under the policy in light of the stucco exclusion and property damage resulting from the subcontractor’s defective work (certainly an issue to consider).  However, the insurer owed the subcontractor a duty to defend based on the allegations in the underlying complaint demonstrating the importance of crafting allegations in the underlying complaint.   The insurer’s indemnification obligation for covered damages, however, may be a different story and it is uncertain how a stucco subcontractor could have an endorsement that contains a stucco exclusion.  Take a look at your policy and, particularly, endorsements that further restrict coverage to ensure you do not have an exclusion relating to your own scope of work that would negate the value of the policy to you for property damage claims.

Eleventh Circuit: When an Insurer Has a Duty to Defend, Its Duty to Indemnify Is Not Ripe Until Resolution of the Underlying Lawsuit

Bradley R. Ryba and Steven P. Nassi | Goldberg Segalla | April 9, 2019

With limited exception, an insurer that owes a duty to defend to its insured cannot litigate whether it also has a duty to indemnify the insured for the same matter until after the insured’s liability has been resolved. In a unanimous decision, the U.S. Court of Appeals for the Eleventh Circuit, applying Florida law, affirmed this principle and held that an insurer’s duty to indemnify is not justiciable until the insured’s liability has been adjudicated in the underlying case. Mid-Continent Cas. Co. v. Delacruz Drywall Plastering & Stucco, Inc., No. 18-14195, 2019 WL 1093211 (11th Cir. Mar. 8, 2019).

The lawsuit stemmed from a homeowners’ suit against its general contractor for construction defects, and the general contractor in turn sued its subcontractor for various claims, including contractual indemnity. After the subcontractor’s insurer accepted its defense in the lawsuit, the insurer sought a declaration in a different lawsuit that it had no duty to indemnify the subcontractor for the claims against it because the allegedly defective construction at issue did not occur during the effective term of the policy.

On summary judgment, the district court held that the insurer’s duty to indemnify was not yet justiciable because the underlying lawsuit was still pending and the subcontractor’s liability was not established. The eleventh circuit agreed, finding that a court must wait until the underlying case is resolved before ruling on the insurer’s duty to indemnify. Although several Florida district courts have recognized the prematurity doctrine, as it is known, this is ostensibly the first time the eleventh circuit has squarely addressed this issue.

The eleventh circuit acknowledged the well-recognized exception to the prematurity rule for when the underlying complaint has not triggered the insurer’s duty to defend. In that instance, a court could determine that an insurer has no duty to indemnify pursuant to the fundamental maxim that where no duty to defend exists, there can be no duty to indemnify. In other words, when a complaint does not trigger coverage in the first instance, the final result in the underlying action will not have any effect upon the insurer’s duty to indemnify. However, in this case, the duty to defend was not contested. As such, the exception to the prematurity rule was inapplicable.

The decision is significant as it illuminates and affirms the parameters of an insurer’s duty to defend and indemnify under Florida law. Specifically, the decision illustrates that when an insurer has a duty to defend, a court cannot address the duty to indemnify until the underlying case is resolved.

Insurer Cannot Avoid Duty to Defend Defunct Insured

Stephen S. Asay | Policyholder Pulse | December 26, 2018

A recent decision in the Middle District of Florida, Southern Owners Insurance Company v. Gallo Building Services, Inc., reminds us of the high bar an insurer must clear to avoid its duty to defend an insured—even when that insured is out of business.

Gallo Building Services was a subcontractor hired to perform various work on a large condo project in Florida. After the project was complete, the condo association identified several construction defects that caused significant property damage and notified the general contractor under Florida’s notice and right to repair statute. To address the association’s claims, the general contractor spent significant sums to investigate and repair the defective work and property damage, and it relocated residents during repairs.

The general contractor notified its subcontractors, including Gallo, about the claims, and it ultimately filed suit against them to recover its costs. Unfortunately, by that time Gallo was out of business. Fortunately, Gallo had a series of primary commercial general liability and commercial umbrella policies issued by Southern Owners Insurance Company. Although Southern Owners appointed counsel to defend Gallo against the general contractor’s claims, it also filed a separate coverage action against Gallo, in which it named the general contractor as an “interested party” defendant.

In the coverage action, Southern Owners sought a declaration that it had no duty to defend or indemnify Gallo in the underlying litigation. Knowing that Gallo was out of business and likely would not defend itself, Southern Owners immediately sought a default judgment against Gallo. However, the general contractor successfully challenged the default judgment and proceeded to litigate on Gallo’s behalf. Southern Owners and the general contractor then filed cross-motions for summary judgment on the insurer’s duty to defend Gallo.

Southern tried to avoid its defense obligations through a series of arguments—all of which were rejected by the court:

  • First, Southern Owners argued that the complaint in the underlying litigation relied on “unsupported and conclusory buzzwords” rather than concrete allegations of fact and, therefore, did not trigger coverage. These “buzzwords” included, among other things, “damage to other building components,” “damage to other property,” and “water intrusion.” But the court found these factual allegations sufficient to trigger a defense under the policies.
  • Second, Southern Owners argued that it had no duty to defend because of the “your work” exclusion, which provides that the policies do not apply to “‘property damage’ to ‘your work’ arising out of it or any part of it.” Specifically, Southern Owners argued that the exclusion eliminates all coverage where defective work in one part of a home causes damage to other parts of the home, even though Gallo was only responsible for a subset of the total work. But the court found that, under Florida law, the analysis of the “your work” exclusion must be limited to the policyholder’s own scope of work, not the entire construction project.
  • Finally, Southern Owners argued that it had no duty to defend based on a broadly worded “exterior finishing system and stucco” exclusion. But Gallo was responsible for multiple scopes of work, including work that did not include the application of stucco, so the court found that the underlying complaint did not only claim property damage as a result of Gallo’s stucco work.

This case is an important reminder of the favorable standards applied to an insurer’s duty to defend in Florida—even if the policyholder is out of business. Assuming the basic insuring agreement of a policy is even potentially triggered, it falls on the insurer to prove that the allegations in the underlying complaint “fall solely and entirely within” an exclusion, with any doubts resolved in favor of the insured. Even a defunct business entity may have insurance coverage that can be a resource to provide a defense and/or to satisfy all or part of a judgment.

CGL Policies and the Professional Liabilities Exclusion

David Adelstein | Florida Construction Legal Updates | August 11, 2018

Commercial general liability (CGL) policies for contractors traditionally contain a professional liabilities exclusion.  This exclusion is generally added through aspecific endorsement to eliminate coverage for professional services. Read the endorsement   The point of the exclusion, in a nutshell, is simply to eliminate a CGL policy for a contractor serving as a professional liability policy.

Contractors need to appreciate a professional liabilities exclusion added through endorsement because oftentimes there are delegated design components they are responsible for. Perhaps the contractor value engineered a system and is responsible for engineering and signing and sealing the engineered documents (through its subcontractor) associated with that system.  Perhaps there is a performance specification that requires the contractor to engineer a system.  Perhaps there is a design-build component.  Regardless of the circumstance, this professional liabilities exclusion can certainly come into play, particularly if a defect is raised with the design or professional services associated with the engineered system.

In a non-construction case dealing with a professional liabilities exclusion, the Second District Court of Appeal in Alicea Enterprises, Inc. v. Nationwise Ins. Co. of America, Inc., 43 Fla.L.Weekly D1713b (Fla. 2d DCA 2018) held:

Whether a professional service has, or has not, been rendered is a fact-intensive analysis.  Thus, when deciding whether an act arises out of the rendering of or failure to render a professional service, the court must focus on the act itself and not the character of the individual performing the act.  The act from which the claim arises must be related to a professional service that requires the use of professional judgment or skill. 

Id. (internal citations omitted).

In this case, the insurer issued a CGL policy to a pharmacy.   The pharmacy was sued in a negligence action.  The pharmacy’s CGL insurer filed an action for declaratory relief claiming it had neither a duty to defend nor indemnify its insured (the pharmacy) since the underlying claims arose out of professional services and the CGL policy contained a professional liabilities exclusion.

The Second District maintained, as to the insurer’s duty to defend its insured, that the insurer had a duty to defend the pharmacy (insured) in the negligence action because the allegations in the underlying complaint could be deemed unrelated to professional services.

The Second District maintained, as to the insurer’s duty to indemnify its insured, that this duty is more fact-intensive and without sufficient discovery, there was a genuine issue of material fact as to whether the evidence brought the pharmacy’s conduct within the meaning of the professional liabilities exclusion in the CGL policy.

Here, while the pharmacy will get the benefit of the insurer’s duty to defend since that is triggered by the underlying complaint, the duty to indemnify is different and triggered by the facts.  It is likely that the facts in this case trigger the application of the professional liabilities exclusion, meaning the CGL insurer does NOT have a duty to indemnify the insured for the damages proven against it.  Not the situation an insured wants to be in!