Does a Mediation Trigger the Duty to Defend Under a CGL Insurance Policy?

Joshua Fruchter | Merge Mediation Group | September 4, 2019

Standardized commercial general liability (CGL) insurance policies impose a “duty to defend” that obligates insurers to defend insureds against “suits” seeking damages for claims potentially covered by the policy. The existence of a duty to defend is determined by the allegations in the “suit” filed against the insured.

Does a mediation qualify as a “suit” under a standardized CGL policy? That question was recently litigated in Illinois state court. See Illinois Tool Works, Inc. v. Ace Specialty Ins. Co., 2019 IL App (1st) No. 18-1945 (August 23, 2019). In that case, the insured manufacturer, ITW, operated a facility at a location (referred to as “AUS-OU”) that was later declared a Superfund site by the United States Environmental Protection Agency (EPA) after the discovery of environmental contamination.

In August 2004, another manufacturer notified ITW that it was negotiating with the EPA concerning the payment of cleanup costs related to the AUS-OU site, and claimed that ITW was partially responsible for those costs because manufacturing activities at ITW’s facility had allegedly released hazardous substances. In response, ITW agreed to share in the expense of remediating the AUS-OU site, and entered into a mediation with the EPA and other manufacturers to allocate cleanup costs. ITW notified its insurers about the mediation, and submitted bills for costs incurred, but the insurers did not reimburse ITW for those costs.

Subsequently, ITW was sued for contribution to cleanup costs for an adjacent site (“Site 36”). The insurers funded ITW’s defense of the Site 36 lawsuit.

After the Site 36 lawsuit settled, ITW filed an action against its insurers seeking a declaratory judgment that the insurers had a duty to defend and indemnify it for claims against it regarding both the Site 36 lawsuit and the AUS-OU mediation. The insurers acknowledged that they had a duty to defend ITW in the Site 36 lawsuit, but argued that the same duty did not apply to the AUS-OU mediation because it was not a “suit” under the policies.

The trial court agreed with the insurers that the AUS-OU mediation did not trigger a duty to defend because it was not a “suit” under the policies.

On appeal, ITW abandoned its argument that the mediation qualified as a “suit” under the policies, and instead maintained that the duty to defend triggered by the Site 36 lawsuit extended to the AUS-OU mediation because the contamination at issue in the Site 36 lawsuit and the AUS-OU mediation arose out of the same allegedly hazardous releases. That argument failed, and the appellate court affirmed.

Why did ITW decide, on appeal, not to press its argument below that the mediation qualified as a “suit” under the policies? The appellate court’s decision indicates that the relevant policies were issued to ITW’s predecessor between 1974 and 1985.

As per an August 2002 article published on the International Risk Management Institute, Inc. (IRMI) website by risk management consultant Craig Stanovich, it was only in 1986 that standardized CGL policies began defining the term “suit” to include (i) arbitration proceedings “in which such damages are claimed and to which the insured must submit or does submit with our consent;” and (ii) “any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

While the definition of “suit” in the new standardized CGL policy does not specifically mention mediation, it seems clear that mediation would qualify as an “alternative dispute resolution proceeding.” Importantly, however, the new definition of “suit” obligates the insured to obtain the insurer’s consent to submit to an ADR proceeding before the insurer becomes obligated to defend the proceeding. Accordingly, assuming a mediation qualifies as a “suit” under the policy, an insured would first need to obtain the insurer’s consent to participate in pre-litigation mediation before the insurer would be obligated to cover mediation costs.

At any rate, given that ITW made its insurers aware of the mediation, and they appeared to have consented (or at least not objected), ITW might have prevailed under the newer definition of “suit” that imposes a duty to fund the costs of an “alternative dispute resolution proceeding” to which the insurer consents.

The importance of obtaining the insurer’s consent to ADR is illustrated by a recent California federal court decision. See Harper Constr. Co., Inc. v. Nat’l Union Fire Ins. Co., 377 F. Supp. 3d 1134 (S.D. Cal. 2019). In Harper, the court held that even if an insured’s interaction with the federal government in a construction dispute under the Contract Disputes Act constituted a form a type of ADR proceeding under the new CGL policy, the duty to defend was not triggered because the insurer had never consented to the proceeding.

Court of Appeals Finds Additional Insured Coverage Despite “Care, Custody or Control” Exclusion

Garret Murai | California Construction Law Blog | July 30, 2019

When things go wrong on a construction project it’s often a scramble of finger pointing. In McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company, Case No. D074219 (June 5, 2019), the California Court of Appeals for the 4th District considered whether an additional insured exclusion, excluding “property in the care, custody or control of the additional insured,” precluded a duty to defend by an insurer.

McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company

McMillin Homes Construction, Inc. was the developer and general contractor on a residential project known as Auburn Lane in Chula Vista, California.  McMillin subcontracted with Martin Roofing Company, Inc. to perform roofing work. Under the subcontract, Martin was required to obtain commercial general liability insurance naming McMillin as an additional insured.

The commercial general liability insurance policy secured by Martin was issued by National Fire and Marine Insurance Company. As is typical, the policy covered “property damage” and “personal injury” arising out of an “occurrence” during the policy period. McMillin was covered as additional insured under ISO endorsement form CG 20 09 03 97.

In 2014, homeowners at Auburn Lane sued McMillin for construction defects. The complaint alleged water intrusion and damages due to roofing defects. McMillin tendered defense to National Fire. However, National Fire denied the claim on the ground that an exclusion contained in the commercial general liability insurance policy, excluding “property in the care, custody or control of the additional insured,” precluded coverage and defense.

In 2016, McMillin sued National Fire for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing. The case was bifurcated, with the parties trying first, the issue of whether the exclusion precluded coverage. During the first phase of the bifurcated trial, McMillin argued that exclusion, excluding “property in the care, custody or control of the additional insured,” required that the property be in the “exclusive or complete” control of McMillin, and that here the property was not in the “exclusive or complete” control of McMillin, since McMillin subcontracted the roofing work to Martin.

National Fire, in turn, argued that nowhere in CG 20 09 03 97 are the terms “exclusive” or “complete” control used. Moreover, argued National Fire, ISO endorsement form CG 21 39 10 93, which precluded coverage for indemnity obligations, underscored the intent of the policy to preclude coverage for construction defects like the one at issue.

The trial court agreed with National Fire and McMillin appealed.

The Court of Appeal Decision

On appeal, the 4th District Court of Appeal identified several well-established principles applicable to the interpretation of insurance policies in California. Among them:

  • An insurer’s duty to defend is broader than its duty to indemnify and an insurer “must defend even where the evidence suggests but does not conclusively show the loss is not covered.”
  • An insurer’s duty to defend arises at the outset of a case “arising upon tender and lasting until litigation is resolved, or until the insurer has established there is no potential for coverage.”
  • Where an insurer denies coverage and a duty to defend, and an insured files an action for declaratory relief, the insured must only prove the existence of a “potential for coverage” while the insurer must establish “the absence of any such potential.”
  • Doubts as to whether an insurer owes a duty to defend is resolved in the insured’s favor.

The Court of Appeals, relying on Home Indemnity Company v. Leo L. Davis (1978) 79 Cal.App.3d 863), which involved a similar exclusion in which the court held that the exclusion did not apply where there was “shared” control, explained that while “McMillin was responsible for the whole project and coordinating schedules to ensure the project finished on time” “Martin was responsible for controlling its job site and supervising the roofing work.”  Thus, held the Court, “Martin an McMillin shared control over Martin’s roofing work.”

Moreover, explained the Court of Appeals, interpreting the policy in the manner urged by National Fire would not be consistent with McMllin’s objectively reasonable expectations, which was that, as an additional insured, it would be covered under Martin’s commercial general liability policy for property damage arising from Martin’s work.

Finally, as to National Fire’s CG 21 39 10 93 argument – which basically boiled down to: the policy was intended to preclude coverage for construction defect claims like the one involved, because together with CG 20 09 03 97, they were intended to preclude coverage for construction claims based in both tort and contract  – the Court of Appeal described the argument “convoluted.”

In interpreting insurance policy provisions, explained the Court, provisions are not interpreted to “protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured.” And, here, the objectively reasonable expectation of McMillin was that as an additional insured, it would be covered by Martin’s commercial general liability insurance policy.

Claims for Negligence? Duty to Defend Triggered

Michael S. Levine | Hunton Andrews Kurth | June 19, 2019

On June 17, 2019, the First Circuit held that an insurer’s duty to defend was triggered because the underlying complaint set forth claims that required a showing of intent as well as claims that sought recovery for conduct that “fits comfortably within the definition of an ‘accident.’” In Zurich American Ins. Co v. Electricity Maine, LLC, Zurich sought declaratory judgment that, under a D&O policy, it had no duty to defend the insured, Electricity Maine, an electrical utility company being sued in the underlying class action. Zurich argued it had no duty to defend because the underlying complaint failed to allege that Electricity Maine engaged in conduct that qualified as an “occurrence” or that caused “bodily injury” under the terms of the policy. The First Circuit disagreed.

The D&O policy stated that Zurich “has a duty to defend Electricity Maine against any lawsuit that seeks damages for ‘bodily injury’ caused by an ‘occurrence.’” The policy defined an “occurrence” as “an accident . . .” and under Maine law an accident is “commonly understood to mean . . . an event that takes place without one’s forethought or expectation . . . .” The Court held that, because the underlying complaint asserted claims for negligence and negligent misrepresentation, in addition to intentional torts, the conduct upon which recovery was sought fell within the definition of an “accident” and therefore qualified as an “occurrence” triggering the duty to defend. Second, the Court held that, although the underlying complaint did not allege that Electricity Maine’s conduct caused “bodily injury,” the complaint did not need to do so to fall within the risk insured and trigger a duty to defend. Instead, because the alleged conduct could result in bodily injury due to emotional distress, the allegations fell within the risk insured and Zurich has a duty to defend.

Liability Insurer’s Duty to Defend Insured is Broader than its Duty to Indemnify

David Adelstein | Florida Construction Legal Updates | May 3, 2019


When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify.   This broad duty to defend an insured is very important and, as an insured, you need to know this.   “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.”  Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted).  This means:

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists.  And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless.  As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.  Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor.   The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam.  The owner sued the general contractor and the general contractor third-partied in the subcontractor.  However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy.  In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.  

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam.   The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint.  (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage.  However, this is a very narrow exception that the court was not going to apply here.) 

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.

California Court of Appeals Weighs in on the Duty to Defend and Suggests “Fetch” New Motion

Garret Murai | California Construction Law Blog | June 5, 2019

It’s not uncommon for construction contracts to include indemnity provisions requiring the indemnitor (typically, the lower-tiered party) to “defend, indemnify and hold harmless” the indemnitee (typically, the higher-tiered party) from third-party claims. But when an indemnitor refuses to defend an indemnitee, who gets decide that issue, the jury or the court?

In Centex Homes v. R-Help Construction Company, Case No. B276708 (March 11, 2019), the 2nd District Court of Appeal answered that question. They also framed the issue better than I could, so I’ll let the court speak for itself:

A subcontractor is hired by a developer to install utility boxes in a subdivision. The subcontract contains a clause requiring the subcontractor to indemnify the developer for all claims arising out of the subcontractor’s work.

A plaintiff in an underlying tort action brings an action against the subcontractor and the developer for injuries allegedly arising from the subcontractor’s work. The subcontractor does not defend the developer.

The trial court submits the question of the subcontractor’s duty to defend to a jury. The jury finds the plaintiff’s injuries were not caused by the subcontractor’s work. Does this end the matter? No.

The end of the trial is not the end of the case. The parties are back to the beginning on the issue of duty to defend. Why? Where plaintiff in an underlying tort action alleges that his injuries arose out of the subcontractor’s work, the developer is entitled as a matter of law to a defense under the indemnity clause. It is error to submit the question of the subcontractor’s duty to defend to a jury. We reverse and remand.

Background

Centex Homes (Centex) contracted with R-Help Construction Company, Inc. (R-Help) to trench, install and inspect utility boxes and conduits at a residential construction project in the City of Thousand Oaks, California. The subcontract required R-Help to defend and indemnify Centex from all claims “to the extent such Claim(s) in whole or in part arise out of or relate to [R-Help’s work].”

Following R-Help’s completion of its work, a lawsuit is filed by Matthias Wagener who was injured when he fell into a utility box. What Mr. Wagener was doing standing on top of a utility box, I don’t know, but he sued both Centex and R-Help alleging that the “defendants” negligently managed, maintained and inspected the utility box cover such that it created an unstable platform.”

During the discovery phase of the litigation, Mr. Wagener was asked about the basis of his claims, to which he responded:

It appears as though R-Help installed and thereafter abandoned the subject junction box or hand holder and adjoining conduit, having installed the lid without the prescribed bolts specifically designed to keep the SCE lid bolted to the junction box. Acting as Centex'[s] agent, R-Help and Centex are both jointly and severally liable to plaintiff for the injuries he suffered and the damages he sustained.

I’m guessing he had help with that response. At any rate, after receiving Mr. Wagener’s response, Centex tendered Mr. Wagener’s claim to R-Help demanding that R. Help defend and indemnify Centex pursuant to the subcontract. After R-Help failed to respond, Centex filed a cross-complaint against R-Help for breach of contract, indemnity and declaratory relief.

Centex later settled with Mr. Wagener, leaving Centex’s cross-complaint against R-Help to be decided.

At the subsequent trial between Centex and R-Help, contradictory evidence was presented by  the parties. Centex’s witnesses testified that the utility box was installed by R-Help, while R-Help’s witnesses testified that it wasn’t. After the case was presented to the jury, the jury found that R-Help did not install the utility box and had no duty to defend Centex.

Centex appealed.

The Court of Appeal Decision

For those of us who practice regularly in the area of construction law the issue on appeal was pretty straightforward: A contractual duty to defend implies an immediate duty to defend. After all, what’s the point of including a defense obligation in a contract if a party can just punt the duty down the road, by which time, even if a trier-of-fact was to determine that there was a duty to defend it would be too late anyway?

Well, that’s exactly what Centex argued on appeal. Citing Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, Centex argued that the California Supreme Court had held “that the duty to defend . . . arises immediately upon the proper tender of defense . . . and before . . . litigation has determined whether indemnity is actually owed.”

The Court of Appeal agreed:

Here Wagener claimed his injuries arose out of or related to R-Help’s work for Centex. Under Crawford, the duty to defend arose immediately upon the proper tender of defense of a claim embraced by the indemnity agreement. The duty to defend was not a question of fact for the jury; the trial court was compelled to determine as a matter of law that Wagener’s claim was embraced by the indemnity agreement.

The Court of Appeal did caution, however, that an escape hatch does exist. Quoting the Supreme Court in Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 289, 298, an insurance case, the Court of Appeal noted:

It would be pointless . . . to require an insurer to defend an action where the undisputed facts developed early in the investigation conclusively show, despite a contrary allegation in the complaint, that the underlying acts occurred on a date when the policy was not in effect or at a location concededly not covered by the policy.

The Crawford decision has even spawned a specific indemnity-related motion, the Crawford-motion, filed by an indemnitee (i.e., the party being indemnified) against an indemnitor (i.e., the party providing the indemnity) to force an indemnitor to defend an indemnitee pursuant to an indemnity agreement. Note: even if an indemnity agreement does not expressly include a defense obligation, a defense obligation will be implied, unless expressly waived. See Civil Code section 2778.

Interestingly, the Centex decision also seems to suggest that an indemnitor could  file a motion, let’s call it a Centex-motion, to get out of the obligation to defend an indemnitee, and perhaps even, as a means of avoiding liability altogether since most defense and indemnity obligations are premised on some fault or presumed fault of the indemnitor. Since, like one of the mean girls in the movie Mean Girls, I don’t have the gravitas to make up the name of a new motion (recall Gretchen’s attempt to get the term “fetch” to catch on), let’s just call it what it is: a motion for summary judgment.

Conclusion

The Centex decision confirms that the duty to defend is immediate and, as can be surmised from the Crawforddecision although it’s not expressly stated in that decision, is not a factual issue to be determined by a jury. The Centexdecision also suggests that an indemnitor subject to a defense obligation could potentially file a motion (a Centex-motion) to avoid defense obligations if it can conclusively show by undisputed facts that no defense is owed under the indemnity agreement.  That is so “Fetch!”