Fourth District Reverses Lower Court Ruling in Construction Defect Litigation

Gregory D. Hagen, Edward P. Garson, John R. Clifford and Ian A. Stewart | Wilson Elser | February 18, 2015

On January 22, 2015, the Fourth District Court of Appeals issued for publication its decision in McMillin Companies LLC v. American Safety Indemnity Company, 4th Dist. Div. 1, D063586.

The case is significant in addressing a fact pattern that is recurring with greater frequency given recent changes in the indemnity rights of developers and general contractors as against subcontractors. Developers are more aggressively pursuing their rights under additional insured (AI) endorsements issued to subcontractors, seeking full coverage in lieu of triggering any self-insured or direct insured monies.

In this case, the general contractor, McMillin, settled the underlying construction defect action using AI monies and then pursued a dozen or more AI carriers for unreimbursed defense costs. Of course, given that each AI carrier had an independent obligation to defend the entire action, there should have been complete coverage for all defense costs. Nevertheless, McMillin pursued its action against the AI carriers and recouped more money in that coverage action than its out-of-pocket total. It asserted, however, that some of the amounts obtained in the coverage action should be attributed to Brandt fees (an insured can recover attorney fees “reasonably incurred to compel payment of the policy benefits”) that were incurred in pursuing the recalcitrant carriers. American Safety Indemnity Company (ASIC), which had issued two commercial general liability policies to the framing subcontractor, argued, on the other hand, that McMillin had failed to meet its burden of establishing that allocation and therefore had no damages.

In a separate motion in limine, McMillin asserted that ASIC owed a duty to defend McMillin, and argued that this point was established under two cases – Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co., Inc.) (1993) 6 Cal.4th 28, 24 Cal.Rptr.2d 467; 861 P.2d 1153 and Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 17 Cal.Rptr.2d 210; 846 P.2d 792 – because the Court had earlier denied ASIC’s motion for summary judgment. The two cases hold that where factual issues preclude summary judgment in the insurer’s favor, the duty to defend is then established, absent additional evidence bearing on the issue.

The trial court found for McMillin on the duty to defend, but also found that McMillin had no damages and thus entered judgment in ASIC’s favor.

The Court of Appeals reversed on both points. First, on the duty to defend, the Court of Appeals found that the mere denial of an insurer’s motion for summary judgment was not sufficient to automatically establish coverage. In this case, the court that originally considered the motion merely found that ASIC failed to meet its “initial burden of production” rather than finding that there was a “disputed issue of fact.” Thus, when a motion for summary judgment filed on a carrier’s behalf is denied, the phrasing of the order is important.

As to the offset issue, the Court of Appeals refused to apply a string of California cases (including Emerald Bay, Bramalea, Ringler, Prichard, and J. Lamb) in which the receipt of fully offsetting settlements from other carriers resulted in no damages and thus dismissal of the insured’s case. Instead, the Court found that offsets may be used to diminish damages but do not necessarily preclude a claim against a carrier that did not participate in the insured’s defense.

This latter portion of the opinion leaves the door open for an insured in a multi-carrier insurance coverage case to allocate settlement monies away from defense costs and essentially “pocket” settlements – attributing them to Brandt fees – while continuing its efforts against non-settling carriers.  Also left unsettled by the Court of Appeals are difficult evidentiary issues involving the proof necessary to establish the allocation of settlement proceeds.

via Fourth District reverses lower court ruling in construction defect litigation – Lexology.

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