JPA ADMINISTRATION AND COVERAGE CASES

JPA ADMINISTRATION AND COVERAGE CASES Summaries provided by Doug Alliston of Murphy, Campbell, Alliston and Quinn

McCarthy Bldg. Cos. v. Mt. Hawley Ins. Co. (C.D.Cal. 2021) 2021 U.S.Dist.LEXIS 35613

Summary: An agreement requiring that an additional insured endorsement be provided during the life of the agreement means the additional insured may be unprotected for completed operations. Discussion: Huntington Beach Union High School District contracted with McCarthy Building Companies, Inc. for management of various construction projects including the Huntington Beach High School Modernization project. The District entered into an agreement with Day Construction Company to complete the high school project. The agreement required Day during the life of the agreement to maintain a Commercial General Liability Insurance that provided contractual liability coverage, applied to completed operations, and named McCarthy as an additional insured. Day complied with this requirement while the project was ongoing. Five years after completion of the project, the District was sued by a woman who had tripped on a doorstop, and the District cross-complained against McCarthy and Day. Mt. Hawley, which insured Day at the time of the woman’s injury, initially agreed to defend McCarthy under its blanket additional insured endorsement, which made an additional insured of any party that the named insured (Day) was contractually required to have named as an additional insured. Mt. Hawley subsequently denied coverage on the basis that at the time of injury, the relevant contract was no longer in effect and there was no continuing obligation of Day to have McCarthy named as an additional insured. McCarthy sued Mt. Hawley and Mt. Hawley moved for summary judgment. The Court found the plain meaning of the phrase “life of this Agreement” to be until performance by both parties is complete. Accordingly, it concluded that Day was under no obligation to provide additional insured status at the time of the woman’s injury and that Mt. Hawley’s blanket additional insured endorsement did not apply.

Truck Ins. Exch. v. AMCO Ins. Co. (2020) 56 Cal. App. 5th 619

Summary: Landowner who is additional insured for injury arising out of tenant’s use of premises is covered without regard to tenant’s fault. Discussion: A car crashed into a restaurant injuring restaurant patrons. The patrons sued the restaurant operator and the building’s owner. There had been a prior similar accident at the site, which was unknown to the restaurant operator but known to the building’s owner. The owner had taken no steps to prevent a recurrence. Consequently, the restaurant operator was granted summary judgment, but the building’s owner was not. The owner’s insurer, Truck Insurance Exchange, then settled and sued the restaurant operator’s insurer, AMCO, for equitable subrogation, equitable indemnification, equitable contribution, and declaratory relief based on the additional insured endorsement issued by AMCO to the owner covering liability “arising out of” the restaurant operator’s use of the premises. AMCO argued that because the restaurant operator was found not at fault in the accident, the owner’s liability did not arise out of the operator’s use of the premises. The trial court disagreed, finding the liability exposure clearly arose out of the use of the restaurant premises. AMCO appealed. The appellate court pointed out that the cases have consistently held that “arising out of” does not indicate any particular standard of causation or theory of liability but broadly links a factual situation with the event creating liability, requiring no more than a minimal causal connection or incidental relationship. Accordingly, the appellate court found the additional insured endorsement applied and confirmed the judgment in favor of Truck Insurance Exchange.

Summary: Self-insured retention applies to additional insureds as well as to the named insured, even if the retention must be paid by the named insured. Discussion: Crown was the named insured on Zurich policies with a $500,000 self-insured retention. Crown had many clients who required that Crown have them named as additional insureds. Crown previously purchased policies with first dollar coverage, but to save premiums it renewed with policies that contained a self-insured retention applicable to both defense and indemnity. After claims were made against additional insureds, Zurich declined to defend them because the retention had not been paid. Crown paid to defend the additional insureds, then sued Zurich alleging the coverage for additional insureds was not subject to the self-insured retention. Crown’s argument was based on the self-insured retention endorsement requiring the named insured (i.e., “you”) to make the payments that exhausted the retention. The court granted summary judgment to Zurich because the self-insured retention endorsement clearly made the named insured’s payment of the self-insured retention a condition precedent to the insurer’s liability. Various documents exchanged in the negotiation of the policy were consistent with that requirement.

California Capital Ins. Co. v. Maiden Reinsurance North America (C.D.Cal. 2020) 472 F. Supp. 3d 754

Summary: Federal court concludes California law would not provide for tort damages in action by insurer against reinsurer. Discussion: California Capital Insurance Company and related companies sued their reinsurer, Maiden Reinsurance, alleging causes of action for breach of contract and for breach of the implied covenant of good faith and fair dealing, seeking tort damages for the latter. Maiden removed the action to federal court, then moved to dismiss the second cause of action and to strike its request for attorney fees and statutory damages. Plaintiffs alleged Maiden reinsured them from 2006 to 2016. Maiden was acquired by Enstar in 2018 and Enstar allegedly began fabricating reinsurance coverage disputes, among other things refusing to pay claims it has previously agreed to pay, demanding return of payments previously made, and denying covered claims. Maiden moved to dismiss, arguing that tort damages were not available in a reinsurance dispute because the relationship between a reinsurer and reinsured is fundamentally different from that of an insurer and insured. Because there was no controlling California precedent, the federal district court considered the circumstances in which the California Supreme Court had imposed tort liability in contractual relationships and its policy reasons for doing so. The California Supreme Court has consistently limited tort recoveries for breach of the implied covenant to the insurance context, denying their extension to employment, surety, and construction contracts, for example, and has emphasized the unique nature of insurance, which includes elements of adhesion (inability to negotiate terms), public interest in the compensation of victims of calamities, and fiduciary responsibilities of liability insurers that require them to investigate, defend, and settle claims against their insureds. The court noted that reinsurance contracts are purchased to increase profits by spreading the burden of indemnification, allowing the reinsured to issue more coverage than its reserves would otherwise allow. Reinsurance agreements are normally negotiated between sophisticated business people who know how to draft contract terms, including penalties for nonperformance, and sue if necessary to protect themselves. Individual insureds are not affected by the performance of the reinsurer, and the reinsurer has no duty to investigate, defend, and settle claims against the reinsured. These factors distinguish reinsurance from insurance. Accordingly, the federal district court concluded the California Supreme Court was unlikely to extend tort remedies to reinsurance contracts, and dismissed the bad faith cause of action to the extent it sought tort damages. However, it did not entirely dismiss the cause of action, since it alleged wrongs in addition to those alleged in the breach of contract cause of action and those wrongs were potentially compensable by contract damages.

Summary: Improper erosion or exhaustion of an underlying policy is not a defense to excess coverage absent fraud, bad faith, or a policy provision so providing. Discussion: Northrop had a multi-layered program of employee benefit plan fiduciary liability insurance, composed of (1) a $15 million primary insurance policy issued by National Union; (2) a $15 million excess insurance policy issued by CNA; and (3) a $15 million secondary excess insurance issued by AXIS. AXIS was required to provide coverage only when the combined $30 million liability limit of the underlying insurance policies was exhausted for “covered loss” under those policies. AXIS argued that National Union and CNA paid a claim for alleged ERISA violations, which included claims for noncovered disgorgement by Northrop which were not adjudicated due to the settlement. AXIS contended that the settlement payments improperly eroded their policies’ liability limits so that a second claim settlement reached into AXIS’s level of coverage. AXIS did not dispute coverage for the second claim which reached into its limits, so it paid its portion of that claim and then sought reimbursement from Northrop, arguing Northrop was unjustly enriched by the underlying insurers’ settlement of the first claim. The federal district court granted summary judgment to AXIS, but the Ninth Circuit Court of Appeals reversed. The Ninth Circuit noted that there was no precedent in the circuit for “improper erosion” liability, and agreed with Northrop’s argument “that AXIS, not Northrop, assumed the risk that Northrop’s primary and first level excess insurers might adjust claims in a manner that would trigger AXIS’s secondary excess coverage,” absent a showing that the payments were motivated by fraud or bad faith. The Ninth Circuit distinguished a prior unpublished opinion that had allowed an excess carrier to challenge that portion of a single claim that reached the excess level, despite the primary insurer’s decision not to challenge coverage for its portion. That is, the excess insurer could deny coverage for a claim it was asked to pay, but it could not challenge another insurer’s decision to pay that or a different claim. The Ninth Circuit then cited a recent federal decision from Washington holding that an excess carrier could not second guess the coverage decision of underlying insurers absent a contractual provision allowing it to be involved in the underlying insurers’ adjustment process. In so holding, the Ninth Circuit pointed to various decisions from outside that circuit as well as the concern that allowing an “improper erosion” standard would undermine settlements and eliminate a primary reason for buying excess insurance. It acknowledged that an “improper erosion” standard could be contractually included in an excess policy and be valid, but did not find such a provision in the AXIS policy despite that policy’s requirement that underlying policies be exhausted by payment for “covered loss.”

Roberts v. County of Riverside (C.D.Cal. 2021) 2021 U.S.Dist.LEXIS 25628

Summary: Risk pool JPA not an insurance company for purposes of Probate Code claim against estate of decedent. Discussion: The California Probate Code provides that actions may proceed against the estates of decedents (Prob. Code § 550) and that “[s]ummons shall be served on a person designated in writing by the [decedent’s] insurer or, if none, on the insurer…” (§ 552(a)). According to the courts, proof of insurance is essential to recovery under this section. In this wrongful incarceration action, the plaintiff spent so long in prison (20 years) that some of the people allegedly responsible had died. When the plaintiff attempted to serve the county’s JPA, Public Risk Innovation, Solutions, and Management (PRISM), as “insurer” for these decedents, PRISM moved to quash the summons on the basis that it was not an insurer. Plaintiff argued PRISM could be treated as an insurer for purposes of Probate Code sections 550 and 552 due to its obligation to indemnify any judgement that might be entered against the estates in question. However, there was precedent that indemnification obligations do not allow an indemnitor to be treated as an insurer. Accordingly, PRISM’s motion to quash was granted.