McMillin Companies LLC v. American Safety Indemnity Company

(The Trial Court’s Denial of Insurer’s Motion for Summary Judgment on Procedural Grounds Did Not Establish the Duty to Defend Under Insurer’s Policy. In Addition, the Insured Was Entitled to Try Its Claim For Damages Based on the Insurer’s Alleged Breach of the Duty to Defend, Not Withstanding That Insured Received Payment of Defense Costs From Other Insurers Exceeding Its Claim of Unreimbursed Fees and Damages.)

In McMillin Companies LLC v. American Safety Indemnity Company, 233 Cal.App.4th 518 (January 22, 2015), the California Fourth District Court of Appeal reversed the trial court’s entry of judgment holding that American Safety Indemnity Company (“ASIC”) was obligated to defend McMillin Companies, LLC (“McMillin”) in an underlying construction defect lawsuit. In addition, the Court of Appeal reversed the trial court’s decision applying amounts collected from other settling insurers so as to offset McMillin’s alleged claims of unreimbursed defense costs and damages caused by ASIC’s alleged breach of the duty of good faith and fair dealing.

Initially, the trial court denied ASIC’s motion for summary judgment arguing that it was not obligated to defend McMillin against the construction defect lawsuit based on its failure to meet its initial burden of establishing the absence of a triable issue of material fact. The trial court did not find that there were triable issues of material fact relative to whether potential coverage was triggered under the ASIC policy.

In addition, the trial court relied on the California Court of Appeal’s decision in Emerald Bay Community Assoc. v. Golden Eagle Ins, Corp. (2005) 130 Cal.App.4th 1078 and held that McMillin had not been damaged based on the fact that other insurers afforded it a defense against the construction defect lawsuit. Essentially, the trial court applied settlement proceeds obtained from the settling insurers in the amount of $690,154 to McMillin’s claim of unallocated damages in the amount of $309,957 and found that McMillin could not prove any contract damages, and without contract damages, McMillin could not maintain a cause of action for breach of the implied covenant of good faith and fair dealing.

In reversing the trial court’s decision, the Court of Appeal noted that ASIC’s procedural failure to meet its initial burden of proof relative to its motion for summary judgment regarding the duty to defend did not equate with finding a material issue of fact addressing whether potential coverage was triggered under the ASIC policy for the underlying construction defect lawsuit. The Court of Appeal stated as follows:

Horace Mann instructs: Where “factual issues exist precluding summary judgment in the insurer's favor . . . , the duty to defend is then established, absent additional evidence bearing on the issue.” (Horace Mann, supra, 4 Cal.4th at p. 1085.) Given this language, ASIC contends that, because Judge Nevitt denied ASIC's motion on the basis ASIC “has not met its initial burden”— not because factual issues existed — the duty to defend was not established as a matter of law. McMillin's response is that under the “doctrine of implied findings,” Judge Nevitt 's denial of ASIC's motion necessarily found that the SAC plaintiffs were additional insureds under the “blanket additional insured endorsement.” We agree with ASIC. The reason for the above quoted language in Horace Mann is that, “if coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.” (Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058, 1068 (Mirpad).) Here, however, Judge Nevitt 's summary judgment ruling did not find a factual dispute that necessarily established a possibility of coverage. Rather, the ruling established only that ASIC did not meet its initial burden of production to make a prima facie showing that there are no triable issues of material fact. As further support for this position, we note that Judge Nevitt did not “specify one or more material facts raised by the motion”—a requirement when the court denies the motion “on the ground that there is a triable issue as to one or more material facts … .” (Code Civ. Proc., § 437c, subd. (g).)22

. . .

Accordingly, the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation. In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC's alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin's proof.

In addition, the Court of Appeal held that the trial court improperly applied the Emerald Bay decision to bar McMillin’s claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Court of Appeal stated as follows:

From the parties' presentations throughout this case, we perceive a basic misunderstanding as to the effect of the type of equitable offset ASIC is asserting. Both ASIC and McMillin treat the entire Settlement proceeds ($690,154) as potential offsets to damages. The Settlement proceeds do not affect McMillin's damages. Rather, in the event of an award of damages at trial, Settlement proceeds that are found to be offsets by the trial court affect only McMillin's right to recover the full amount of damages awarded at trial. (See Goodman v. Lozano (2010) 47 Cal.4th 1327, 1338 [same, even where no duty to indemnify].) In the context of this record, that means all attorney fees and costs McMillin incurred other than those that were paid by insurer(s) that accepted the tender of, and participated in, the defense of the Baker litigation. The significance of this distinction—namely, that an offset affects the right to recover damages, not the amount of damages suffered—is that McMillin should be allowed to present at trial evidence of the contract damages it suffered; and if the trier of fact awards contract damages and finds support for the other elements of McMillin's claim for breach of the implied covenant of good faith and fair dealing, then McMillin may also recover tort damages, subject to proof (and the potential posttrial request for offset to reduce McMillin's recovery). The fact that the 11 other insurer defendants settled with McMillin should not, and does not, affect whether ASIC breached the duty to defend or the implied covenant of good faith and fair dealing. At best, the Settlement proceeds from the other 11 insurers may reduce (by way of offset) the amount ASIC ultimately owes McMillin for contract or tort damages.

The Court of Appeal distinguished the Emerald Bay decision as follows:

Throughout the briefing at all stages in both the trial and appellate courts, ASIC has relied on the opinion in Emerald Bay, supra, 130 Cal.App.4th 1078, as authority requiring the court to rule as a matter of law that McMillin did not suffer any contract damages. We disagree; Emerald Bay is not controlling, except to the extent it supports the claim that McMillin suffered damages here, whereas the insured in Emerald Bay did not.

In Emerald Bay, an insured sued Golden Eagle Insurance Corporation for breach of the duties to defend and to indemnify under a policy of commercial general liability insurance. (Emerald Bay, supra, 130 Cal.App.4th at pp. 1082–1083.) Although Golden Eagle had refused to defend or indemnify the insured in the underlying action at a certain point in time, Federal Insurance Company, another of the insured's insurers, provided a complete defense (and indemnification) at all times. (Id. at pp. 1083–1084.) The trial court granted summary judgment in favor of Golden Eagle—and the Court of Appeal affirmed—on the ground that, since Federal had provided a complete defense at all times, the insured “ ‘suffered no cognizable damages’ ” in its claims both for breach of contract and for breach of the implied covenant of good faith and fair dealing. (Id. at pp. 1087–1096.)

ASIC's reliance on Emerald Bay is misplaced, because the predicate in Emerald Bay—namely, that at all times the insured had been provided a complete defense by a participating insurer (Emerald Bay, supra, 130 Cal.App.4th at p. 1084)—is not present here. ASIC's other authorities are also unpersuasive because of ASIC's failure to appreciate that, in each, the insured was never without a complete defense provided by someone other than the defendant. (Bramalea California, Inc. v. Reliable Interiors, Inc. (2004) 119 Cal.App.4th 468, 471–473 [where one insurer paid for insured's defense in underlying litigation, second insurer's failure to do so “was of no consequence” to insured].) ASIC fails to distinguish the situation where the insured is provided a complete defense (the plaintiffs in Emerald Bay and related authorities) from the situation where the insured is without a complete defense but later, following litigation, recovers payments from others that arguably compensate the insured for having to provide its own defense (McMillin here).