Underwriters of Interest Subscribing to Policy No. A15274001 v. ProBuilders Specialty Insurance Co.

(Underwriters are Entitled to Contribution from ProBuilders Under Policy Issued to General Contractor, Notwithstanding Other Insurance Clause Purporting to Relieve ProBuilders of Defense Obligation)

In Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance Company, 241 Cal.App.4th 721 (October 23, 2015), the California Fourth District Court of Appeal reversed the trial court’s entry of summary judgment in favor of ProBuilders Specialty Insurance Company (“ProBuilders”) and held that the “other insurance” clause in the ProBuilders policy did not relieve it of its duty to participate in the defense of its insured, Pacific Trades Construction & Development, Inc. (“Pacific Trades”). The parties’ dispute arose out of Pacific Trades’ tender of defense of an underlying construction defects lawsuit. Underwriters of Interest Subscribing to Policy Number A15274001 (“Underwriters”) insured Pacific Trades for the period of October 23, 2001 to October 23, 2003 under a commercial general liability policy (“CGL policy”). ProBuilders issued policies insuring Pacific Trades for the period of December 9, 2002, to December 9, 2004. Underwriters agreed to defend Pacific Trades against the underlying construction defects lawsuit. However, in November 2007, ProBuilders informed Pacific Trades that, “although there was a potential for indemnity coverage under its policies, ProBuilders would not participate in providing a defense to Pacific Trades because Pacific Trades was “currently being defended by another carrier.” ProBuilders relied on the “other insurance” clause in its policies which stated as follows:

Underwriters's policy provided its policy would be “excess” over any other “primary insurance available to you against any ‘suit’ if any other insurer has a duty to defend the insured against that ‘suit.’”

Underwriters hired defense counsel to defend Pacific Trades against the construction defect lawsuit in July 2007. As early as 2009, Underwriters demanded that ProBuilders participate in funding a defense of the underlying construction defects lawsuit (i.e., "Aceves action”). However, ProBuilders never contributed to funding the defense of the Aceves action.

In 2010, the parties to the Aceves action negotiated a settlement amounting to approximately $1 million. Of that amount, ProBuilders ultimately contributed $270,000 to such settlement. The settlement was confirmed as a good faith settlement in October 2010. However, the insurers’ payments to fund that settlement, along with execution of the necessary settlement agreements by numerous parties to the Aceves action and final dismissal of the suit, lingered into 2011. Underwriters continued to pay Pacific Trades’ defense counsel for services connected to the Aceves action until at least March 2011.

Subsequently, once the Aceves action was completely settled, Underwriters filed an equitable contribution lawsuit against ProBuilders in November 2012 seeking reimbursement of a portion of the defense costs paid by Underwriters in connection with the defense of the underlying Aceves action. Thereafter, ProBuilders and Underwriters filed cross-motions for summary judgment seeking a determination of whether ProBuilders had any obligations to contribute to the settlement of Pacific Trades.

ProBuilders’ motion for summary judgment argued that ProBuilders had no obligation to pay any portion of the defense costs based on (1) the other insurance clause in its policies; (2) the failure of Pacific Trades to satisfy a condition precedent (contained in the “Contractors Special Conditions” (CSC) endorsement to the ProBuilders policies requiring Pacific Trades to obtain valid written indemnity agreements from the subcontractors that it hired to build the homes, certificates of insurance from the subcontractors it hired showing Pacific Trades as an additional insured and maintaining records evidencing compliance with these obligations); and (3) Underwriters' refusal to supply ProBuilders with copies of the bills forming the basis of the amounts it sought from ProBuilders.

In response, Underwriters opposed ProBuilders’ motion arguing that the terms of the policies purporting to excuse ProBuilders’ defense obligation constituted an “escape” clause which is routinely disregarded by California courts. Underwriters also argued that its contribution action was timely filed and that the CSC endorsement did not apply to bar a defense of Pacific Trades under the ProBuilders policies.

The trial court agreed with ProBuilders and entered summary judgment in its favor based primarily on the argument that the other insurance clause in its policies relieved it of the duty to participate in the defense of Pacific Trades against the Aceves action.

In reversing the trial court’s decision, the Court of Appeal held that the ProBuilders other insurance clause constituted an “escape clause” disfavored under California law. As a result, the Court of Appeal held that such clause did not relieve ProBuilders of its obligation to participate in the defense of Pacific Trades against the Aceves action, along with Underwriters. In so holding, the Court of Appeal reasoned as follows:

The clause ProBuilders seeks to enforce has been characterized by the courts as an escape clause: it provides that ProBuilders will be liable to pay for defense costs for any suit seeking damages to which its insurance applied, but then purports to extinguish that obligation when there is “other insurance affording a defense against such suit . . . available to you.” As our Supreme Court explained in Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, 1079–1080:

“‘. . .’ (CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th 1839, 1845 . . .; [citation].) Partly for this reason, the modern trend is to require equitable contributions on a pro rata basis from all primary insurers regardless of the type of ‘other insurance’ clause in their policies.”

The courts have repeatedly addressed—and rejected—arguments by insurers that an “other insurance” clause in their insuring agreement permitted them to evade their obligations by shifting the entire burden associated with defending and indemnifying a mutual insured onto a co-insurer. As the court explained in Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203–204 when “the ‘other insurance’ clause in (Century Surety Co.); Fireman's Fund, supra, 65 Cal.App.4th 1279 [same]; CSE Ins. Group v. Northbrook Property & Casualty Co., supra, 23 Cal.App.4th 1839 [same]; Peerless Cas. Co. v. Continental Cas. Co. (1956) 144 Cal.App.2d 617 [insurer with hybrid escape/excess clause required to contribute].)

The Court of Appeal also rejected ProBuilders’ argument that Pacific Trades’ failure to comply with the requirements in the CSC endorsement barred a defense under the ProBuilders policies. The Court of Appeal reasoned as follows:

We are not persuaded by ProBuilders's argument, for several reasons. First, the CSC provision on its face applies only to claims against Pacific Trades “in whole or in part based on work performed by independent contractors,” but does not purport to apply to claims against Pacific Trades for its own negligence or other misfeasance. ProBuilders's showing below did not conclusively establish that all of the claims against Pacific Trades in the Aceves lawsuit were limited to claims based on work performed by independent contractors; to the contrary, the attorney hired to defend it in the underlying action averred Pacific Trades was included as a defendant based on allegations of Pacific Trades's own negligence. Because ProBuilders's showing was inadequate to definitively eliminate the potential for coverage under the CSC provision for some part of the claims against Pacific Trades, its showing was inadequate to enter summary judgment against Underwriters's claim for equitable contribution. (See Evanston Ins. Co. v. American Safety Indemnity Co. (N.D.Cal. 2011) 768 F.Supp.2d 1004.) Second, even assuming some of the claims against Pacific Trades in the Aceves lawsuit were “based on work performed by independent contractors” within the ambit of the CSC provision, there was some evidence below raising a triable issue of fact as to whether Pacific Trades had complied with its terms, because the record below contained at least one written subcontract between Pacific Trades and a subcontractor, and the record also contained numerous Certificates of Insurance showing Pacific Trades was an additional insured under many subcontractors' insurance policies. We conclude ProBuilders's argument that summary judgment was proper based on Pacific Trades's alleged noncompliance with the CSC provision is without merit.

The Court of Appeal also rejected ProBuilders’ argument that the two-year statute of limitations applicable to contribution claims barred Underwriters’ lawsuit. In particular, the Court of Appeal held that the limitation period for a contribution action accrues when the non-contributing insurer first refuses the demand to contribute, but that the two-year statute of limitations is tolled until all of the defense obligations in the underlying action are terminated by final judgment in the underlying action.

Lastly, the Court of Appeal rejected ProBuilders’ argument that Underwriters failure to produce defense counsel’s bills entitled it to summary judgment. Rather, the Court of Appeal held that ProBuilders’ remedy in such instance was afforded by the Code of Civil Procedure addressing discovery disputes.