Insurance Coverage & Bad Faith Newsletter - Spring 2023

LaBarbera v. Sec. Nat'l Ins. Co.

(Plaintiff-Indemnitee Had No Standing as Third-Party Beneficiary to Sue Contractor’s Insurer Under CGL Policy’s Indemnitee Defense Provision Because Provision Bestowed Direct Benefits on Insurer and Insured-Contractor, and Merely Incidental Benefits on Plaintiff-Indemnitee, and Any Doubt That Plaintiff Was a Third-Party Beneficiary of Indemnity Defense Provision Would Be Resolved Against Plaintiff)

(June 2023) - In LaBarbera v. Sec. Nat'l Ins. Co., 86 Cal. App. 5th 1329, 1329, 303 Cal. Rptr. 3d 256 (2022), the Third District Court of Appeal affirmed the trial court’s order granting summary judgment to the home renovation contractor’s insurer in the plaintiff-owner’s suit for reimbursement, albeit on grounds rejected by the trial court.

The plaintiff hired a contractor to remodel a house pursuant to a contract that provided the contractor would defend and indemnify the plaintiff for all claims arising out of the work. The contractor obtained a general liability insurance policy from his liability insurer to cover his work on the remodeling project. During the remodeling work, a subcontractor suffered catastrophic injuries, and sued both the plaintiff and the contractor. The plaintiff's liability insurer defended the plaintiff in the underlying lawsuit. The plaintiff tendered his defense to the contractor and his insurer, but they either ignored or rejected the tender. After settling the underlying lawsuit for $465,000, the plaintiff and his liability insurer sued the contractor and his insurer, seeking to recover the full $465,000 settlement amount and over $100,000 in expenses and attorneys’ fees incurred defending the plaintiff in the underlying lawsuit.

The contractor’s policy, issued by Security National, included standardized coverage for “liability for damages … [a]ssumed in a contract or agreement that is an ‘insured contract.’” Security National acknowledged that the indemnity provision in the contractor’s agreement with the plaintiff qualified as an “insured contract” within the meaning of the policy. The policy also provided, “If we defend an insured against a suit and an indemnitee of the insured is also named as a party to the suit, we will defend that indemnitee” if certain conditions are met.

In its motion for summary judgment, Security National argued, first, that the plaintiff had no standing to sue because the plaintiff was neither an insured nor a third-party beneficiary of the insurance policy. The trial court rejected this argument, holding the policy language clearly expresses an intent that, under certain circumstances, the policy may operate for an indemnitee’s benefit.

Second, Security National argued that the plaintiff could not satisfy one of the conditions of the indemnitee coverage. Specifically, the policy required “[t]he allegations in the suit and the information we know about the occurrence are such that no conflict appears to exist between the interests of the insured and the interests of the indemnitee.” (Italics added.) Security National contended that the plaintiff’s defense strategy in the previous underlying litigation included shifting the blame for the claimant’s injuries to the contractor, which created an apparent conflict between their interests. The trial court agreed and entered summary judgment, without addressing Security National's arguments related to the bad faith and subrogation claims.

On appeal, the Court of Appeal affirmed summary judgment on the grounds that the plaintiff was not a third-party beneficiary under the Security National policy. The parties agreed that the plaintiff, as an indemnitee under Security’s National’s indemnitee defense clause, benefits from the clause. The question turned on whether the plaintiff was of a class of indemnitees that the indemnitee defense clause was intended to directly benefit, as the plaintiff contended, or whether the plaintiff is merely an incidental beneficiary to an agreement that the parties intended to benefit the contractor-insured, as Security National contended.

While neither party cited any on-point California case law, Security National cited a Wisconsin case holding that the indemnitee defense clause made the indemnitee merely an incidental beneficiary: “[A]n indemnitee may incidentally benefit if all the conditions of this clause are met; and that depends on what the insured wants, within the defined limits of the clause, not on what the indemnitee wants. We conclude that, based on the insurance contract language, Tenneco is not a third-party beneficiary under the contract.” Berg v. Gulf Underwriters Ins. Co., 2008 WI App 121, 313 Wis. 2d 522, 756 N.W.2d 478.

The plaintiff cited Prouty v. Gores Tech. Grp., 121 Cal. App. 4th 1225, 1226, 18 Cal. Rptr. 3d 178, 179 (2004), a non-insurance case in which the Court of Appeal, Third District, held that the plaintiffs (employees of a purchased company) were intended beneficiaries to a stock purchase agreement that including an agreement not to terminate for a grace period and required severance. The Court of Appeal in LaBarbera held Prouty was inapposite because the instant indemnitee defense clause in Security National’s policy provided no direct protection to the plaintiff, unlike the provisions in Prouty that “protected the employees.”

Instead, the parties' intent in crafting the indemnitee defense clause here was to benefit Security National and Knight, with LaBarbera as an incidental beneficiary. Additionally, were we to doubt that LaBarbera is a third party beneficiary of the indemnity defense clause, we would resolve any doubt against his position.

The Court thus affirmed the trial court’s decision granting Security National's motion for summary judgment, albeit on different grounds.

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