ORDER GRANTING IN PART AND DENYING IN PART TRAVELERS' MOTIONS FOR SUMMARY JUDGMENT
On January 30, 1995, the above captioned matter came on regularly for hearing before the Honorable Rudi M. Brewster. After over an hour of oral argument, the matter was continued to February 17, 1995, when further argument was heard. John Leland Williams, Esq. appeared on behalf of plaintiff The Travelers Indemnity Company of Illinois ("Travelers"); Mark A. Milstein, Esq. appeared on behalf of defendant Insurance Company of North America ("INA"); and Deborah Broom Pegg, Esq. and Brian I. Glicker, Esq. appeared on behalf of defendant Assicurazioni Generali SpA Insurance Company ("Generali"). Plaintiff Travelers brings a motion for summary judgment against INA and a motion for summary judgment against Generali. The Court hereby GRANTS IN PART AND DENIES IN PART Travelers' motions for summary judgment.
Three corporations -- Leisure Technology, Inc., Leisure Technology of California, Inc., and Leisure Technology Corporation of Oceanside (collectively, "Leisure Technology") -- were engaged in residential real estate development in Oceanside. Leisure Technology was named as a defendant in three lawsuits relevant to this case: (1) the Finkelstein action;
(2) the Southridge action;
and (3) the Ocean Hills action.
Travelers, INA, and Generali each issued an insurance policy or policies to Leisure Technology. Generali issued a primary general liability policy. INA issued an "Excess Commercial General Liability Coverage" policy. Travelers issued two general liability policies: the first was effective March 31, 1988, to March 31, 1989; the second was effective March 31, 1989, to March 31, 1990. INA's policy was effective March 31, 1990, to March 31, 1991. Generali's policy was effective March 31, 1991, to March 31, 1992.
The Finkelstein action was filed on August 27, 1991, and arose from the allegedly defective construction of, and resulting damage to, a condominium complex in Oceanside. The complaint in Finkelstein alleged many different types of defects which allegedly resulted in many different types of damages. Plaintiffs in the Finkelstein action alleged that they became aware of the defects and damage on or about August 27, 1991, when they filed the action. Plaintiffs in Finkelstein alleged "emotional injury," inter alia, in their complaint.
For the Finkelstein action, Leisure Technology tendered its defense to all three insurers. Travelers undertook the defense with a reservation of rights. INA refused to defend. On March 26, 1993, Generali accepted defense subject to a reservation of rights. On May 7, 1993, Generali withdrew its defense. The Finkelstein action eventually settled. Both Travelers and INA contributed to the settlement; Generali did not.
The Southridge action was filed on February 19, 1993, brought by the homeowners' association for damage to the common areas of the same condominium complex at issue in Finkelstein. The defects and damages alleged in the complaint include defectively constructed slopes, project walls, fencing, landscaping, streets, curbs, gutters and drainage. Plaintiffs in Southridge alleged that they had discovered the defects within 3 years of the February 19, 1993 filing of the complaint. Leisure Technology tendered its defense to all three insurers. Travelers undertook the defense under a reservation of rights; the other two insurers refused. The Southridge action settled and both INA and Travelers contributed to the settlement.
The Ocean Hills action is a class action suit seeking damages for property damage caused by numerous defects in over 400 homes and their common areas. The complaint alleges that the damage occurred from 1988 through at least 1993. On February 7, 1994, Leisure Technology tendered defense of the Ocean Hills action to all three insurers. Travelers accepted defense of the suit under a reservation of rights. INA refused to defend. Generali accepted defense with a reservation of rights after this motion was filed on December 30, 1994. As of the date of filing this motion Travelers has spent $ 55,659.87 in defense costs, but Travelers estimates that final defense costs will exceed $ 1 million.
Travelers brings these motions for summary judgment for: (1) declaratory relief that Generali had the duty to defend in the Finkelstein action and for reimbursement of a portion of Travelers' defense costs; (2) declaratory relief that Generali had the duty to defend in the Southridge action and for reimbursement of a portion of Travelers' defense costs; (3) declaratory relief that Generali has the duty to defend in the ongoing Ocean Hills action and for reimbursement of a portion of Travelers' defense costs to date; (4) contribution by Generali towards the settlement costs of the Finkelstein action; (5) declaratory relief that INA had the duty to defend in the Finkelstein action and for reimbursement of a portion of Travelers' defense costs; (6) declaratory relief that INA had the duty to defend in the Southridge action and for reimbursement of a portion of Travelers' defense costs; and (7) declaratory relief that INA has the duty to defend in the Ocean Hills action and for reimbursement of a portion of Travelers' defense costs.
A. Standard of Law
On a motion for summary judgment, the moving party must establish that there is "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); British Airways Board v. Boeing Co., 585 F.2d 946, 951 (9th Cir. 1978), cert. denied, 440 U.S. 981, 60 L. Ed. 2d 241, 99 S. Ct. 1790 (1979). Summary judgment must be granted if the party responding to the motion "fails to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). To show that summary judgment is not appropriate, the nonmoving party must set forth specific facts demonstrating a genuine issue of material fact. Id. Such evidence need not be in a form admissible at trial to avoid summary judgment. Id.
B. Motion Against Generali
1. Duty to defend in Finkelstein
The Finkelstein complaint alleged that the plaintiffs in Finkelstein became aware of the construction defects on or about the time of the filing of the complaint which was on August 7, 1991. Generali's occurrence policy was in effect from March 31, 1991, through March 31, 1992. Preliminarily, Generali accepted defense of the Finkelstein action, but then based on its own examination of extrinsic evidence withdrew that defense. Travelers argues that Generali had a duty to defend in Finkelstein because the complaint showed a potential for coverage under Generali's policy. Generali does not dispute that the complaint alleged coverage during Generali's policy, but contends that Generali's own examination of extrinsic evidence proved that in fact none of the alleged defects occurred during Generali's policy period.
The duty to defend requires an insurer to defend a suit which potentially seeks damages within the coverage of the policy. Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081, 846 P.2d 792 (1993). The burden of proof in a duty to defend case in California was made clear in Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 861 P.2d 1153 (1993):
In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove that it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales.
Id. at 300. An insurer must defend the entire suit against its insured, even if only some of the alleged claims are covered, "until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim." Horace Mann, supra, at 1081.
At issue in this motion is not so much the respective burdens of each party, but rather timing. Generali argues that it is presently capable of proving to the court that there was never any potential for coverage under Generali's policy in the Finkelstein action. Generali seeks to submit this proof to the court three and a half years after the action was filed.
The Court begins with the clearly established principle that "the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." Montrose, supra, at 295 (quoting Horace Mann, supra, at 1081). "Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf." Montrose, supra, at 295 (citing Signal Companies, Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 367, 165 Cal. Rptr. 799, 612 P.2d 889 (1980)). This principle dictates that even when resolution of the indemnity suit conclusively shows that no coverage existed, the duty to defend may still have existed.
Indeed, the duty to defend is so broad that as long as the complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured even though it has independent knowledge of the facts not in the pleadings that establish that the claim is not covered.
CNA Casualty of California v. Seaboard Surety Co., 176 Cal. App. 3d 598, 606, 222 Cal. Rptr. 276 (1986).
California law is clear that the duty to defend is measured at the outset of the litigation, not by hindsight. Devin v. United Services Auto. Assn., 6 Cal. App. 4th 1149, 1157 (1992); CNA Casualty of Ca., supra, at 610. Specifically, the duty to defend arises upon tender of defense by the insured to the insurer. Montrose, supra, at 295. As the court in Montrose noted, the insured's desire for immediate defense is likely to have been a strong motive in purchasing the policy. Consequently, "California courts have been consistently solicitous of insureds' expectations on this score." Id. at 296.
Once the insured has tendered defense of an action in which a potential for coverage exists under the insurer's policy, the insurer's duty to defend exists and is ongoing until: (1) the action is resolved, OR (2) the insurer proves to the court in a declaratory relief action by conclusive evidence that no potential for coverage exists, OR possibly (3) the policy limits on the duty to defend have been reached. Such a rule provides incentive to the insurer to investigate claims thoroughly and expeditiously.
The Court's interpretation of the law is supported by the California Court of Appeal's opinion in Haskel, Inc. v. Superior Court of Los Angeles, 95 C.D.O.S. 2367 (March 30, 1995). In Haskel, the court interpreted the California Supreme Court's opinion in Montrose as follows:
. . . if there was any potential for coverage for the administrative damage claims sought against Haskel, a duty of defense arose. If the claims asserted in the underlying action raise a potential for coverage, the insurers have a duty to provide a defense to Haskel upon tender of those claims unless and until they produce in court undisputed extrinsic evidence which conclusively establishes that there is no potential for coverage.