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Scottsdale Insurance Co. v. Century Surety Co.

March 10, 2010

SCOTTSDALE INSURANCE COMPANY PLAINTIFF AND APPELLANT
v.
CENTURY SURETY COMPANY, DEFENDANT AND APPELLANT



Appeal from a judgment of the Superior Court of Los Angeles County, Helen I. Bendix, Judge. Reversed and remanded. (Los Angeles Count Super. Ct. No. BC311522).

The opinion of the court was delivered by: Croskey, Acting P. J.

CERTIFIED FOR PARTIAL PUBLICATION*fn1

When multiple insurance companies have the duty to defend the same mutual insured against the same legal action, the costs of the defense are to be allocated among the insurers equitably. When an insurance company which has the duty to defend declines to participate in the defense of the common insured, those insurers who contributed to the defense may pursue an action for equitable contribution against the non- participating insurer. In this case, Scottsdale Insurance Company (Scottsdale) brought suit against Century Surety Company (Century) seeking equitable contribution based on Century's failure to participate in the defense of 17 common insureds in hundreds of actions in which Scottsdale, along with at least one other insurer, shared the costs of the defense of those insured parties. Scottsdale also sought equitable contribution with respect to indemnity of the common insureds in those underlying actions in which Scottsdale (and at least one other insurer) had paid amounts to settle the actions.

Three principal defenses were raised. In the unpublished portion of the opinion we discuss two of them and conclude that the trial court correctly decided both. First, Century argued that it was not required to defend or indemnify three of the common insureds because Century's insurance policies did not provide coverage of the insureds for the actions alleged against them. Specifically, Century relied on a policy exclusion intended to exclude from coverage any action arising out of work which had been completed by the insured prior to the effective date of the policy (the prior work exclusion). The trial court concluded that Century's prior work exclusion was not conspicuous, plain, and clear, and refused to enforce it. Century was therefore required to share equitably in the costs of the defense and indemnification of the common insureds, despite the presence of this exclusion.

The second issue we discuss in the unpublished portion of the opinion is the one raised by Century's argument that the statute of limitations had run on Scottsdale's right to seek equitable contribution against it with respect to many of the underlying actions. Scottsdale attempted to rely on a tolling agreement which had been entered into between Scottsdale and Century with respect to a previous equitable contribution action Scottsdale had pursued against Century (the Orange County action). The trial court found that the tolling agreement applied only to the underlying actions at issue in the Orange County action; and that it did not apply to any of the underlying actions at issue in the instant action. The court therefore concluded that the statute of limitations barred Scottsdale's right to recover with respect to many of the underlying actions.

Finally, we consider, in the published portion of the opinion, the important issues of damages and burden of proof in an action for equitable contribution by one insurer against another. The trial court concluded that Scottsdale was entitled to equitable contribution from Century with respect to approximately 80 of the underlying actions. The amount of money that Scottsdale had contributed toward the defense and indemnity of the underlying insureds in those actions was not subject to dispute. With respect to many of the underlying actions, the parties also did not dispute: (1) the total number of insurers who participated in the defense of the common insureds; and (2) that the defense costs were allocated among the participating insurers by means of an equal shares formula.*fn2 Century argued, in order to calculate the amount which it owed Scottsdale for defense costs, the trial court should recalculate, under the equal shares method, the amount each insurer would have paid for defense costs had Century participated with the other insurers in the defense of the insured. Thus, Century argued it should be ordered to pay Scottsdale the difference between the equal share Scottsdale paid without Century's participation, and the equal share it would have paid had Century participated.*fn3 The trial court rejected Century's proposed method of calculation, and instead awarded Scottsdale half of all defense and indemnity payments it made with respect to the claims for which it was entitled to recover equitable contribution. This result, however, was in conflict with the general rule, heretofore applied in non-insurance cases, that in order to be entitled to equitable contribution a party must have first paid more than its share of the loss and it bears the burden of proving such circumstance.

We apply those principles here and conclude that they should have equal application in insurance cases. As a result, we will hold that not only must Scottsdale prove that it had paid more than its "fair share" of the defense and indemnity costs for the common insureds but it also bears the burden of producing the evidence necessary to calculate such "fair share." Moreover, we also hold that one insurer cannot recover equitable contribution from another insurer any amount that would result in the first insurer paying less than its "fair share" even if that means that the otherwise liable second insurer will have paid nothing. Because the trial court applied an incorrect standard, we will reverse and remand for a redetermination of Scottsdale's equitable contribution damages.*fn4

FACTUAL AND PROCEDURAL BACKGROUND*fn5

Scottsdale and Century had many insureds in common; most were construction subcontractors. When a lawsuit was filed against one of the mutual insureds, the claim would be tendered to all of the insured's insurers. Frequently, Century would decline to participate in the defense and indemnity of the insured, often relying on one of two endorsements to its policies. One such endorsement, the prior work exclusion, is relied upon in this appeal. The other, an endorsement which purported to render Century's coverage as excess to other insurance (the excess endorsement), is not.

While Century declined to participate in the defense and indemnity of the common insureds, Scottsdale and other insurers did so. They agreed to share the costs of defense equally,*fn6 and agreed to share the costs of settlement as well. There is no indication that any of the underlying cases is still pending.

Scottsdale alone brought suit against Century for equitable contribution. There is no evidence that any other insurer brought suit against Century for equitable contribution,*fn7 nor does it appear that any of the common insureds brought suit against Century for bad faith for its failure to provide them with a defense or indemnity with respect to the several underlying claims.

The instant action is not the first time Scottsdale pursued Century for equitable contribution. In 2000, Scottsdale brought the Orange County action against Century. The first amended complaint in that action sought equitable contribution with respect to 32 underlying actions - it alleged the same 3 causes of action (equitable contribution toward defense costs, equitable contribution toward indemnity costs, and declaratory relief) with respect to each underlying action.*fn8 In the Orange County action, Century relied on the excess endorsement. Century and Scottsdale agreed to litigate the validity of the excess endorsement by means of a test case. They filed cross-motions for summary adjudication regarding the validity of the excess endorsement with respect to one of the underlying actions. Scottsdale prevailed. In order to enable Century to pursue its argument on appeal, Scottsdale dismissed the Orange County action without prejudice. A tolling agreement was executed, whereby it was agreed that Century would not assert a time bar if, after resolution of the appeal in the test case, Scottsdale refiled the Orange County action. The test case was never resolved on appeal; Century and Scottsdale settled the Orange County action while that appeal was pending.

On March 3, 2004, Scottsdale filed the instant action, seeking equitable contribution with respect to over 300 underlying actions involving 17 common insureds.*fn9 The complaint did not specify any particular measure of the damages sought; it simply alleged that Scottsdale had paid more than its equitable share and that Century should be required to pay "in an amount according to proof at trial, and in accordance with equitable principles."

By the time the case proceeded to a bench trial in 2006, the number of underlying claims had been reduced to 184. Century raised several defenses, such as the excess endorsement, the prior work exclusion, and the statute of limitations, which could apply to multiple underlying claims. As the trial proceeded, the trial court concluded that it would be efficient to proceed by means of phases, because a possible ruling in favor of Century on one of its defenses would dramatically reduce the number of underlying claims at issue and impact the amount of evidence that would be necessary for the calculation of damages. At the close of the evidence on the first phase, both parties rested. The trial court accepted post-trial briefs on several issues. It then issued a series of tentative statements of decision, heard argument, and followed with final statements of decision on each issue.*fn10 As already mentioned, the trial court concluded: the prior work exclusion did not apply; the tolling agreement did not apply; and Scottsdale could recover one-half of the amounts it paid on the approximately 80 underlying claims on which it could recover. Ultimately, judgment was entered in favor of Scottsdale for that amount, in addition to prejudgment interest and costs. Both parties filed timely notices of appeal.

ISSUES ON APPEAL

In Century's appeal, Century argues that the trial court erred in concluding its prior work endorsement was unenforceable.*fn11 Century also argues the trial court abused its discretion in its calculation of the amounts owed. In Scottsdale's cross-appeal, Scottsdale argues that the trial court erred in concluding the tolling agreement did not apply to any underlying action which was not the subject of the Orange County action.*fn12

DISCUSSION

1. The Prior Work Exclusion Is Ineffective

In the policies issued to three common insureds, Century relies on the prior work exclusion.*fn13 It is undisputed that the prior work exclusion was intended by Century to respond to case law which adopted a continuous trigger theory of liability. Under the continuous trigger theory, if there is a claim of continuous or progressively deteriorating bodily injury or property damage through several policy periods, the damage is potentially covered by all commercial general liability (CGL) policies in effect during the period of injury. (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2009) ¶ 7:175, p. 7A-86 (Rev. #1 2009).) Concerned that, under this theory, Century's CGL policies might have to respond to damages suffered during the policy period, although caused by work done before the policy came into effect, Century attempted to exclude from coverage damages arising from previously completed work.

a. The Language of the Prior Work Exclusion Century chose to exclude prior work by the use of an endorsement entitled "EXCLUSION OF SPECIFIC WORK OR LOCATION."*fn14 The endorsement is intended to exclude from coverage any bodily injury or property damage arising from specific work or locations. The endorsement was preprinted with a "SCHEDULE," which would enable Century to identify specific work or locations which were excluded from coverage. Across the top of the schedule is printed: " `Location,' Address, Description." These headings presumably allowed Century to identify specific locations which would be excluded from coverage. Somewhat lower down, the schedule had headings stating, " `Your Product' or `Your Work' (Description)" and "Date of (Specify) Manufacture, Sale, Distribution, Disposal, or Completion." These headings presumably allowed Century to identify specific products or work which would be excluded from coverage.

The body of the endorsement provided, as to the locations and work identified in the schedule, as follows:

"1. Coverages (Section I) do not apply to `bodily injury' or `property damage' arising out of:

"a. The accident(s) or `location(s)', if any, described above; or

"b. The products or work, if any, described above, if the `bodily injury' or `property damage' is included in the `products- completed operations hazard' even if other causes contribute to or aggravate the `bodily injury' or `property damage'.

"2. The following additional definition applies:

" `Location' means premises involving the same or connecting lots, or premises whose connection is interrupted only by a street, roadway, waterway or right-of-way of a railroad."

Several terms in the endorsement appear in quotation marks. Century's CGL coverage form explains that "words and phrases that appear in quotation marks have special meaning," and refers the reader to the definitions section of the policy. That section defines, in the usual manner, "bodily injury," "property damage," "products-completed operations hazard," "your product," and "your work." While "location" appears in quotation marks in the endorsement, it is not otherwise defined in the policy. From the language preprinted on the endorsement, it appears that "location" is to be defined in the schedule itself - with Century completing the endorsement to identify locations, with addresses and descriptions, to which the endorsement's language would apply. In other words, if Century identified any "locations" in the schedule, paragraph 1.a. would then exclude from coverage any bodily injury or property damage arising from the defined "locations," and paragraph 2 would further define "location" to include connecting lots.

In none of the three policies at issue did Century identify any locations on this portion of the schedule. Century did, however, attempt to identify specific work to be excluded from coverage under paragraph 1.b. In each of the three policies at issue, Century wrote, in the schedule, " `Your work' which was completed at any `Location' prior to the effective date of this policy."*fn15 Century intended, by this language, to use an "EXCLUSION OF SPECIFIC WORK OR LOCATION" endorsement to exclude from the products-completed operations hazard coverage all work completed prior to the effective date of the policy.

b. Applicable Law

"[I]n an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of coverage under the nonparticipating insurer's policy-the same showing of potential coverage necessary to trigger the nonparticipating insurer's duty to defend-and that the burden of proof then shifts to the recalcitrant insurer to prove the absence of actual coverage." (Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal.App.4th 874, 877.) In this case, ...


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