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Arrowood Indemnity Co. v. Travelers Indemnity Co. of Connecticut

October 6, 2010


APPEAL from a judgment of the Superior Court of Los Angeles County, Michael C. Solner, Judge. Reversed and remanded. (Los Angeles County Super. Ct. No. BC384266).

The opinion of the court was delivered by: Suzukawa, J.



Two insurers issued comprehensive general liability (CGL) policies to the same insured in different years. Several years later, the insured, a general contractor, was sued for negligence allegedly committed during the second policy period, and it tendered its defense to the second insurer. The second insurer learned during discovery that the insured also had done work for the plaintiff during the first policy period, and it asked the first insurer to participate in the defense. The first insurer did so. However, after the jury returned a verdict against the insured, the first insurer refused to indemnify the insured, asserting that the jury had found negligence only during the second policy period. The second insurer indemnified the insured and then sued the first insurer for equitable contribution. It lost after a bench trial, and this appeal followed.

We conclude that the jury's verdict against the insured did not clearly indicate whether the jury found negligence during the first policy period, the second policy period, or both. We thus address the following issue of first impression: Which insurer bears the burden of proving the existence (or nonexistence) of coverage in a case like the present one, where one insurer has participated in the defense and/or indemnity of an insured and the other has not? We hold that in an action for equitable contribution brought by an insurer who has defended and indemnified an insured against a coinsurer who has not defended or has not indemnified the insured, the participating 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 necessary to trigger the recalcitrant insurer's duty to defend. The burden of proof then shifts to the nonparticipating insurer to prove the absence of actual coverage. Here, because the first insurer failed to meet its burden of proving the absence of coverage, we reverse and remand to allow the trial court to allocate equitably defense and indemnity costs.


I. The Insurance Policies

Travelers issued a commercial general liability insurance (CGL) policy to Krata, Inc., doing business as Five Star Services, effective July 1, 2000, to July 1, 2001 (the Travelers policy). Arrowood (as successor in interest to Royal Surplus Lines Insurance Company) issued a CGL policy to Five Star, effective July 1, 2002, to July 1, 2003 (the Arrowood policy).*fn1 Each policy had a liability limit of $1 million per occurrence and $2 million in the aggregate.

The Arrowood and Travelers policies contained identical policy language. As relevant here, the policies provided that the insurers "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Further, "[w]e will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'bodily injury' or 'property damage' to which this insurance does not apply."

The policies applied to "bodily injury" and "property damage" if "(1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and [¶] (2) The 'bodily injury' or 'property damage' occurs during the policy period." An "occurrence" "means an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" means: "(a) Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or [¶] (b) Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it."

Both policies had identical supplementary payment provisions, providing coverage for "[a]ll costs taxed against the insured" in any suit "we [the insurer] defend," and for prejudgment and postjudgment interest.

II. The Underlying Action

On January 7, 2005, Ron and Maureen Ashley (the Ashleys) filed a complaint against Ruth and George Dunmore (the Dunmores) in an action entitled Ashley v. Dunmore, Sacramento County Superior Court, case No. 05AS00066 (the underlying action). The complaint alleged that in November 2002, the Ashleys agreed to purchase the Sunflorin Village Apartment Complex (Sunflorin or the property) from the Dunmores. Immediately prior to the sale, the Dunmores or their property manager, FPI Management, Inc. (FPI), hired Five Star to remediate dry rot in the property's exterior wood siding, trim, and decks. While doing the repair work, [the Dunmores and FPI] discovered "substantial and pervasive dry rot damage to the Property's exterior building envelope, wood siding, trim, decks and balconies." The dry rot "in many instances compromised the structural integrity of the balconies and guard rails, posing serious safety risks to the tenants and visitors to the Property." Nonetheless, because [the Dunmores] had decided to sell the property, "they elected to not correct the safety hazards and/or replace the dry rotted wood, but instead to conceal the dry rot damage by, among other things, fastening new trim to defective wood, or covering the dry rot damage with new paint." The Dunmores did not disclose the existence of the dry rot damage to the Ashleys, and the Ashleys did not discover it until after the close of escrow.

On March 16, 2005, the Dunmores cross-claimed against FPI and Five Star. They alleged that "[i]n or about November of 2002, FPI and Five Star entered into an agreement evidenced by one or more writings ('the Remediation Agreement') in which Five Star agreed to perform dry rot remediation at the Property. The Dunmores are informed and believe and thereon allege that, in the Remediation Agreement, Five Star agreed, among other things, to locate and replace wooden structures on the Property which were affected by dry rot." However, "FPI and/or Five Star intentionally or negligently failed to locate and replace or otherwise remediate wooden structures on the Property which were affected by dry rot, and performed their work in such a manner as to cover some dry rot conditions on the Property with new wooden structures so that the dry rot conditions were no longer visible." Accordingly, "[a]n actual controversy has arisen and now exists between the Dunmores and [FPI and Five Star] in that the Dunmores contend, and [FPI and Five Star] deny, that, as between the Dunmores and [FPI and Five Star], responsibility, if any, for the damages claimed by [the Ashleys] herein rests entirely or partially on [FPI and Five Star], and that, as a result, [FPI and Five Star] are obligated to partially or fully indemnify the Dunmores for any sums, including attorneys' fees, expenses, and costs of suit, that the Dunmores may incur in defense of [the Ashleys'] Complaint, as well as for any damages, judgment, attorneys' fees, expenses, costs of suit, or other awards recovered by [the Ashleys] against the Dunmores."

III. Tender of the Underlying Action

Five Star tendered the defense of the underlying action to Arrowood in June 2005. On July 5, 2005, Arrowood agreed to defend Five Star under a reservation of rights.

On May 10, 2006, Arrowood tendered Five Star's defense to Travelers. Arrowood advised Travelers that its initial investigation indicated that Five Star had done dry rot repair at Sunflorin during Arrowood's policy period (July 1, 2002, to July 1, 2003), but "[f]urther investigation with the named insured and the property manager determined there were proposals/contracts for dry rot repair that dated back to your [Travelers'] policy period."

By letter of September 11, 2006, Travelers agreed to defend Five Star. It stated that it had completed its review of the "facts, pleadings, and the policy provisions of the Travelers Property Casualty Insurance Company ('Travelers') policy issued to [Five Star]," and having done so, agreed to "participate in the defense of Five Star under a reservation of rights."

IV. Trial of the Underlying Action

The underlying action went to trial before a jury. On October 20, 2006, the jury returned a special verdict, finding that Five Star was liable for negligence and the Ashleys were contributorily negligent. It also found that the Ashleys' total damages for dry rot repairs were $717,358 and Five Star and the Ashleys were each 50 percent responsible for the damages.

Five Star brought motions for new trial and for judgment notwithstanding the verdict. The trial court denied both motions.

As against Five Star, the trial court awarded the Dunmores attorney fees of $205,661 and costs of $50,589. Accordingly, the total award against Five Star was $358,679 (50 percent of damages award) $205,661 (attorney fees) $50,589 (costs) $4,176 (postjudgment interest) = $619,105.

Travelers refused to indemnify Five Star for any portion of the compensatory damages award, but it paid $53,471 of the attorney fee award.*fn2 It also paid a portion ($28,606) of the fees and costs incurred to defend Five Star in the underlying action from the May 10, 2006 tender. Arrowood indemnified Five Star for the balance of the judgment ($565,673), and it paid the balance of the fees and costs incurred to defend Five Star ($225,213).

V. The Present Action

On January 24, 2008, Arrowood filed the present action for declaratory relief, indemnity, contribution, subrogation, and reimbursement against Travelers. Travelers answered, denying the allegations of the complaint and asserting 11 affirmative defenses, including that Arrowood's claims were barred "to the extent that the underlying claims asserted against [Five Star] are not actually covered or potentially covered under the Travelers policy" and that "the alleged 'property damage' at issue in the underlying action filed against Five Star did not occur during the effective policy period of the Travelers policy alleged in the Complaint." Travelers also cross-claimed against Arrowood for declaratory relief, equitable indemnity, equitable contribution, and equitable subrogation, asserting that based on the jury's special findings in the underlying action, Arrowood should be ordered to reimburse Travelers for all of the sums Travelers contributed to Five Star's defense, as well as for the $53,471 Travelers paid to indemnify Five Star.

Travelers and Arrowood filed cross-motions for summary judgment, seeking adjudication of their respective defense and indemnity obligations to Five Star. On January 5, 2009, the trial court denied both motions, explaining its ruling as follows:

"The special verdict form did at least arguably resolve the controverted . . . factual issues in the underlying case, those being liability and damages. But that jury was not asked to make any actual findings as to whether any dry rot work done by Five Star in the year 2000, which would have fallen into the Traveler[s] policy, whether that work caused or contributed to the necessity for any later work . . . . Those kinds of questions, apparently, from my read, weren't in front of the jury. And these issues, really, concern more the coverage and contributions issues as between the two insurers, not the liability and damages that the jury was asked to assess. I don't think that I can conclude, based on what I've seen here, that there is no potential for coverage in terms of the Traveler[s] policy, and I think the matter has to proceed to trial."

The case was tried to the court on June 25, 2009. The parties stipulated to the introduction of many facts and exhibits and there was no live testimony.*fn3 At the conclusion of argument, the trial court ruled that Travelers had no duty to defend or indemnify with respect to the underlying action, and thus it entered judgment for Travelers in the amount of $97,838.75, representing the costs and fees it paid to Five Star in connection with the underlying action. The court stated as follows:

"I am finding that there was no duty to defend on behalf of Travelers. The verdict form deals specifically with the . . . year 2002/2003. That's question one of the verdict. And the complaint that was operative in this lawsuit listed those dates as between 2002/2003 as being the dates for which . . . Five Star Service[s'] work was being questioned. The Travelers[] policy had expired before the date here.

"Now, it came to be that some information was gleaned and Travelers was put on notice at a later time. And they decided, I think, erroneously, and decided in an overabundance of caution -- maybe because of bad faith considerations. I don't know. They decided that they would defend under reservations of rights. And, in so doing, they ended up paying $53,000 and change as a contribution toward the ultimate decision.

"I think that Montrose [Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287] and Buena Vista [Mines, Inc. v. Industrial Indemnity Co. (2001) 87 Cal.App.4th 482] are the controlling cases. Having decided the initial issue of a duty to defend . . . , I don't need to, thereafter, get to the duty to indemnify, and I don't need to get to an allocation there. If the duty to defend does not exist, then the duty to indemnify does not exist, and there needs to be no allocation.

"The remedial work that was done by Five Star in 2002/2003 under the Arrowood or Surplus -- Arrowood policy was found by the jury to have been negligently done. The scope of that work was expanded over whatever work they did in the year 2000 and should have included remediation work for any work in 2000. The jury found that the negligence that occurred was in the 2002 to 2003 area. That's sufficient, I think, for my determination.

"I suppose we can look back at the special verdict form. That's where fault has been found here. Maybe it could have been crafted a little better. I think, on balance, that it worked out because the evidence of the work done was under the Arrowood's policy period.

"So I have not taken the plaintiff's arguments lightly. I've read the cases, but I think this is the proper conclusion."

Judgment was entered on August 13, 2009, and notice of entry of judgment was served on August 17, 2009. Arrowood timely appealed.


Arrowood contends that Travelers owed Five Star a duty to defend and a duty to indemnify. Further, because Arrowood and Travelers had equal "time on the risk"--each insured Five Star for one year--Arrowood contends that Travelers is responsible for 50 percent of the costs of defense ($253,819 ÷ 2 = $126,909), 50 percent of the "supplementary payments" (attorney fees, costs, and interest) ($260,425 ÷ 2 = $130,212), and 50 percent of the damages award ($358,679 ÷ 2 = $179,339).

Travelers contends that it did not owe Five Star either a duty to defend or a duty to indemnify. Thus, it urges that the trial court properly ordered Arrowood to reimburse it for all sums (defense and indemnity) it paid on Five Star's behalf. In the alternative, Travelers contends that even if it owed a duty to defend, its share of defense costs should be based on the percentage of work performed during each insurer's policy period. Specifically, Travelers asserts that Five Star did approximately 26 percent of its work during Travelers' policy period, and 74 percent of its work during Arrowood's policy period. Thus, Travelers urges that it should be responsible for no more than 26 percent of Five Star's defense costs.


"'Where, as here, a case is tried on stipulated facts and documentary evidence, we make our own determination of the questions of law presented by the stipulated facts. [Citation.]' (Mercedes-Benz Credit Corp. v. Johnson (2003) 110 Cal.App.4th 53, 56.)" (Baccouche v. Blankenship (2007) 154 Cal.App.4th 1551, 1554; see also Air China Limited v. County of San Mateo (2009) 174 ...

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