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St. Paul Mercury Insurance Company v. Mountain West Farm Bureau Mutual Insurance Company

October 25, 2012

ST. PAUL MERCURY INSURANCE COMPANY, PLAINTIFF AND RESPONDENT,
v.
MOUNTAIN WEST FARM BUREAU MUTUAL INSURANCE COMPANY, DEFENDANT AND APPELLANT.



APPEAL from a judgment of the Superior Court of Los Angeles County, Rolf M. Treu, Judge. (Los Angeles County Super. Ct. No. BC376341)

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

CERTIFIED FOR PUBLICATION

Affirmed in part and reversed in part.

INTRODUCTION

St. Paul Mercury Insurance Company (St. Paul Mercury), the general liability insurer for the general contractor, sought equitable contribution from Mountain West Farm Bureau Mutual Insurance Company (Mountain West), the insurer for the framing subcontractor, based on an additional insured endorsement in Mountain West's policy naming the general contractor. The trial court ruled in favor of St. Paul Mercury and ordered Mountain West to contribute $2,087,171.50, plus interest in the amount of $372,731.73, to the defense and settlement costs St. Paul Mercury incurred in the underlying construction defect litigation.

Mountain West's entire appeal is shaped by its view that it participated in the defense of its additional insured by paying into the settlement of the underlying construction defect action on behalf of its insured (the framing subcontractor). Yet, Mountain West admitted it owed a duty to defend its additional insured (the general contractor) but did not provide a defense. Consequently, the shifting burdens under Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal.App.4th 874 (Safeco) apply to this equitable contribution action. Thereunder, St. Paul Mercury had the burden to prove the potential for coverage under Mountain West's policies; Mountain West had the burden to prove the absence of actual coverage as an affirmative defense, and forfeited its right to challenge the reasonableness of the defense costs and the amounts paid in settlement. We hold the trial court's allocation of the burdens of proof under Safeco is supported by the evidence and its apportionment of costs was not an abuse of discretion. However, we also hold that the award of prejudgment interest was error. Accordingly, the judgment is affirmed in part and reversed in part.

FACTUAL AND PROCEDURAL BACKGROUND

1. The parties

Four Seasons Jackson Hole (FSJH) commenced a project to build a Four Seasons resort hotel in Teton Village, near Jackson Hole, Wyoming that included 17 high-end condominium units referred to as Area 6. Jacobsen Construction Company, Inc. (Jacobsen), was the general contractor on the project. St. Paul Mercury insured Jacobsen in a series of a general liability policies through April 1, 2004.

Teton Builders, Inc. (Teton), the framing contractor, contracted to build all of the structural wood framing for the four-story Area 6 condominium units only. Teton did not work on the main hotel structure.

Mountain West insured Teton in two commercial general liability policies, one effective October 1, 2001 through October 1, 2002, and the other from October 2002 through October 1, 2003. Mountain West and Teton made Jacobsen an additional insured under Teton's policies on June 12, 2002 and removed Jacobsen from the policies on March 17, 2003.

Teton commenced framing on the Area 6 condominium units in July 2002. Teton built the skeleton of the building, i.e., the internal and external walls, floors, roof, roof edges, crickets,*fn1 and the exterior balconies above the first floor. Teton stopped work in February 2003, after completing approximately 90 percent of the contract.

FSJH terminated Jacobsen from the project in February 2004.

2. The underlying construction defect action

Jacobsen sued FSJH alleging breach of contract and nonpayment. FSJH cross-complained against Jacobsen seeking damages for construction defects for, inter alia, "[i]nstallation of defective and non-conforming work," "defective and incomplete installation of exterior wood finishes," "out of plumb, out of square and/or out of level interior walls," and defective weatherproofing and roof edges. In its amended cross-complaint dated March 23, 2006, FSJH alleged "defective and deficient installation of framing, drywall, millwork, and paint at Area 6" among other problems (the underlying construction defect action).

To determine who should receive Jacobsen's tender of defense, Jacobsen's attorneys reviewed the list of defects alleged by FSJH to identify the potentially responsible trades. Jacobsen determined "early in the case" that it was allegedly liable for property damage purportedly arising from Teton's defective framing work. Jacobsen tendered its defense of the cross-complaint to every insurer that had issued a certificate of insurance or additional insured endorsement on every policy issued to a subcontractor whose work was allegedly defective. There were 14 such insurers, one of which was Mountain West. Jacobsen, through St. Paul Mercury, tendered the defense of FSJH's cross-complaint to Mountain West in late 2004.

Mountain West refused to accept St. Paul Mercury's tender and rejected numerous attempts by St. Paul Mercury's attorneys to share evidence showing the damage alleged by FSJH that arose out of Teton's framing work.

3. Settlement of the underlying construction defect action

The underlying construction defect action was resolved by a settlement in two phases. The first phase settled the siding and interior drywall issues and problems with wavy walls and improperly installed balconies in both the hotel and Area 6 condominiums, but excluded roofing and roof edge issues (the siding settlement). Thus, the siding settlement involved claims for property damage against Jacobsen that arose out of Teton's framing work. St. Paul Mercury contributed $1 million to that settlement on behalf of Jacobsen. Mountain West did not participate in the siding settlement or contribute any payments toward it.

The second phase resolved all remaining claims, i.e., the roofing and roof edge issues (the roofing settlement). The total amount of the roofing settlement was $1.6 million. St. Paul Mercury contributed $1,265,000 to the roofing settlement. Mountain West paid $100,000 on behalf of Teton. The trial court found the entire settlement was made in good faith.

4. The instant action for equitable contribution

St. Paul Mercury brought the instant action for equitable contribution against four subcontractors and five insurers, including Teton and Mountain West. After various dispositive pretrial motions, of the five insurers St. Paul Mercury claimed owed a duty to defend Jacobsen, only Mountain West remained in the case. The threshold question of Mountain West's duty to defend Jacobsen in the underlying construction defect action was resolved by motion. Mountain West did not dispute it "never defended Jacobsen against FS Jackson Hole's cross-complaint." In granting summary adjudication, the trial court ruled Mountain West's duty to defend Jacobsen "was triggered by the allegations of framing deficiencies."

At trial, Jacobsen's forensic architectural expert, and St. Paul Mercury's attorneys and adjuster described how the interior and exterior framing and roof damage alleged by FSJH were caused by Teton's defective framing work for which Jacobsen was allegedly liable. Teton's framing of the Area 6 ceilings and walls was improperly installed and warped, and out of plumb or plane, causing problems with the drywall, trim, door operations, the roof, and the casing, and allowed water to seep through windows and doors. Teton installed heavy timber railings and balusters, cracked beam ends and knee braces, and loose structural king posts that had cracks and gaps. On the exterior, the decks framed by Teton were higher than the interior floors allowing water to intrude into the condominium units and pond. Teton improperly installed the eaves and fascias on the buildings and so they and the roof leaked and caused water intrusion as well as gutter and downspout problems. Finally, Teton built all of the skeleton, putting up the walls, but failed to install the blocking and bracing on upper floors.

Jacobsen's project manager explained that construction was done in stages. Teton framed all four stories sequentially. As Teton finished framing the lower floors and began the next level, other trades followed with their work on the lower floors.

At the close of trial, the court issued a 12-page statement of decision in which it explained its finding that Mountain West improperly refused to participate in the defense of Jacobsen and did not prove the absence of actual coverage. Using a time-on-the-risk method of allocation, the court ordered Mountain West to contribute $767,071.50 to the defense costs and $1,320,100 to the settlement. The amounts equate to 43 percent of each cost. The trial court also ordered Mountain West to pay ...


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