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American Safety Indemnity Co. v. Admiral Insurance Co.

California Court of Appeals, Fourth District, First Division

September 27, 2013

ADMIRAL INSURANCE COMPANY, Defendant and Appellant.

APPEAL from a judgment of the Superior Court of San Diego County, No. 37-2010-00092157-CU-IC-CTL Richard E.L. Strauss, Judge.

Law Offices of Martin N. Buchanan, Martin N. Buchanan; Walsh McKean Furcolo and James T. Derfler for Defendant and Appellant.

Blau & Associates, David S. Blau and Ron L. Nelson for Plaintiff and Respondent.

BENKE, Acting P. J.

In this case, we once again apply the well-established principle that any limitation on the coverage provided by a liability insurance policy must be express and consistent with the reasonable expectations of the insured.

Here, the subject commercial general liability policy has a provision labeled "Self-insured Retention (SIR)" that clearly makes the insured liable for the first $250, 000 in damages payable to any third party claimant. The policy also makes it clear the insured's payment of defense costs count toward meeting the insured's SIR obligations.

However, the SIR clause we are asked to consider does not expressly make payment of the SIR a condition of the insurer's broader obligation to provide a defense when an arguably covered claim is tendered. Rather, the SIR clause expressly applies only as a limitation on the insurer's duty to indemnify the insured for covered damages for which the insured is found liable. Given the language of the policy, an insured could quite reasonably interpret it as providing a defense to arguably covered claims as soon as such claims are tendered and before any SIR has been paid. Thus, like the trial court, we find the defendant insurer in this equitable subrogation action had a duty to defend its insureds when large soil subsidence claims were made against them and without regard to the SIR provisions in their policies.

We recognize other liability insurance policies contain SIR clauses that expressly and unambiguously make payment of a SIR obligation a condition of any obligation under the policy, including any duty to defend. We also recognize those SIR provisions have been enforced according to their terms. The policy in dispute here, however, does not contain such an express condition on the defendant insurer's duty to defend.

Because the defendant insurer had a duty to defend its insureds, principles of equitable subrogation required that it reimburse the defense costs another insurer, plaintiff herein, paid on behalf of the defendant's insureds in the course of the underlying subsidence litigation. Although the plaintiff insurer made the payments notwithstanding the fact the insureds were not covered under any policy the plaintiff issued, the circumstances under which the plaintiff made the payments did not impair the plaintiffs' right to equitable subrogation.


A. Fessler Lawsuit & ASIC I

This case and a related appeal we decided in 2009, American Safety Indemnity Company v. Admiral Insurance Company (Dec. 4, 2009, D053564) (nonpub. opn.) (ASIC I), grow out of the same underlying subsidence litigation and involve the same insureds and their insurers. We briefly summarized the underlying litigation in ASIC I:

"Between the late 1990's and 2002, Zephyr Newhall, LP, and its partner Zephyr Partners, LLC (collectively Zephyr), worked with developer D.R. Horton, Inc. [Los Angeles Holding Company; hereafter Holding], to build housing on a tract of land in Santa Clarita which Zephyr owned. [Holding] hired Ebensteiner Co. (Ebensteiner) to grade the tract pursuant to plans created by Leighton and Associates, Inc. (Leighton), a geological engineering firm. As part of their grading contract, Ebensteiner agreed to indemnify [Holding] against liability for any loss attributable to Ebensteiner's breach of duty even if [Holding's] conduct also contributed to the loss.

"The grading began in February 2002, but was not without incident. On or about March 11, 2002, a backcut slope failure occurred as a direct result of the grading, creating a 140- by 100-foot landslide and tension cracks that visibly extended to within 50 feet of existing upslope homes. Another similar backcut slope failure, resulting in a 70- by 200-foot slide, occurred April 4, 2002.

"On or about April 15, 2002, several adjacent homeowners noticed physical damage to their property caused by the slides. On January 23, 2003, the homeowners sued [Holding], Ebensteiner, Zephyr and Leighton, among others (hereafter Fessler lawsuit). [¶]... [¶]

"At the time of the work, [Holding] was insured by defendant and respondent Admiral Insurance Company (Admiral), while Ebensteiner was insured by plaintiff and appellant American Safety Indemnity Co (ASIC). The respective policies limited coverage to $1 million per occurrence. The Admiral policy contained a provision which designated it 'excess' over the ASIC coverage; the ASIC policy contained a similar excess insurance disclaimer for those instances where the ASIC policy was not primary. The ASIC policy also covered [Holding] as an 'additional insured.'

"[Holding] tendered its defense of the Fessler claims to ASIC, which initially declined the tender. [Holding] then filed a bad-faith lawsuit against ASIC. On May 6, 2004, [Holding] and ASIC settled the bad-faith lawsuit. Under the terms of the settlement, ASIC agreed to pay [Holding's] defense costs and to not thereafter dispute its duty to defend [Holding].

"The Fessler lawsuit itself was settled on October 1, 2007. Ebensteiner agreed to pay the Fessler plaintiffs $2.52 million, [Holding] agreed to pay plaintiffs $1.75 million, and Leighton agreed to pay plaintiffs $630, 000, for a total sum of $4.9 million. Pursuant to the agreement, [Holding] and Ebensteiner dismissed with prejudice their cross-claims against one another, with the exception of claims either of their insurers had against the other's insurer. ASIC and Admiral each contributed their respective policy limits of $1 million to the settlement.

"While the Fessler lawsuit was pending, ASIC asked Admiral to contribute to the defense costs ASIC incurred on behalf of [Holding]. Admiral refused and ASIC filed [a declaratory relief action]. ASIC alleged Admiral was obligated to reimburse ASIC a pro rata share of the $2 million ASIC spent on [Holding's] defense. As we have indicated, ASIC and Admiral filed cross-motions for summary judgment.

"Among other matters, in opposing Admiral's motion, ASIC relied on expert and percipient witness deposition testimony that had been developed in the Fessler lawsuit. In particular, ASIC relied on two experts retained by the Fessler plaintiffs who concluded the slope failure was caused by defects in Leighton's grading plans and not by any deficiency in the grading performed by Ebensteiner. ASIC also relied on a geologist employed by Leighton who testified that, as far as he knew, Ebensteiner [ASIC's named insured] performed the grading according to Leighton's plans." (ASIC I, supra, D053564 [at pp 3-6].)

In ASIC I, Admiral argued the broad indemnity clause in the Ebensteiner grading subcontract protected both Holding and Admiral from any indemnity claim by Ebensteiner or ASIC. In ASIC I, we held that although the indemnity clause might provide a complete defense to the claims ASIC was making, it would only do so upon a showing Ebensteiner was negligent. We found that the record did not establish Ebensteiner's negligence as a matter of law and reversed the summary judgment entered in Admiral's favor.


In addition to Holding, the Fessler plaintiffs also sued two Holding related entities, D.R. Horton, Inc. and D.R. Horton, Inc.—Los Angeles (collectively the Horton entities). The Horton entities had no contractual relationship with Ebensteiner, and Ebensteiner owed them no duty of indemnity; ...

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