No “Occurrence” Found Where Contractor Intentionally Performed Defective Work With The Hope It Would Not Cause Property Damage

The California Court of Appeal, Fourth Appellate District, affirmed in part and reversed in part an order awarding an insurance company its $1 million policy limits used to settle a construction defect claim on behalf of an insured general contractor.

In Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), a building owner, JSL Properties, LLC (“JSL”), and a developer, D.B.O. Development No. 28 (“DBO”), sued a general contractor, Moorefield Construction, Inc. (“Moorefield”), for floor leaks which occurred at a Best Buy electronics store between 2003 and 2009. In its second amended complaint, JSL claimed that Moorefield had defectively installed flooring on top of a concrete slab despite knowing that the existing slab contained excessive moisture levels. Navigators Specialty Insurance Company (“Navigators”) defended Moorefield in the action subject to a reservation of rights under a commercial general liability insurance policy. The litigation settled for $1,310,000 of which Navigators contributed its $1 million policy limits.

Navigators filed a declaratory relief lawsuit against Moorefield seeking a declaration that it had no duty to defend or indemnify the general contractor in the underlying construction defect action. Following a bench trial, the trial court issued a decision in favor of Navigators and against Moorefield. The trial court found that the flooring defects did not constitute an “occurrence” or accident under the policy. The trial court also held that Navigators had no duty to make any payments under the “supplementary payments” portion of the policy. Navigators received an award which required Moorefield to reimburse Navigators its $1 million policy limits contributed to settle claim.

The Court of Appeal agreed with the trial court that Navigators had no duty to indemnify Moorefield in the underlying action. The appellate court found evidence which established that Moorefield knew about the excessive moisture in the concrete slab and that it deliberately installed the flooring despite this known condition. Thus, the Court of Appeal held that no unexpected or unintended event constituted an “occurrence” to trigger an indemnity obligation under the policy. Moorefield and amicus curiae argued that construction defects could not be considered intentional conduct unless the contractor expected or intended its work to be defective and cause property damage. The Court of Appeal rejected that argument by stating, on the record before it, Moorfield knew about and intended to perform defective work with the hope it would not cause property damage. Even though Moorfield did not intend to cause property damage, the insured’s subjective belief was irrelevant.

However, the Court of Appeal reversed the portion of the trial court’s ruling which found that Navigators had no duty to make payments under the “supplementary payments” provision of the policy. The Court of Appeal determined that Navigators owed a duty to pay for attorneys’ fees and costs as part of the settlement because such amounts were recoverable under the construction contract and were awardable as taxed costs in litigation. Although no duty to indemnify existed, the appellate court found that Navigators was obligated to pay “supplementary payments” as part of its broader duty to defend.

The Court of Appeal also found that the trial court had improperly determined that the entire $1 million settlement payment was made for damages, rather than attorneys’ fees. The evidence indicated that JSL and DBO had only incurred $377,000 in damages related to the floor leaks. The appellate court further held that the trial court had committed prejudicial error in placing the burden of proof for this issue on Moorefield. Accordingly, the Court of Appeal remanded the case for a new trial seeking allocation of the settlement payment between damages and attorneys’ fees.

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The opinion in Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

Doctrine of Superior Equities Does Not Bar Assignment of Claim against Insurance Broker

In a recent decision from the Fifth District Court of Appeal, the court held that a negligence cause of action against an insurance broker could be assigned to a third party, including the insurer of an injured party. In AMCO Insurance Company v. All Solutions Insurance Agency, LLC, 16 C.D.O.S. 1521, two separate lawsuits were filed against Amarjit Singh (“Singh”) in connection with a fire caused by Singh’s negligence. Hideo Ogawa and Myong Echols (collectively, “Ogawa”) owned a restaurant that was damaged by the fire. David Saari (“Saari”) owned commercial property that was damaged by the fire. AMCO Insurance Company (“AMCO”) was the commercial property insurer for Saari and paid $371,326 to Saari for damages caused by the fire. AMCO then brought a subrogation action against Singh. Ogawa also brought suit against Singh for losses caused by the fire. Singh tendered the claims to his insurance company but the claims were denied because there was no policy in effect on the date of the fire as a result of the negligence of Singh’s insurance broker, All Solutions Insurance Agency, Inc. (“All Solutions”). Subsequently, Singh entered into stipulated judgments with AMCO and Ogawa and assigned his claims against All Solutions to AMCO and Ogawa.

AMCO and Ogawa as assignees of Singh filed suit against All Solutions. The trial court granted summary judgment to All Solutions holding that Singh’s claim for broker negligence against All Solutions was not assignable. In addition, the trial court held that AMCO and Ogawa’s claims were precluded by the rule of superior equities.

The Court of Appeal noted that the general rule in California favors the assignability of tort causes of action. However, there are exceptions for causes of action for wrongs done to the person, the reputation or feelings of the injured party. Other exceptions include legal malpractice based upon the highly personal and confidential relationship between an attorney and client. All Solutions argued that the same reasons for prohibiting assignment of legal malpractice claims were equally applicable to insurance malpractice claims. However, the Court of Appeal rejected this argument stating that the communications between an insurance broker and client are not privileged or confidential and because of the standardized nature of insurance policies, the product delivered by the insurance broker to the client is not highly unique or personal.

The Court of Appeal also held that AMCO and Ogawa’s claims were not barred by equitable subrogation principles or the doctrine of superior equities. Equitable subrogation refers to the transfer of rights against a third party that arises in equity and occurs only by operation of law because a party (i.e., the subrogee) has paid a loss of another (i.e., the subrogor). The most common equitable subrogation action is one brought by an insurer against a wrongdoer who caused the loss paid by the insurer. In these instances, the doctrine of superior equities has developed based on the idea that an insurer who has been compensated (by receipt of premiums) for issuing a policy should not be allowed to shift the very loss contemplated by the policy to an innocent party. An insurer pursuing a claim for equitable subrogation must demonstrate that it is not attempting to shift the loss to an innocent party. California does not recognize a difference between equitable subrogation and conventional (i.e. contractual subrogation). Accordingly, even a contractual assignment to an insurer from its insured is subject to the doctrine of superior equities. All Solutions contended that the doctrine of superior equities limited the contractual assignments because it was Singh, and not All Solutions, who caused the fire.

With regards to Ogawa, the Court of Appeal held that the doctrine of superior equities did not apply because Ogawa was not a surety (i.e., an insurer). The Court of Appeal also found that AMCO was not subject to the doctrine of superior equities because it did not have a subrogee-subrogor (i.e., insurer-insured) relationship with Singh who had caused the fire. Rather, AMCO insured Saari who had been damaged by Singh. The doctrine of superior equities would have precluded the contractual assignment to AMCO if AMCO had insured Singh. However, AMCO’s insured was Saari and AMCO pursued its equitable subrogation claim against Singh for payments AMCO made to Saari. Accordingly, the doctrine of superior equities did not apply.

Finally, the Court of Appeal held that even if the doctrine of superior equities did apply, All Solutions had not demonstrated through material facts that its equitable position was equal or superior to AMCO. The Court of Appeal criticized the separate statement of undisputed material facts that All Solutions had submitted in support of summary judgment. No facts were introduced demonstrating how the fire losses would have been allocated if All Solutions had obtained the proper insurance for Singh. As a result, the Court of Appeal was unable to determine how the unobtained coverage would have related to coverage provided by AMCO. Accordingly, All Solutions did not demonstrate that its equitable position was equal or superior to AMCO’s equitable position. The Court of Appeal reversed the trial court granting All Solutions’ motions for summary judgment.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

Medical Insurer Waived Its Right To Rescind Policy By Electing To Cancel And Retaining Premiums

In DuBeck v. California Physicians’ Service, 2015 Cal. App. LEXIS 203 (March 5, 2015), California’s Second Appellate District held that California Physicians’ Service dba Blue Shield of California (“Blue Shield”) waived its right to rescind a health insurance policy by taking actions wholly inconsistent with rescission.

In October 2004, Bonnie DuBeck (“DuBeck”) was involved in an accident and developed a lump in her left breast. On February 11, 2005, DuBeck visited the UCLA Breast Center for tests in the affected area.  Later that month, additional tests revealed the lump was malignant.

On February 16, 2005, DuBeck applied for health insurance with Blue Shield. DuBeck failed to disclose her recent medical issues and treatment. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck that covered pre-existing conditions only after six months of continuous coverage. DuBeck underwent breast cancer surgery on April 6, 2005, less than a week after the policy was issued, and her medical providers submitted bills for her treatment to Blue Shield. In its June 2005 explanation of benefits, Blue Shield stated the breast cancer “may have existed prior to [DuBeck’s] enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

On September 8, 2006, seventeen months into coverage, Blue Shield wrote to DuBeck cancelling the policy based on her earlier misrepresentations. The letter stated: “[A]t this time[,] Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006.” It advised Dubeck that “[a]ny claims for covered services incurred before this date will be covered,” and that “at this time Blue Shield will not seek refund of any claims payments made on your behalf.” Blue Shield had not reimbursed DuBeck for her breast cancer surgeries but had made payment for other health care costs.

Two years later, DuBeck filed a complaint against Blue Shield challenging the cancellation of the policy and asserting claims for breach of contract, violation of the covenant of good faith and fair dealing and intentional infliction of emotional distress. DuBeck alleged that Blue Shield had previously denied her claims for medical treatment in April and May 2005 under the pre-existing condition exclusion in the policy. Therefore, Blue Shield knew or should have known that she had received treatment for her malignancy in February 2005. By delaying the cancellation, Blue Shield was able to collect more in premiums than it paid in benefits. In December 2008, Blue Shield answered the complaint and asserted rescission of the policy as a defense. Blue Shield moved for summary judgment on rescission which the trial court granted. The Court of Appeal reversed.

The Court of Appeal held Blue Shield had waived its right to rescind the policy. First, the Court found Blue Shield was aware of all pertinent information which would have allowed it to rescind when it elected to cancel DuBeck’s coverage two years prior in September 2006. However, instead of rescinding the policy, Blue Shield “cancelled” the policy which allowed it to keep the policy premiums.

Second, Blue Shield was aware of Dubeck’s medical condition as early as five days into coverage when she underwent breast surgery. In fact, Blue Shield refused to pay for the surgery because the breast cancer may have existed prior to the policy. The Court concluded that Blue Shield’s delay in investigating the misrepresentation resulted in DuBeck incurring substantial medical expenses and impeded her ability to timely investigate the availability of government assistance for her medical needs. These actions were entirely inconsistent with rescission. Accordingly, Blue Shield waived its right to rescind the policy.

As this decision shows, there is no middle-ground between acknowledging coverage and rescission. Blue Shield may have had several reasons for cancelling rather than rescinding. Blue Shield was able to keep policy premiums and its cancellation allowed DuBeck to keep benefits for treatment received prior to the cancellation. However, Blue Shield’s approach was fatal to its rescission claim.

Contamination Products Insurance Does Not Cover Recall of Ingredients Supplied to Insured Manufacturer

In Windsor Food Quality Company, Ltd v. The Underwriters of Lloyds of London, et al. (2015) 2015 Cal.App. LEXIS 195, the California Court of Appeal for the Fourth Appellate District held that a contamination products policy does not cover contaminated ingredients obtained from a supplier and incorporated into the insured manufacturer’s product.

The insured, Windsor Food Quality Company, Ltd. (“Windsor”) manufactured Jose Ole frozen food products using ground beef supplied by Westland/Hallmark Meat Company (“Westland”).  The United States Department of Agriculture announced a voluntary recall of all products containing Westland’s ground beef because Westland had used “downer cattle” (non-ambulatory disabled cattle, the use of which is prohibited in human food) that may have been contaminated.  Windsor recalled its products which had incorporated Westland ground beef and incurred an approximate $3 million loss.

Windsor tendered the loss to its contamination products insurer, The Underwriters of Lloyds of London (“Lloyds”).  Lloyds denied the tender on the grounds that its policy did not cover recalled products.  Windsor then sued Lloyds for breach of contract and breach of the implied covenant of good faith and fair dealing.  The trial court granted Lloyd’s motion for summary judgment and Windsor appealed.

The policy’s insuring agreement covered “Malicious Product Tampering” to an “Insured Product.”  “Insured Products” was defined as “all products including their ingredients and components once incorporated therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured… .”  Windsor argued that the frozen food products containing the contaminated beef qualified as an “Insured Product” because the beef was incorporated into Windsor’s final product.  The court disagreed, finding no ambiguity and that the plain meaning of the policy required Windsor to prove “there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

The decision highlights the distinction between contamination products insurance and recall insurance.  The former provides coverage for loss arising out of products contaminated during the insured’s manufacturing process and the latter provides coverage for loss resulting from recalled products regardless of when the alleged contamination to the products occurred.