Summary: If there is a small potential for coverage, a defense should be provided promptly subject to a reservation of rights. Withdrawing that defense when there is no additional investigation or new facts is not within the custom and practice of Commercial General Liability insurers in California and most of the country.
An Insurer Should Never Deny A Defense Unless Absolutely Certain There Is No Potential For Coverage
The District Court, Northern District of California, granted a motion for summary judgment in favor of KB Home in part against the Travelers in Kaufman & Broad Monterey Bay, et v. Travelers Property Casualty, No. : 5:10-CV-2856 EJD (N.D.Cal. 07/18/2012)
Travelers issued commercial general liability policies to Norcraft Companies, L.P., ("Norcraft") a cabinet installer. The Norcraft policies provide coverage for "property damage" arising out of an occurrence that takes place in the coverage territory and that occurs during the policy period.
Subcontract And Aldrich Action
On or about January 22, 2003, and February 5, 2003, KB Home and Norcraft entered into subcontracts to furnish, deliver and install cabinets at certain homes within two housing developments in Monterey, California. The subcontracts required Norcraft to name KB Home as an additional insured under its commercial general liability policies.
On October 21, 2008, a number of homeowners commenced a lawsuit in Monterey County Superior Court against KB Home, Aldrich, et al. v. KB Home, et al. ("Aldrich Action"). The homeowners alleged a number of construction defects, including "cabinet and wood trim" defects, that resulted in damage to the homes and their component parts.
KB Home filed a cross-complaint against various parties, including Norcraft, alleging among other things that Norcraft is contractually required to defend and indemnify KB Home with regard to the Aldrich action.
Travelers' Acceptance, Withdrawal, And This Action
On April 1, 2009, Glaspy & Glaspy, counsel for KB Home, tendered the defense and indemnity of KB Home as additional insureds under the Norcraft policies in the Aldrich action. This initial tender included copies of the original Complaint, First Amended Complaint, KB Home's Cross-Complaint, a Stipulation and Order of Reference to the Special Master, the Subcontract and additional insured documentation.
On April 6, 2009, Patricia E. Dlugokenski ("Dlugokenski"), a senior technical specialist for Travelers, acknowledged receipt of the tenders and requested additional information, including: a statement of claims or documentation related to the alleged defects and deficiencies, expert investigation reports into defects or damages, current pleadings and any Case Management Order or Pre-Trial Order documents, and the location of any document depository.
On April 6, 2009, in response, KB Home provided an updated Homeowner matrix, the amended complaint, and the dismissal of one of the plaintiffs' homes. KB also informed Travelers that the Pre-Trial Order had not yet been filed and there was no defect list but that KB Home would forward the defect list as soon as it is received. On July 6, 2009, Dlugokenski noted in the internal Claims Notes that "it is likely some, although minor damages resulted from [cabinet] installation. Damages to the walls or pulling away from the walls could be attributed to installation." (Emphasis added) Also on July 6, 2009, Dlugokenski issued a letter accepting KB Home's tender as additional insureds under the Norcraft policies.
The letter also requested information that would assist Travelers in its evaluation of the demand for payment of defense expenses, such as contact information for all carriers who have been provided a tender of defense, their responses, the amounts they have paid, the percentage they agreed to pay, a litigation budget, and an additional insured matrix showing the carriers tendered as well as their responses.
On October 20, 2009, Dlugokenski sent an email to KB Homes' counsel requesting "documentation of damage caused by our named insured (defect report, etc.)" KB Home's counsel informed Travelers that no defect list was available to date.
On November 5, 2009, Tom Frazier ("Frazier"), Travelers' unit manager conducted a review of KB Home's tenders and found that they lacked documentation of damage or liability arising out of Norcraft's work. On December 1, 2009, KB Home contacted Travelers about its outstanding balance and requested payment. On December 10, 2009, Dlugokenski responded with a single-sentence email stating, "We will be withdrawing our acceptance." On February 9, 2010, Hartford Casualty Company ("The Hartford"), another insurance company, accepted KB Home's tenders of defense and issued a payment of $30,000 for KB Home's defense in the Aldrich action. The Hartford made no further payments.
On March 9, 2010, Dlugokenski sent a letter to KB Home advising that Travelers was withdrawing from KB Home's defense.
On May 27, 2010, KB Home filed this action against Travelers. On July 8, 2010, Fred Adelman, counsel for the Aldrich plaintiffs, signed a letter stating that "[t]he plaintiffs in this action are pursuing recovery for damages arising out of the cabinets."
On August 4, 2010, KB Home provided the Aldrich plaintiffs' preliminary defect list regarding cabinets, entitled "Aldrich, et al. v. KB Home, et al., Preliminary Defect List." On December 17, 2010, based on the August 4, 2010 defect list, Travelers sent a letter to KB Homes in which it agreed to participate in the defense of KB Homes as an additional insured from August 4, 2010 forward and that it was appointing Christian Lucia of Seller Hazard Manning Ficenac & Lucia ("Sellar Hazard") to represent KB Home in the Aldrich action. Travelers added that if KB Home wished to continue to retain Glaspy & Glaspy to provide it with a defense it could do so, but at its own expense.
On January 4, 2011, KB Home sent a letter to Travelers stating that Travelers has forfeited any right to control KB Home's defense because it breached its duty to defend KB Home. KB Home also stated that Sellar Hazard had "a clear conflict of interest and is currently representing a subcontractor directly adverse to KB Home in a pending construction defect lawsuit and that under no circumstances will KB Home waive the conflict.
On January 28, 2011, Travelers issued payment of $73,654.54 to KB Home as payment for its one-half share of KB Home's defense fees and costs in the Aldrich action pursuant to its equal shares allocation with The Hartford. On July 19, 2011, Norcraft and the Aldrich plaintiffs reached a settlement in the Aldrich action by the terms of which plaintiffs agreed to an issue release related to all cabinet issues, in exchange for the lump sum payment of $30,000. Travelers claims that, as of August 25, 2011, it had paid in excess of $187,418 in the defense of KB Home in the Aldrich action, which it claims is the amount of all outstanding invoices presented.
On August 26, 2011, KB Home filed its Motion for Partial Summary Judgment. Also on August 26, 2011, Travelers filed is Motion for Summary Judgment or, in the Alternative, Partial Summary Judgment. On September 16, 2011, Travelers filed counterclaims against KB Homes for reimbursement, unjust enrichment, breach of contract, and declaratory relief.
KB Home sought partial summary judgment that:
Travelers sought summary judgment in its favor on KB Home's breach of contract claim because:
The District Court considered both motions and ruled against Travelers and in favor of KB Home in most parts of its motion. It reasoned about the various issues:
Breach Of Contract
For an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. Hence, the duty may exist even where coverage is in doubt and ultimately does not develop. The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage.
The Norcraft policies provide coverage for "property damage." The Norcraft polices do not cover property damage to Norcraft's work arising out of it or any part of it.
Travelers argued that the complaint does not allege that other property was damaged as a result of the cabinets. Specifically, Travelers argues that the Aldrich complaint only alleges the existence of cabinet and wood trim defects at the homes and that the cabinets were installed so as to interfere with the cabinets' useful life.
Travelers' reading of paragraph 17, however, appears to consider only the final sentence of the allegation which list the defects, including cabinet and wood trim defects, to which the rest of the paragraph makes reference. The immediately preceding sentence states that the "defects ... have resulted in damage to the homes and their component parts. Thus, the complaint alleges that cabinet and wood trim defects caused damage to the homes and their component parts, which potentially includes parts of the homes other than the cabinets.
The District Court concluded that as a result of the Aldrich complaint tendered on April 1, 2009, Travelers was required to defend KB Home unless and until Travelers could demonstrate, by reference to undisputed facts, that the claim cannot be covered. KB Home's motion for partial summary judgment that Travelers owed it a duty to defend as of April 1, 2009 was granted.
Travelers failed to present evidence showing a genuine issue of fact regarding whether, at the time of its March 9, 2010 withdrawal, there was no potential for a covered liability.
To be excused from its duty to defend by KB Home's alleged breach of the duty to cooperate, Travelers must show prejudice that resulted from KB Home's withholding these documents. Travelers has not identified any related prejudice, much less provided evidence upon which a reasonable jury could find prejudice. KB Home, however, has pointed to evidence that Travelers was not prejudiced by these documents because, even if these documents had been produced earlier, Travelers would have acted no differently.
Travelers' expert, Gene Irizarry, declared that "even though KB [Home] did not provide the Lot Files to Travelers, had it done so, no duty to defend would have been triggered." This evidence indicates that, with or without the documents, Travelers still would have determined that it did not have a duty to defend. Thus, assuming that KB Home withheld these documents, Travelers has not raised a genuine issue of fact regarding whether Travelers was excused from its duty to defend as a result.
The undisputed facts demonstrate that Travelers breached its duty to provide KB Home with a complete and immediate defense of the Aldrich action when it withdrew from KB Home's defense on March 9, 2010. Therefore the District Court granted KB Home's motion and denied Travelers' motion.
Whether Travelers Cured Its Breach By Its Belated Payment
KB Home also moved for summary judgment that Travelers' belated acceptance of its duty to defend does not cure its prior breaches. In opposition, Travelers argued that KB Home has not provided any evidence of damages. KB Home sought judgment that Travelers' failure to take up KB Home's defense when its duty was triggered is not cured because Travelers did so after KB Home filed this action.
A belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty. KB Home's motion for summary judgment that Travelers did not cure its breach by its belated payment for KB Home's defense was, therefore, granted by the District Court.
"The insurer's right to control the insured's defense extends to the right to select legal counsel." Travelers Property Cas. Co. of America v. Centex Homes, No. 11-3638-SC, 2012 WL 1657121, at *4 (N.D. Cal. May 10, 2012). However, "[w]hen an insurer wrongfully refuses to defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate." Eigner v. Worthington, 57 Cal. App. 12 4th 188, 196 (1997).
Here, the Aldrich action was tendered to Travelers on April 1, 2009 and triggered Travelers' duty to defend. On March 9, 2010, Travelers declined to participate in the Aldrich defense. Travelers, however, agreed to defend KB Home on December 17, 2010, after KB Home had provided Travelers with a defect list from the Aldrich plaintiffs on August 4, 2010 and after KB Home filed this lawsuit.
Duty To Defend Arose Immediately Upon Tender
Since Travelers' duty to defend arose immediately upon the April 1, 2009 tender, Travelers' withdrawal and delay in providing KB Home with a defense divested it of the right to control KB Home's defense. Thus, Travelers failed to demonstrate that the undisputed evidence shows KB Home's rejection of Travelers' chosen counsel was a breach of the cooperation clause.
During the time the insurer had rejected the tender of the defense, the insured arranged and paid for its own defense. The belated tender did not fully remedy the harm caused by the insurer's refusal to defend by later paying the insured's attorney fees, though this belated decision unquestionably mitigated its damages.
Breach Of Duty To Investigate
An unreasonable failure to investigate amounting to such unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. Based on KB Home's initial tender, on July 6, 2009, Travelers' Claim Notes document Traveler's decision to accept KB Home's defense because of a likelihood of covered damages.
An insurer's early closure of an investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith. KB Home, therefore, presented evidence sufficient to create a genuine issue of fact regarding whether Travelers acted in bad faith in refusing to defend KB Home.
For the reasons discussed above, the District Court ordered as follows:
Travelers' has been found to breach its duty to defend in two cases in California because of its failure to thoroughly investigate upon tender of defense and that, when it had second thoughts and agreed to defend, found it had lost its right to control the defense.
If, as in KB Homes, there is a small potential for coverage, a defense should be provided promptly subject to a reservation of rights. Withdrawing that defense when there is no additional investigation or new facts is not within the custom and practice of Commercial General Liability insurers in California and most of the country.
Travelers then added insult to the injury caused by its withdrawal of defense by coming back and offering to defend with control of counsel and the defense and ignoring the conflict of interest between it, its chosen counsel, and the additional insured. In addition, had it done a thorough investigation, it could have accelerated the settlement negotiations and resolved the Aldrich case for less than the amount of defense costs.
Barry Zalma is an insurance coverage attorney and Certified Fraud Examiner. He is the founder of Barry Zalma, Inc., a California law firm whose practice emphasizes the representation of insurers and those in the business of insurance and is the principal consultant of Zalma Insurance Consultants.
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