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September 25, 2012

Slumlord Must Repay Insurer for Settlement Contribution

Summary:

When defending a case under a reservation of rights it is imperative to properly reserve rights to contribute to a settlement. If done properly it is imperative that the insurer then file suit to recover the amounts paid if the insured will not voluntarily pay.

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Insurers Should Never Allow Slumlord to Profit From Bad Acts
In Axis Surplus Insurance Company v. Reinoso No. B228332 (2012) WL 2389324) an insurer, under a full reservation of rights, including the right to recover any costs of defense or settlements paid, defended Edgar and Linda Reinoso from claims by their tenants. Evidence, as the defense progressed clearly established that the Reinosos operated rental properties in a manner that allowed infestations of insects, vermin, and rats. Mr. Reinoso had pleaded no contest to at least two charges about properties he owned and was classified as a “slum lord.”

Ultimately, the tenants settled their claims against the Reinosos and their management company, Proud American, for over $3 million, with Axis contributing over $2 million under a reservation of rights.

Axis sued the Reinosos and Proud American for reimbursement of defense and settlement costs, based on the policy’s exclusion for injuries that were “expected or intended from the standpoint of the insured.” The trial court awarded Axis recovery of its $2 million+ settlement contribution, concluding that Axis had proven that the tenants’ claims were not actually covered.

The California Court of Appeal affirmed the judgment allowing Axis reimbursement of its settlement contribution and found wanting Mrs. Reinoso’s argument that she was an “innocent” insured and that the exclusion for “expected or intended” injuries thus did not apply to her.

Since an insurer only has a duty to indemnify the insured for covered claims, and no duty to pay for non-covered claims because the insured did not pay premiums for such coverage, and since both Reinosos owned and operated the apartment complex in a manner that damaged their tenants and profited from the operation of the apartments Mrs. Reinoso was not innocent of the charges made by the tenants. Since evidence showed that Linda had a sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer of the full amount paid by the insurer to settle the Tenant Action the Court of Appeal concluded would amount to unjust enrichment.

Mrs. Reinoso was a co-owner of the property in question with Edgar, and the property was held as community property. She participated in the management of the property. Defendants in a joint venture are jointly and severally liable for non-economic damages whatever their respective interests in the joint venture. Moreover, Linda’s community property interest would be liable for obligations in connection with the property. Faced with exposure of many millions of dollars, perhaps up to $30 million, and punitive damages, Linda received the full benefit of the settlement.

The Court of Appeal agreed with the trial court that the insurer was entitled to reimbursement of the amounts it contributed to the settlement.

Conclusion
When defending a case under a reservation of rights it is imperative to, as did Axis, properly reserve rights to contribute to a settlement. If done properly it is imperative that the insurer then file suit to recover the amounts paid if the insured will not voluntarily pay.

To do so, the Court of Appeal noted, that the insurer must create and deliver to the insured:

  1. a timely and express reservation of rights;
  2. an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and,
  3. an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.

Axis did so, and all insurers considering paying a settlement in a case where there is no coverage for indemnity should follow the recommendation.

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