Insurance Client Alert: Denial of Summary Judgment Does Not Automatically Establish Duty to Defend

by Haight Brown & Bonesteel LLP
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In McMillin Companies v. American Safety Indemnity (No. D063586, filed 1/20/15), a California appeals court ruled that an insurer's loss of a summary judgment motion on the duty to defend does not necessarily establish that a duty to defend existed.

McMillin was the general contractor for a series of residential construction projects, sued in a construction defect action brought by 117 homeowners. McMillin tendered its defense to its subcontractors' insurers, including American Safety (ASIC), claiming status as an additional insured (AI). ASIC denied the tender.

McMillin sued ASIC and other insurers alleging breach of contract and bad faith for the failure to defend McMillin as an additional insured. Eventually, all of the other insurers settled, leaving ASIC as the sole defendant. ASIC moved for summary judgment, but the trial court denied the motion, ruling that ASIC had failed to carry its burden of disproving coverage under a blanket additional insured endorsement in the policy.

At trial, McMillin argued that the denial of summary judgment established the duty to defend, citing Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, for the proposition that if coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would not only result in a denial of a summary judgment motion, but also establish a possibility of coverage and thus a duty to defend. The trial court agreed, and ruled that ASIC could not present any further evidence to refute the duty to defend at trial.

However, the appeals court saw a distinction, noting that in denying summary judgment, the trial court had ruled that with regard to four allegedly undisputed issues, "ASIC has not met its initial burden of proof." The court noted that ASIC had moved for summary judgment on the grounds that the underlying case did not involve liability from ongoing operations of the named insured; liability from the named insured's sole negligence; and that exclusions j(5) and j(6) barred coverage. But according to the appeals court, "[the] summary judgment ruling did not find a factual dispute that necessarily established a possibility of coverage. Rather, the ruling established only that ASIC did not meet its initial burden of production to make a prima facie showing that there are no triable issues of material fact."

The appeals court pointed out that what the Horace Mann opinion specifically states is that: "[If] factual issues exist precluding summary judgment in the insurer's favor...the duty to defend is then established, absent additional evidence bearing on the issue." And according to the appeals court, "Denying a summary judgment motion because the moving party failed to meet its initial burden of production is not the same as denying the motion based on an unresolved factual dispute." Thus, it had been an error to preclude ASIC from providing additional evidence at trial showing that there was no duty to defend.

Beside the effect of a summary judgment denial, the McMillin court also addressed the impact of the other insurers' agreement to defend and settle with McMillin, based on ASIC's contention that even if it had been in breach of the duty to defend, McMillin could prove no damages since it had been defended by others, negating breach of contract or bad faith under Emerald Bay Community Assn. v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078.

The appeals court saw a distinction here as well, based on the fact that no other insurer had actually been providing McMillin a full and contemporaneous defense, but that ASIC's argument hinged on the fact that the other insurers had settled with McMillin after the fact, for both defense and indemnity, in amounts greater than McMillin's defense costs.

The appeals court framed the issue as one of equitable offset, saying that the only way for ASIC to prove McMillin had no damages was to prove that each dollar of settlement proceeds offset each dollar of defense fees. But "the fact that the 11 other insurer defendants settled with McMillin should not, and does not, affect whether ASIC breached the duty to defend or the implied covenant of good faith and fair dealing. At best, the Settlement proceeds from the other 11 insurers may reduce (by way of offset) the amount ASIC ultimately owes McMillin for contract or tort damages." Thus, the trial court had erred in granting a nonsuit on the issue, and remanded the whole case for further trial.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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