Since I don’t do insurance defense work, fights between insurers isn’t something I have to deal with. It’s good sport nonetheless. In the next case, Travelers v. Navigators Specialty Insurance Company, Case No. D078852 (October 15, 2021), three of the biggies – Travelers, Navigators and Mt. Hawley – got into it over indemnity.
The Travelers Case
General contractor TF McGukin, Inc. was involved in a construction defect lawsuit with respect to a condominium project. TFM entered into subcontracts with several subcontractors including F&F Steel and Stairway, Inc and Calvac Paving which required the subcontractor to defend and indemnify TFM against any claims arising out of the subcontractor’s work. The subcontracts also required the subcontractors to name TFM as an additional insured.
Navigators issued a commercial general liability policy to F&F and Travelers issued a commercial general liability to Calvac. Travelers agreed to defend TFM in the construction defect action,
While the decision doesn’t explain what happened in the construction defect action, what did take place, obviously, is that defense costs were incurred, to the tune of nearly $500,000.
In January 2015, Travelers filed suit various parties including Navigators and Mt. Hawley. Mt. Hawley had issued a commercial general liability policy to TFM.
What followed was three amended complaints and two demurrers. In the first two complaints, Travelers alleged causes of action against Navigators and Mt. Hawley for declaratory relief, equitable contribution and equitable indemnity each premised on Traveler’s claim that Navigators and Mt. Hawley had a duty to defend TFM but refused to do so.
In March 2018, Travelers filed a third amended complaint on alleging that it was “deceived” into defending TFM because TFM and Calvac had signed a subcontract that was “fraudulently backdated to make it appear that it was entered into at the time of the construction contract.” Travelers further alleged that while TFM and Calvac had signed an earlier subcontract, that subcontract did not require that TFM be named as an additional insured, and that its defense of TFM was therefore “not triggered.” In short, Travelers wanted full reimbursement of its defense costs, not just partial reimbursement.
In response, Navigators and Mt. Hawley demurred to the Navigator’s third amended complaint. WIth respect to the Traveler’s declaratory relief claim, Navigators and Mt. Hawley argued that declaratory relief as to their duty to defend was moot because the construction defect action had ended. With respect to Traveler’s equitable indemnity claim, Navigators and Mt. Hawley argued that equitable indemnity is only available for reimbursement of payments made in a settlement or to satisfy a judgment not for defense costs.
Finally, as to Traveler’s equitable contribution claim, Navigators and Mt. Hawley took divergent approaches. Navigators argued that because, according to Traveler’s third amended complaint, it did not insure the same insured (TFM) or the same risk (TFM’s risk), no equitable contribution arose because equitable contribution requires that: (1) insurers share the same level of obligation; (2) on the same risk; (3) for the same insured.
Mt. Hawley, on the other hand, took a contract approach, and agued that if the trial court took judicial notice of its policy, Mr. Hawley merely agreed to provide excess coverage while Travelers provided primary coverage. As such, according to Mt. Hawley, Travelers and Mt. Hawley were not insurers with the “same level of obligation” and their respective policies did not cover the “same risk.”
The trial court granted the demurrers without leave to amend agreeing with Navigators and Mt. Hawley on their arguments with respect to Traveler’s declaratory relief and equitable indemnity claims. The trial court refused to take judicial notice of Mt. Hawley’s policy, but based on Navigator’s demurrer, also sustained the demurer to Traveler’s equitable contribution claim without leave to amend.
Travelers appealed except to the trial court’s ruling on the declaratory relief cause of action.
The Court of Appeal Decision
On appeal, the Fourth District Court of Appeal explained that on appeal from an order sustaining a demurrer, the court reviews the arguments on appeal de nova and exercises its independent judgment about whether a complaint states a cause of action as a matter of law.
Addressing first Mt. Hawley’s argument that the trial court should have taken judicial notice of Mt. Hawley’s insurance policy, the Court of Appeal explained that under Evidence Code section 452(h), which permits a court to take judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy,” that under existing case law the existence of a contract between private parties (such as an insurance policy) cannot be established by judicial notice.
As to Traveler’s equitable contribution claim, the Court of Appeal explained that “in the insurance context”:
[T]he right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. Where multiple insurance carriers insure the same insured and cover the same risk, each insurer has independent standing to assert a cause of action against its coinsurers for equitable contribution when it has undertaken the defense or indemnification of the common insured. Equitable contribution permits reimbursement to the insurer that paid on the loss for the excess it paid over its proportionate share of the obligation, on the theory that the debt it paid was equally and concurrently owed by the other insurers and should be shared by them pro rata in proportion to their respective coverage of the risk. The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others.
Here, explained the Court of Appeal, the trial court accepted as true Traveler’s allegations that it was “deceived” and never owed an obligation to defend TFM and, as such, Travelers could not show that it insured the “same insured” or the “same risk.” However, held the Court of Appeal, while a court must “treat a demurrer as admitting all material facts properly pleaded,” it “does not, however, assume the truth of contentions, deductions or conclusions of law,” and here Traveler’s allegation that it owed no duty to defend TFM was a legal allegation not a factual one.
As to Traveler’s equitable indemnity claim, the Court of Appeals noted that, according to Mt. Hawley, equitable indemnity is only applicable to joint tortfeasors, and that here, no plaintiff asserted tort claims against both or either Travelers and Mt. Hawley. However, explained, the Court of Appeals, “[c]ase law and commentators recognize that an equitable indemnity claim may be asserted in a dispute between insurance carriers, even though they are not joint tortfeasors”:
In the context of litigation between insurers, “[a]lthough courts often use the terms `equitable contribution,’ `equitable indemnity’ and `equitable subrogation’ interchangeably, they are really separate remedies that apply in discrete situations. . . . Equitable contribution is a loss-sharing procedure. It lies where several insurers insure the same risk at the same level (e.g., all primary insurers) and one pays the entire loss. That insurer may seek equitable contribution from the others to obtain reimbursement for a portion of what it has paid. . . . Equitable indemnity is a loss-shifting procedure. `Equitable indemnity applies in cases in which one party pays a debt for which another is primarily liable and which in equity and good conscience should have been paid by the latter party.'”
As to Navigator’s argument that Travelers failed to state a claim for equitable indemnity because equitable indemnity requires a loss through payment of an adverse judgment or settlement, not for defense costs, the Court of Appeal held that “[e]quitable indemnification is available to an insurer who “‘has paid an obligation which was entirely the responsibility of a co-insurer” and does not turn on whether that “obligation” was the payment of a settlement, satisfaction of a judgment, or an insurer incurring defense costs:
The duty to pay defense costs is reasonably classified as the “obligation” of an insurance carrier under a general liability policy, just like the duty to indemnify the insured for the cost of a settlement or a judgment. If a claim for equitable indemnity can be based on a carrier’s obligation to pay a settlement on behalf of an insured, we perceive no reason why paying defense costs would not also be sufficient to give rise to a claim for equitable indemnity, as long as the carrier believes that another carrier should have been the party to make those payments.
So there you have it. A battle between the giants. As between insurers, an insurer can sue another insurer for reimbursement of defense costs on an equitable indemnity and equitable contribution basis.