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Setoff Defense May Trigger CGL Coverage, California Supreme Court Rules


July 7, 2003


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(A revised version of this article appears in The Construction Lawyer, Volume 24, No. 3, Summer 2003, published by the American Bar Association's Forum on the Construction Industry.)


By John W. Ralls
Howrey LLP

A general contractor hired a security firm to provide security at a school construction site. During construction, a fire broke out, causing damage to the general contractor's work. Afterward, the general contractor refused to pay the security firm for its services. The security firm sued to recover payment for services. The general contractor asserted an affirmative defense -- that the security firm was legally responsible for the damages caused by the fire - and claimed an entitlement to set off those damages. The security firm tendered the setoff claim to its CGL carrier, which refused the tender.

The security firm settled with the general contractor for a discounted sum. The security firm then brought an action against its insurance carrier, asserting that the carrier should have provided a defense and indemnity in connection with the setoff claim.

The trial court dismissed the complaint, but the Court of Appeal reversed, concluding that a liability insurer's duty to defend includes defense of setoff claims. The Court of Appeal reasoned that the setoff claim constituted a "suit for damages" because the claim possibly could result in an award of damages against the plaintiff.

The California Supreme Court disagreed with the reasoning but affirmed. Construction Protective Services, Inc. v. TIG Specialty Insurance Co., 29 Cal.4th 189, 57 P.3d. 372 (2002). "[A] set off claim may only be used defensively, being in nature a defensive pleading asserting that the [setoff] claim constituted prior payment for the amount sought in the plaintiff's complaint." Because the insurance policy was not part of the record, the Supreme Court declined to rule as a matter of law whether a setoff defense constituted a suit for damages under the insurance policy. The court found "the allegations [of the complaint] sufficient to establish a prima facie right to relief" because the plaintiff alleged the policy covered the setoff claim.


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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.


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