Important Construction Insurance Coverage Issues Addressed In Two Recent California Decisions


September 10, 2001

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Thelen Reid Brown Raysman & Steiner LLP

Two recent California appellate decisions have resolved coverage issues that insureds and insurers regularly confront in the defense of construction related claims. In Presley Homes, Inc. v. American States Insurance Company, 01 C.D.O.S 5828 (July 10, 2001), the Court of Appeals held that an insurer's defense obligation under an additional insured endorsement covered all claims in the litigation, including claims for which there was no possibility of indemnity coverage.

The California Supreme Court ruled in Blue Ridge Insurance Company v. Jacobsen, 25 Cal.4th 489 (2001) that an insurer can enter into a reasonable settlement of claims without the insured's consent and then seek reimbursement from the insured on the theory that the claims were not covered by the insurer's policy.

Presley Homes

The Presley Homes decision arose from a common scenario in construction defect cases. Presley Homes, a developer of single-family homes, hired a number of contractors to construct homes in a community it was developing. As is typical, Presley Homes required that its contractors name it as an additional insured under their general liability policies.

Presley Homes was sued by a homeowner for construction defects, and it tendered the claim to American States Insurance Co., which had issued additional insured endorsements in favor of Presley Homes under two separate contractor policies. American States agreed to defend Presley but only as to the claims arising out of the two contractors' work. In other words, the insurer refused to defend claims pertaining to work by other contractors.

After the parties were unable to reach an interim defense agreement under which the insurers would pay a percentage of the defense costs, Presley demanded a complete defense of all claims. American States refused to provide a full defense, and Presley filed a coverage action against the insurer.

The trial court ruled in favor of American States, and Presley appealed. The Court of Appeals reversed the trial court's decision, finding that it was well-established that an insurer in California is required to defend an entire action even if it consists of covered and uncovered claims. The court noted that this was not a contractual requirement but a public policy decision that the court had adopted in Buss v. Superior Court, 16 Cal.4th 35 (1997). The court also concluded that this ruling did "not result in any unfairness to [the insurer]" because the insurer has a right to seek contribution from other insurers.

Blue Ridge Insurance

Blue Ridge agreed to defend the Jacobsens against a personal injury claim, subject to a reservation of rights. The plaintiff in the underlying litigation made a demand equal to the Jacobsens' policy limit. This placed Blue Ridge in the position of having to accept the settlement or expose itself to potential liability for a judgment in excess of the policy limit. Blue Ridge informed the insureds that it thought the offer was reasonable and that it intended to settle the case unless plaintiffs objected to the settlement and agreed to assume responsibility for their own defense. The Jacobsens objected to the settlement but refused to provide their own defense. Thereafter, Blue Ridge settled the case and filed an action against the Jacobsens to recover the settlement payment.

Before the Blue Ridge Insurance decision, it generally was accepted that an insurer could seek recovery of a settlement payment to resolve uncovered claims if the insured did not object to the settlement. The Supreme Court took that principle a step further in this case, ruling that despite objections by the insured, Blue Ridge could recover the settlement payment if it was ultimately determined there was no coverage for the personal injury claim.

The Court established three prerequisites for an insurer to seek reimbursement for non-covered claims resolved in a reasonable settlement:

Implications

The Presley Homes decision will assist general contractors and developers in obtaining a full defense under subcontractor policies. This is important because an additional insured does not always have sufficient additional insured coverage from all subcontractors implicated in a defect case. The ruling also relieves additional insureds of the burden of negotiating joint defense arrangements with multiple subcontractor insurers. Nonetheless, additional insureds should be mindful that under the ruling in Buss v. Superior Court, an insurer is entitled to seek reimbursement of defense costs that it can show were spent solely on defending uncovered claims.

The ruling in the Blue Ridge case could work to undercut the benefits of the Presley Home decision. For example, an insurer defending a developer could offer to settle an entire case and then, following the procedure in Blue Ridge Insurance, seek reimbursement of any sums paid for damage caused by other contractors. As with any settlement reimbursement action under Blue Ridge Insurance, the additional insured would be left to fund a battle against its insurer rather than having the insurer pay for the defense of the plaintiff's claims.

It is yet to be seen how frequently insurers will settle cases over their insured's objection. If confronted with such a settlement option from its insurer, an insured should consult independent legal counsel to maximize the available insurance benefits and to minimize the risk of liability in the underlying litigation.

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2001 Thelen Reid Brown Raysman & Steiner LLP