Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County Nos. BC316790, BC320427.. Wendell Mortimer, Jr., Judge.
Chamberlin Keaster & Brockman, Robert W. Keaster, Nicholas R. Andrea for Cross-complainant and Appellant.
McMillan & Shureen, Donald T. McMillan for Cross-defendants and Respondents American States Insurance Company and American Economy Insurance Company.
McCormick, Barstow, Sheppard Wayte & Carruth, Wade M. Hansard, Brandon M. Fish, Trevor W. Hickey for Cross-defendant and Respondent The Insurance Corporation of New York.
Law Offices of Glenn M. White, Glenn M. White for Cross-defendant and Respondent Financial Pacific Insurance Company.
Long & Levitt, Karen L. Uno, Beth a Trittipo for Cross-defendant and Respondent AMCO Insurance Company.
Greenan, Peffer, Sallander & Lally, Robert L. Sallander, Jr., Robert G. Seeds for Cross-defendant and Respondent Travelers Property Casualty Company of America.
No appearance for Cross-defendants and Respondents American International Specialty Lines Insurance Company; Transcontinental Insurance Company; Commercial Union Insurance Company; and Guaranty National Insurance Company.
BOREN, P.J.
An insurer for a construction company seeks equitable contribution and subrogation for defense costs incurred in connection with two lawsuits against its insured. It has sued 10 insurance companies that insure subcontractors who worked for the construction company on a defectively built condominium project. The subcontractors’ policies named the construction company as an “additional insured.”
The trial court dismissed the lawsuit. We reverse. Appellant has stated a cause of action for equitable contribution against its co-insurers. Further, appellant must be given leave to amend its pleading to allege that it is an excess insurer relative to respondents.
FACTS
The Underlying Lawsuits
This dispute originates in claims made against a company called Investec Construction (the Insured). The Insured was sued in two actions in Santa Barbara County because it performed defective construction work on a condominium project. The Insured tendered its defense to its primary insurers, including appellant Gerling America Insurance Company (Gerling). Gerling refused to defend the Insured.
After refusing to participate in the defense of the Insured, Gerling was sued in Orange County by a co-insurer, Pacific Insurance Company (Pacific), for equitable contribution, equitable reimbursement and declaratory relief (the Orange County lawsuit). Like Gerling, Pacific is one of the Insured’s primary insurers. Unlike Gerling, Pacific undertook the Insured’s defense in the construction defect lawsuits. Pacific sought to compel Gerling to contribute to the cost of defending the Insured.
The Orange County lawsuit was tried by the court in 2005. The principal issue was whether Gerling had a duty to defend and indemnify the Insured in the two construction defect lawsuits. The court found that “Gerling had a duty to defend” the Insured against the lawsuits from their inception to their conclusion. Gerling’s reliance on a “prior damages” policy exclusion “was misplaced,” the court wrote in its statement of decision. Because Gerling shared Pacific’s primary duty to defend the Insured in both of the lawsuits, the court ordered Gerling to reimburse Pacific $1.268 million, as Gerling’s one-half share of Pacific’s outlay.
The Current Action
The current action got underway when one of the Insured’s primary insurers, Nationwide Indemnity, sued some 16 other insurers--including Gerling and respondents--for equitable contribution. Nationwide’s action was consolidated with one brought by primary insurers Pacific and Fulcrum Insurance Company against some of the same defendants. Gerling filed a cross-complaint against the respondent insurance companies.
Respondents are American International Specialty Lines Insurance Company; American States Insurance Company; AMCO Insurance Company; Transcontinental Insurance Company; Travelers Property Casualty Company of America; Insurance Corporation of New York; Financial Pacific Insurance Company; Commercial Union Insurance Company; Guaranty National Insurance Company; and American Economy Insurance Company. We refer to any particular argument by a respondent as one collectively put forward by “respondents.”
Respondents insure subcontractors (roofers, plumbers, tilers, drywallers, painters, and plastering companies, for example) who worked for the Insured on the construction of the defective condominium project that was the subject of the lawsuits against the Insured. The subcontractors’ agreements required them to defend and indemnify the Insured against claims arising out of the construction project, and to name the Insured as an additional insured under the subcontractors’ insurance policies.
In its cross-complaint, Gerling asserts claims for equitable contribution and equitable subrogation. It contends that: (1) the allegations in the two Santa Barbara lawsuits “created a potential for coverage establishing a duty for each of the [respondents] to defend” the Insured; (2) it is entitled to subrogation for the costs it incurred in connection with the defense and settlement of the actions against the Insured; and (3) respondents are obligated to reimburse Gerling for an equitable share of the defense and indemnity costs it paid.
Respondents demurred to Gerling’s cross-complaint. They argued that Gerling--by virtue of its refusal to defend the Insured in the underlying lawsuits--is barred from seeking an equitable remedy. Respondents wrote, “Since Gerling did not provide a defense and indemnity to [the Insured] in the Underlying Actions, under the equitable principles supporting a claim of equitable contribution, Gerling should not be allowed to receive equity when it did not perform in an equitable manner.” Respondents contend, in short, that Gerling has unclean hands. They reason that because Pacific defended and settled the construction defect lawsuits, without the participation of Gerling, only Pacific can legitimately make a claim against other insurers. Respondents asked the trial court to take judicial notice of the complaint and the statement of decision in the Orange County lawsuit.
Gerling opposed the demurrers. It argued that the defense of unclean hands presents a factual issue that cannot be determined at the pleading stage. Further, even if Gerling failed to defend the Insured in the construction defect lawsuits, respondents cannot show that they were harmed by Gerling’s conduct. Gerling challenged respondents’ use of the judgment in the Orange County lawsuit for collateral estoppel purposes, because the issues in the two cases are not identical.
The Trial Court’s Ruling
At the hearing on the demurrers, the trial court took judicial notice of the complaint and statement of decision in the Orange County lawsuit. Citing the finding that “Gerling had unclean hands and was not in a position to raise equitable defenses,” the court concluded that this finding “operates as collateral estoppel on this issue. Gerling has not done equity by its failure to investigate, defend and indemnify.” As a result, the court reasoned, Gerling lacks standing to bring this equitable action against respondents under the doctrine of unclean hands. The court sustained the demurrers without leave to amend. The court signed an order dismissing Gerling’s cross-complaint. The appeal is timely.
DISCUSSION
1. Appeal And Review
A signed order of dismissal constitutes an appealable judgment. (Code Civ. Proc., § 581d; Salas v. Sears, Roebuck & Co. (1986) 42 Cal.3d 342, 345, fn. 3.) Although the main action brought by Nationwide, Pacific and Fulcrum against respondents did not end as a result of the trial court’s ruling, the dismissal fully and finally ended Gerling’s cross action. Consequently, Gerling is entitled to take an immediate appeal.
Nationwide dismissed its claims against Gerling in April 2007, so Gerling is no longer a defendant in the main action.
We review de novo the ruling on the demurrer, exercising our independent judgment to determine whether a cause of action has been stated. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115.) We take judicial notice of documents contained in the court records of the Orange County lawsuit between Pacific and Gerling. (Evid. Code, §§ 452, subd. (d), 459, subd. (a); Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1113, fn. 1.) Taking judicial notice of documents does not alter the standard of review. At most, “[t]he noticed material may show the complaint fails to state a cause of action although the bare allegations do not disclose this defect.” (Gilbert v. State of California (1990) 218 Cal.App.3d 234, 241.) The demurrer tests the sufficiency of the plaintiff’s claims as a matter of law. The only ruling reviewed for an abuse of discretion is the trial court’s refusal to grant leave to amend. (Traders Sports, Inc. v. City of San Leandro (2001) 93 Cal.App.4th 37, 43-44.)
2. Ruling On Demurrer
a. Equitable Contribution Claim
1.Application of Res Judicata Doctrine
The trial court concluded that the judgment in the Orange County lawsuit “operates as a collateral estoppel” on the issue of unclean hands. Collateral estoppel is one facet of the doctrine of res judicata. Collateral estoppel applies when an issue‘““necessarily decided in [prior] litigation [may be] conclusively determined as [against] the parties [thereto] or their privies . . . in a subsequent lawsuit on a different cause of action.”’” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 828.) The doctrine may preclude a party to prior litigation from redisputing issues decided against him. It is not necessary that the earlier and later proceedings involve the identical parties or their privies. “Only the party against whom the doctrine is invoked must be bound by the prior proceeding. [Citations.] [¶] Accordingly, the collateral estoppel doctrine may allow one who was not a party to prior litigation to take advantage, in a later unrelated matter, of findings made against his current adversary in the earlier proceeding.” (Id. at p. 828.)
Gerling argues that the trial court improperly applied collateral estoppel because the issue in the Orange County lawsuit is not “identical” to the one being litigated in this proceeding. (Mattco Forge, Inc. v. Arthur Young & Co. (1992) 5 Cal.App.4th 392, 407.) In the Orange County lawsuit, the court found that Gerling had a duty to defend the Insured in the two Santa Barbara construction defect lawsuits. The court wrote that Gerling was barred from asserting, against Pacific, the equitable defenses of laches, unclean hands, equitable estoppel and waiver because it ignored Pacific’s demands that it defend the Insured.
Gerling correctly observes that the court’s finding does not preclude Gerling from seeking equitable contribution from respondents, who (1) cover the Insured’s subcontractors and (2) did not participate in the defense of the construction defects lawsuits. The court in the Orange County lawsuit found that Gerling acted inequitably as to Pacific, an insurer that actually defended the Insured. The court in the Orange County statement of decision emphasized that Pacific made “attempts to obtain Gerling’s voluntary participation with [the Insured’s] defense. . . .” In fact, “[t]he evidence demonstrates that Pacific diligently pursued Gerling, and clearly communicated to Gerling that it believed it had a duty to defend and help settle the underlying cases, placing the onus on Gerling to justify its refusal to defend with undisputed and conclusive evidence. Having failed to defend despite its duty, Gerling is not in a position to raise equitable defenses.” (Italics added.) The finding of unclean hands with respect to Pacific is not a blanket finding that Gerling acted inequitably toward nonperforming co-insurers like respondents, none of whom stepped up to the plate to defend the Insured in the construction defect lawsuits.
An insurer that wrongfully refuses to accept the tender of its insured’s defense cannot be penalized by having to pay the entire judgment itself, exonerating its co-insurers from liability. (Insurance Co. of North America v. Liberty Mutual Ins. Co. (1982) 128 Cal.App.3d 297, 305-306.) In the Liberty Mutual case, an insurer argued that a co-insurer had unclean hands, having breached its contract with their mutual insured by refusing a tender of defense. On demurrer, the insurer contended that the nonperforming co-insurer must be penalized by having to pay the entire cost of the defense and judgment, relieving the performing carriers of all obligations to the insured. (Id. at pp. 304-305.) The court rejected this analysis: “We have been cited to no authority nor have we found any which allows a performing carrier to be indemnified fully by the carrier which wrongfully refused a tender of defense.” (Id. at p. 305.)
The point is illustrated in Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27. In Zurich, a logging company contracted with a timber company to log and haul its timber. In turn, the logging company subcontracted with a trucking company to move the timber. The trucking subcontractor was insured by Zurich Insurance Company, whose policy included the logging company as an additional insured. An accident occurred in which someone was injured by a log being loaded onto the subcontractor’s truck. Zurich refused the logging company’s demand for a defense, which was instead supplied by the logging company’s insurer. (Id. at pp. 31-32.) The Supreme Court found that Zurich was, in fact, required to defend and indemnify the logging company. (Id. at pp. 32-35.) And despite Zurich’s wrongful refusal to defend, it was only required to pay on a pro rata basis. The court wrote, “it is our view that all obligated carriers who have refused to defend should be required to share in costs of the insured’s defense, whether such costs were originally paid by the insured himself or by fewer than all of the carriers.” (Id. at p. 37, italics added.)
Tellingly, in the Orange County lawsuit, the court did not require Gerling to reimburse Pacific one hundred percent of the defense and indemnity costs associated with the construction defect lawsuits against the Insured, despite having found that Gerling had unclean hands and had no reasonable basis for refusing the Insured’s tender. In other words, Gerling was not penalized for having breached its insurance contract with the Insured, and Pacific and Gerling each had to pay an equal share of the Insured’s bill. Indeed, the court in the Orange County lawsuit expressly “decline[d] Pacific’s invitation to apply an allocation more favorable to [Pacific] . . . based on the fact that it defended while Gerling refused despite having a duty to do so.”
Thus, even if Gerling had unclean hands that precluded it from asserting equitable defenses against Pacific, it is not required to bear respondents’ share of the Insured’s defense and indemnity costs as a punishment for refusing to defend the Insured. Notions of “bad faith” that attach to the dealings between an insured and his insurance company do not generally apply to business dealings between co-insurers. Whereas an insured expects his insurer to cover his entire defense upon tender--as required by the insurance contract--the same is not true of co-insurers. Co-insurers do not contract with each other and have no right to expect that only one of them will assume the entire responsibility of defending their mutual insured. (Insurance Co. of North America v. Liberty Mutual Ins. Co., supra, 128 Cal.App.3d at p. 307.)
In sum, Gerling is not collaterally estopped from seeking equitable contribution from respondents. The statement of decision in the Orange County lawsuit did not require Gerling to shoulder all the defense and indemnity costs incurred by the Insured, even though Gerling acted wrongfully in refusing the Insured’s tender of its defense. In a like manner, Gerling cannot be barred by res judicata from seeking contribution from respondents toward what Gerling paid Pacific for the Insured’s defense and settlement. (See Golden Eagle Ins. Co. v. Insurance Co. of the West (2002) 99 Cal.App.4th 837.)
We cannot resolve on demurrer any factual defenses that respondents might raise at trial, such as lack of notice of the pending lawsuits against the Insured. (See American Internat. Specialty Lines Ins. Co. v. Continental Casualty Ins. Co. (2006) 142 Cal.App.4th 1342, 1366.)
2.“Fair Share” Argument
Respondents contend that Gerling cannot state a cause of action “because it has not paid more than its fair share of the total litigation costs,” reasoning that Gerling’s “fair share” was determined in the Orange County lawsuit. Of course, the Orange County lawsuit was only between Pacific and Gerling: respondents were not parties to that lawsuit although the Insured is an “additional insured” under respondents’ policies. The main action and the cross-action in the present proceeding are an effort by Pacific, Nationwide, Fulcrum and Gerling to make respondents contribute to the Insured’s defense and settlement. If we credit this “fair share” argument, all nonperforming co-insurers who fail to participate in the defense and indemnity of their mutual insured could avoid liability for equitable contribution by simply laying low then claiming that the performing insurers paid no more than their fair share.
The purpose of equitable contribution between insurers is to prevent “a possible windfall” for insurers like respondents, who do not or will not defend a mutual insured, leaving “a chance that the costs of defense will be provided by some other insurer at no expense to the company which declines to carry out its contractual commitments.” (Continental Cas. Co. v. Zurich Ins. Co., supra, 57 Cal.2d at p. 37.) In short, “‘there are . . . compelling reasons for allowing recovery when the other insurer has not entered the case at all or has refused to defend the insured against suit by the injured party.’” (Ibid.) Merely because respondents did not defend the construction defects lawsuit against their “additional insured” at the time that litigation arose does not mean that they are excused from later contributing to the defense and settlement.
b. Equitable Subrogation Claim
Respondents contend that Gerling cannot state a cause of action for equitable subrogation because (1) Gerling did nothing for its insured, and (2) as a primary insurer, Gerling is not entitled to a remedy in subrogation. “Equitable subrogation allows an insurer that paid coverage or defense costs to be placed in the insured’s position to pursue a full recovery from another insurer who was primarily responsible for the loss. [Citation.] Because this doctrine shifts the entire cost burden, the moving party insurer must show the other insurer was primarily liable for the loss and that the moving party’s equitable position is inferior to that of the second insurer. [Citations.] This doctrine commonly applies to shift defense costs between primary and excess insurers.” (Maryland Casualty Co. v. Nationwide Mutual Ins. Co. (2000) 81 Cal.App.4th 1082, 1088-1089; RLI Ins. Co. v. CNA Casualty of California (2006) 141 Cal.App.4th 75, 84.)
Gerling has not alleged that it is an excess insurer whose equitable position is inferior to that of respondents. The court in the Orange County lawsuit found that “Gerling shared Pacific’s primary duty to defend” the Insured in the construction defect lawsuits. Where a construction subcontractor’s insurance policy lists the contractor as an “additional insured,” the contractor’s insurers may pursue the subcontractor’s insurers under a theory of equitable contribution, because all the insurers cover the same primary risk. (Maryland Casualty Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 26-27.) As a general rule, equitable subrogation is not the correct legal theory. (Maryland Casualty Co. v. Nationwide Mutual Ins. Co., supra, 81 Cal.App.4th at pp. 1088-1093.)
In its reply brief, Gerling maintains that the policies issued by respondents “require that their coverage be primary and that the coverage issued by the direct insurers for Investec be excess.” If, in fact, Gerling’s policy is excess insurance relative to respondents’ primary insurance, then Gerling may be entitled to seek equitable subrogation against respondents for defense costs. The cause of action for equitable subrogation, as presently alleged, does not indicate that Gerling’s insurance is excess relative to respondents’ policies. Gerling must be given leave to amend its cross-complaint to allege the terms in respondents’ policies that make Gerling’s policy an excess policy relative to respondents’ policies, thereby giving rise to a claim for equitable subrogation. (Code Civ. Proc., § 472c, subd. (a); Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal.App.4th 659, 668 [plaintiff may show how it can amend its complaint “‘for the first time to the reviewing court’”].)
Whether or not Gerling can actually prove that its policy is “excess” to respondents’ policies is not a matter that concerns us at the pleading stage of this litigation.
DISPOSITION
The judgment (order of dismissal) is reversed. The case is remanded to the trial court with instructions to vacate its order sustaining the demurrers without leave to amend. The court is directed to enter a new order overruling the demurrers as to the first cause of action (for equitable contribution) and to third cause of action (for declaratory relief), and to sustain the demurrers to the second cause of action (for equitable subrogation) with leave to amend. Respondents to bear all costs on appeal.
We concur: DOI TODD, J., ASHMANN-GERST, J.