Summary
In McClain, a dispute arose over whether an insurance company had a duty to defend an insured who had been named in a third party complaint.
Summary of this case from Beazley Ins. Co. v. Am. Economy Ins. Co.Opinion
2:05-cv-00706-LRH-RJJ.
June 23, 2008
ORDER
Presently before the court is Defendant National Fire and Marine Insurance Company's ("National Fire") Motion for Summary Judgment (#59). Plaintiff Patrick McClain ("McClain") filed an opposition (#72) to which National Fire replied (#80).
Refers to the court's docket
Also before the court is McClain's Motion for Summary Judgment or, Alternatively, Motion for Summary Adjudication (#61). National Fire filed an opposition to this motion (#81).
I. Facts and Procedural History
This is an insurance dispute concerning whether National Fire had a duty to defend McClain in a underlying construction defect suit and contribute to that suit's eventual settlement. The underlying suit, which this court will call the Big Horn litigation, arose out of alleged construction defects in a condominium project located in Pahrump, Nevada. The action began when Big Horn Homeowners Association sued Tri-Shamrock Contractors, Inc. and Big Horn, LLC for construction defects in the condominium project. Tri-Shamrock Contractors, Inc. and Big Horn, LLC in turn filed a third-party complaint against McClain and several other third-party defendants that took part in constructing the condominiums. McClain's work on the project involved installation of a pool and its plumbing.
The Big Horn litigation ended when the Big Horn Homeowners Association settled its claims against Tri-Shamrock Contractors and Big Horn, LLC for $6.3 million. McClain and his insurer, the Scottsdale Insurance Company ("Scottsdale"), participated in the settlement by contributing $425,000 to the plaintiffs. Of this amount, Scottsdale provided $410,000, while McClain paid the remaining $15,000. It is not clear whether Scottsdale provided the $410,000 as a loan to McClain or whether it paid the money without requiring any further obligation from McClain. As part of this settlement, Scottsdale "assigned its rights of equitable contribution for both defense and indemnity of the underlying action against [National Fire] to McClain." (Supplemental Complaint (#20) at 4.)
Before the Big Horn litigation settled, Scottsdale Insurance Company filed suit against McClain and National Fire, claiming that (1) Scottsdale has no duty to indemnify McClain, (2) National Fire has a duty to defend McClain, (3) National Fire has a duty to indemnify McClain, and (4) National Fire owes Scottsdale litigation expenses incurred in the Big Horn litigation.
McClain subsequently filed a cross-complaint against National Fire, asserting eleven claims arising from National Fire's alleged failure to (1) defend McClain in the Big Horn litigation, (2) indemnify McClain for his settlement in the Big Horn litigation, (3) contribute to expenses incurred in the Big Horn litigation, and (4) contribute to the Big Horn litigation settlement.
National Fire and McClain have both moved for summary judgment on the eleven claims asserted in McClain's cross-complaint. McClain in the alternative has moved for "summary adjudication" or, more accurately, partial summary judgment.
II. Legal Standard
Summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In assessing a motion for summary judgment, the evidence, together with all inferences that can reasonably be drawn therefrom, must be read in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); County of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1154 (9th Cir. 2001).
The moving party bears the burden of informing the court of the basis for its motion, along with evidence showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). On those issues for which it bears the burden of proof, the moving party must make a showing that is "sufficient for the court to hold that no reasonable trier of fact could find other than for the moving party." Calderone v. United States, 799 F.2d 254, 259 (6th Cir. 1986); see also Idema v. Dreamworks, Inc., 162 F. Supp. 2d 1129, 1141 (C.D. Cal. 2001).
In order to successfully rebut a motion for summary judgment, the non-moving party must point to facts supported by the record which demonstrate a genuine issue of material fact. Reese v. Jefferson Sch. Dist. No. 14J, 208 F.3d 736 (9th Cir. 2000). A "material fact" is a fact "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Where reasonable minds could differ on the material facts at issue, summary judgment is not appropriate. See v. Durang, 711 F.2d 141, 143 (9th Cir. 1983). A dispute regarding a material fact is considered genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Liberty Lobby, 477 U.S. at 248. The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient to establish a genuine dispute; there must be evidence on which the jury could reasonably find for the plaintiff. See id. at 252.
III. Discussion
McClain has asserted eleven claims against National Fire: (1) declaratory relief establishing National Fire's duty to defend McClain, (2) declaratory relief establishing Scottsdale's right to equitable contribution for its expenses to defend McClain, (3) declaratory relief establishing Scottsdale's right to equitable apportionment for its expenses to defend McClain, (4) equitable contribution for Scottsdale's expenses to defend McClain, (5) declaratory relief establishing National Fire's duty to indemnify Scottsdale and McClain, (6) declaratory relief establishing Scottsdale's and McClain's right to equitable contribution for the monies paid in settlement, (7) declaratory relief establishing Scottsdale's and McClain's right to equitable apportionment for the monies paid in settlement, (8) equitable contribution for the monies paid in settlement, (9) breach of contract, (10) tortious breach of the implied covenant of good faith and fair dealing, and (11) unfair claims settlement practices under Nevada Revised Statutes section 686A.310.
While these claims present multiple theories of recovery against National Fire, each of these claims is founded upon allegations that National Fire either had a duty to defend McClain, National Fire should have provided coverage for the Big Horn litigation settlement, or both. The court will consider each of these issues in turn.
A. Duty to Defend
The Nevada Supreme Court discussed an insurer's duty to defend its insured in United National Insurance Co. v. Frontier Insurance Co., 99 P.3d 1153 (Nev. 2004):
The duty to defend is broader than the duty to indemnify. There is no duty to defend "[w]here there is no potential for coverage." In other words, "[a]n insurer . . . bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy." Once the duty to defend arises, "this duty continues throughout the course of the litigation." If there is any doubt about whether the duty to defend arises, this doubt must be resolved in favor of the insured. The purpose behind construing the duty to defend so broadly is to prevent an insurer from evading its obligation to provide a defense for an insured without at least investigating the facts behind a complaint.
However, "the duty to defend is not absolute." A potential for coverage only exists when there is arguable or possible coverage. Determining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy.Id. at 1158 (footnotes omitted).
The relevant complaint for determining whether National Fire had a duty to defend is Big Horn Homeowners Association, Inc.'s complaint against Tri-Shamrock Contractors, Inc. and Big Horn LLC, filed on July 18, 2003 in Nevada's Fifth Judicial District Court ("the Big Horn complaint"). In this complaint, the homeowner's association alleges the following:
Defendants . . . failed to properly and adequately investigate, design, inspect, plan, engineer, supervise, construct, produce, manufacture, develop, prepare, market, distribute, supply, sell and/or manage [the condominiums] . . . and all Condominium Units therein have experienced, and continue to experience, defects and deficiencies, and damages resulting therefrom. . . . Said defects and deficiencies include, but are not necessarily limited to defects and deficiencies in the design, manufacture and/or construction of . . . plumbing. . . . Plaintiff is informed and believes, and thereon alleges, that the Subject Property may be defective or deficient in other ways and to other extents not presently known to Plaintiff, and not specified above. . . . Plaintiff is informed and believes and thereon alleges that the above-referenced defects, deficiencies and failures have proximately caused property and other damage to Plaintiff, its property, Plaintiff's members and their properties. Said damages include, but are not limited to . . . plumbing . . . failure which has lead [sic] to water intrusion and damage. . . .
(Complaint for Money Damages (#60), Ex. 1 at 5-6.)
In support of National Fire's argument that it had no duty to defend McClain, National Fire argues that the allegations asserted against McClain in the Big Horn litigation are not an "occurrence" as defined within National Fire's policy and thus do not fall within the policy's coverage. The court disagrees. The second claim asserted against Tri-Shamrock Contractors, Inc. and Big Horn, LLC in the Big Horn complaint alleges that they negligently constructed the condominium project, which resulted in property damage. Id. at 11-12. Tri-Shamrock Contractors, Inc. and Big Horn, LLC in turn filed a third-party complaint against McClain seeking indemnification and alleging that the damages incurred by Big Horn Homeowners Association "were proximately caused by the . . . negligent and careless conduct of [McClain]."
(Fourth Amended Third-Party Complaint (#60), Ex. 2 at 5-6.)
These allegations are sufficient to raise a potential of coverage under National Fire's policy. National Fire's policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Commercial Policy (#80), Ex. S at 14.) This provision is broad enough to encompass the Big Horn complaint's allegations of negligence.
National Fire also argues that its policy was not in effect when the alleged property damage due to McClain's conduct arose. National Fire points out that its policy did not come into effect until July 10, 2003; therefore the homeowner's complaint, which was filed on July 18, 2003, as a practical matter alleged property damage that was a continuation of an "occurrence" that occurred before its coverage period.
Endorsement M-5076 excludes coverage for property damage that is caused by an "occurrence" that commences prior to the first day of the policy's coverage period even if the property damage "continues, is alleged to continue, or is deemed to continue during the policy period" of the policy. (Commercial Policy — Endorsement M-5076 (#80), Ex. S.)
National Fire's argument is unpersuasive. As stated by the Nevada Supreme Court in United National Insurance, "A potential for coverage only exists when there is arguable or possible coverage. Determining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy." Id. at 1158 (emphasis added) (footnote omitted). Here, the Big Horn complaint does not state when the alleged property damage occurred. Thus, given the absence of an allegation demonstrating that the alleged property damage fell outside of National Fire's coverage period, it is arguable or possible that property damage occurred within the eight-day period extending from when National Fire's insurance coverage began on July 10th until the Big Horn complaint was filed on July 18th. Therefore, in accordance with the Nevada Supreme Court's United National Insurance decision, the court holds National Fire had a duty to defend McClain in the Big Horn litigation.
1. Exclusion When Defense is Tendered to Another Insurer
National Fire argues that even assuming the Big Horn complaint alleged damage that occurred after its coverage commenced, National Fire had no duty to defend McClain because its policy contains an endorsement eliminating its duty to defend in the event its insured tenders a defense to another insurance carrier. As an initial matter, National Fire's argument fails because it does not take account of how this court must determine the duty to defend: "Determining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy." United Nat'l Ins., 99 P.3d at 1158. Accordingly, National Fire's exclusion has no force in relation to its duty to defend because the Big Horn complaint contains no reference to McClain's tender of defense to another insurer.
This endorsement, M-5077 (Election of Insurance Carrier for Defense), reads as follows:
If any insured believes that more than one insurance company may have the duty to defend a "suit" for which coverage is provided under this Policy, that insured must elect in writing either to request us to defend the insured or to request one or more other insurance companies to defend the insured with regard to that "suit".
We have the option, but not the duty, to defend any "suit" if an insured has requested another insurance company or companies to defend the "suit" in whole or in part, regardless of whether such request has been accepted or accepted under a reservation of rights. We may request the insured to warrant that it has not requested and will not request another insurance company to defend the "suit" in whole or in part as a condition precedent to our defending the "suit".
If we are providing a defense for any insured to any "suit", including a defense under reservation of rights, and that insured or any other insured requests the defense of such "suit" in whole or in part by any other insurance carrier, regardless of whether such insurance carrier agrees to provide a defense or agrees to provide a defense under reservation of rights, then our duty to defend ends and we shall have the right, but not the obligation, to withdraw from any further participation in the defense of that "suit".
(Commercial Policy — Endorsement M-5077 (#80), Ex. S.)
United National Insurance contemplates the consideration of facts outside of the complaint in order to compel an insurer to defend its insured. See United Nat'l Ins., 99 P.3d at 1158 ("[A]n insurer . . . bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy.") (emphasis added). However, if an insurer seeks to avoid defending its insured, that insurer may only do so by demonstrating that the complaint shows there is no potential for coverage when compared with the insurer's policy: "Determining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy." Id. (citing Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991). The Nevada Supreme Court's citation to the Colorado Supreme Court's Hecla decision is significant because that decision explicitly stated facts external to the complaint could not be considered in determining whether an insurer can avoid defending its insured. See Hecla, 811 P.2d at 1089 (stating that "[t]he appropriate course of action for an insurer who believes that it is under no obligation to defend, is to provide a defense to the insured under a reservations of its rights to seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or to file a declaratory judgment action after the underlying case has been adjudicated.").
Even if this court were to consider McClain's tender of the Big Horn defense to another insurer in determining whether National Fire had a duty to defend, the court finds that National Fire's endorsement eliminating its duty to defend is contrary to public policy and therefore unenforceable. National Fire's endorsement eliminating its duty to defend is known as an "escape clause." An escape clause is an insurance provision whereby coverage purports to disappear in the presence of other insurance. Century Surety Co. v. United Pac. Ins. Co., 109 Cal. Rptr. 2d 879, 885 (Cal.Ct.App. 2003). "Courts view escape clauses with disfavor, since the insured pays premiums for coverage, but, yet, does not receive coverage due to the operation of the clause." 22 Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 140.2, at 393 (2002).
National Fire's endorsement is an extreme example of an escape clause. Not only does the endorsement eliminate National Fire's duty to defend in the event another insurance carrier takes up the insured's defense (as was the case here), National Fire's endorsement eliminates its duty to defend even when an insured merely requests a defense from another insurer. This endorsement would even purport to eliminate the duty to defend even if another carrier validly refuses the insured's request for a defense. The court cannot enforce this provision in light of the fundamental nature the duty to defend has in insurance law. See N. American Bldg. Maint., Inc. v. Fireman's Fund Ins. Co., 40 Cal. Rptr. 3d 468, 475 (Cal Ct. App. 2006) ("It has long been a fundamental rule of law that an insurer has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement."). As stated by the California Court Appeal, "An `insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.'" Pruyn v. Agric. Ins. Co., 42 Cal. Rptr. 2d 295, 302-03 (Cal.Ct.App. 1995). In sum, this court cannot enforce National Fire's endorsement without running afoul of public policy supporting the fundamental duty to defend one's insured.
National Fire's policy also contains another endorsement, M-5076 (Exclusion of Damages Commencing Prior to Policy Period), which states the following: "If any insured requests an insurance company, including us, to defend, pay or indemnify any amount or otherwise respond to any claim or "suit" under any insurance policy incepting prior to the first day of the policy period of this Policy, this Policy shall not apply to damages sought in that claim or "suit". (Commercial Policy — Endorsement M-5076 (#80), Ex. S.) To the extent National Fire is arguing that this endorsement similarly eliminates its duty to defend, the court finds that the endorsement is against public policy and therefore unenforceable for the same reasons endorsement M-5077 is unenforceable.
2. McClain's Individual Claims
The court now turns to McClain's claims in light of this court's holding that National Fire had a duty to defend McClain in the Big Horn litigation.
a. Declaratory Judgment that National Fire Has a Duty to Defend
McClain's first claim seeks "a judicial determination of [plaintiffs'] rights and a declaration that [National Fire] owed the plaintiffs a defense when the underlying action was tendered to [National Fire] under the insurances policiy(ies). . . . A judicial declaration is necessary and appropriate at this time in order for plaintiffs to ascertain [National Fire's] obligation to participate in their defense of the underlying action with Scottsdale." (Supplemental Complaint (#20) at 4.) This claim is moot now that the underlying Big Horn litigation has settled. The controversy among the parties now centers upon McClain's and Scottsdale's right to be reimbursed for the litigation expenses due National Fire's failure to defend the Big Horn Litigation. Therefore this court will dismiss McClain's first claim for relief.
b. Declaratory Judgment Establishing Scottsdale's Right to Equitable Apportionment for Its Expenses to Defend McClain
McClain's claim for "equitable apportionment" seeks "[a] judicial declaration regarding the equitable amount of plaintiffs' right . . . to contribution from [National Fire]. . . ." (Supplemental Complaint (#20) at 6.) This claim appears to confuse the difference between a claim for equitable contribution, which is a cause of action to recover from a co-insurer that shares common liability with the party seeking contribution, Md. Cas. Co. v. Nationwide Mut. Ins. Co., 97 Cal. Rptr. 2d 374, 377-78 (Cal.Ct.App. 2000), with apportionment, which is the method by which a court distributes costs among insurers that share the same level of liability, see American Cas. Co. of Reading Pa. v. Health Care Indem., Inc., 520 F.3d 1131, 1139 (10th Cir. 2008). Therefore, because McClain's claim for a declaratory judgment establishing Scottsdale's right to equitable apportionment fails to state a cognizable cause of action, the court will dismiss McClain's equitable apportionment claim.
c. Equitable Contribution for Scottsdale's Expenses to Defend McClain
National Fire moves for summary judgment on McClain's equitable contribution claim based on the contention that Scottsdale was a "volunteer" in the Big Horn litigation because there is no evidence McClain was covered under Scottsdale's policies. National Fire is correct that McClain must be covered under Scottsdale's policies before Scottsdale can succeed in a claim for equitable apportionment: "[W]here two or more insurers independently provide primary insurance on the same risk for which they are both liable for any loss to the same insured, the insurance carrier who pays the loss or defends a lawsuit against the insured is entitled to equitable contribution from the other insurer or insurers. . . ." Fireman's Fund Ins. Co. v. Md. Cas. Co., 77 Cal. Rptr. 2d 296, 301 (Cal.Ct.App. 1989) (emphasis added).
The court finds that National Fire has failed to meet its initial moving burden of showing that there is an absence of any genuine issue of material fact. National Fire cannot show there is an absence of evidence supporting McClain's equitable contribution claim without at least showing that there was no potential for coverage under Scottsdale's policy. As National Fire has not presented Scottsdale's policy in support of its motion, National Fire has not met its initial moving burden. Therefore, National Fire's motion for summary judgment is denied as to McClain's equitable contribution claim for defense costs.
By the same token, McClain has also not presented Scottsdale's policies in support of his motion for summary judgment. McClain must show Scottsdale potentially provided coverage for the claims asserted in the Big Horn litigation before he can succeed in a claim for equitable contribution. Therefore, McClain motion's for summary judgment is denied as to his claim for equitable contribution of the monies Scottsdale expended in his defense.
d. Breach of Contract
"Wrongful failure to provide coverage or defend a claim is a breach of contract." Isaacson v. Cal. Ins. Guar. Ass'n, 750 P.2d 297, 308 (Cal. 1988). This court has found that National Fire breached its duty to defend McClain in the Big Horn litigation. Therefore, the court grants partial summary judgment to McClain on the issue of liability as to his breach of contract claim for National Fire's failure to defend.
e. Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing
McClain also asserts a claim for tortious breach of the implied covenant of good faith and fair dealing. In Nevada, every contract imposes the duty of good faith and fair dealing upon the contracting parties. Albert H. Wohlers Co. v. Bartgis, 969 P.2d 949, 956 (Nev. 1999). However, a " tort action for breach of the implied covenant of good faith and fair dealing requires a special element of reliance or fiduciary duty and is limited to `rare and exceptional cases.'" Great American Ins. Co. v. Gen. Builders, Inc., 934 P.2d 257, 263 (Nev. 1997) (citation omitted). This special element of reliance is present in relationships formed by insurance agreements. Id. "To establish a prima facie case of bad-faith refusal to pay an insurance claim, the plaintiff must establish that the insurer had no reasonable basis for disputing coverage, and that the insurer knew or recklessly disregarded the fact that there was no reasonable basis for disputing coverage." Powers v. United Services Auto. Ass'n, 962 P.2d 596, 604 (Nev. 1998).
In light of National Fire's refusal to defend McClain in the Big Horn litigation rather than defending McClain under a reservation of rights, the court concludes that a reasonable jury could find National Fire tortiously breached the implied covenant of good faith and fair dealing. This claim will therefore proceed to trial.
f. Unfair Claims Settlement Practices Under Nevada Revised Statutes Section 686A.310
McClain alleges a number of violations of Nevada's statute creating insurer liability for unfair practices in settling claims, Nevada Revised Statutes section 686A.310. In its motion for summary judgment, National Fire states that "none of these particular statutory `offenses' is charged in the pleading . . . and thus no claim for relief against [National Fire] is stated." As National Fire is moving for summary judgment, it must meet its initial burden of showing the absence of any genuine of material fact with regard to McClain's claims. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). However, National Fire, by this bald statement, has not met its initial burden. National Fire's motion for summary judgment as to McClain's claims under 686A.310 is therefore denied.
B. National Fire's Coverage of the Big Horn Settlement
The other central issue in this case is whether National Fire's policy covers the Big Horn litigation settlement. The California Court of Appeal has explained an insured's right to monies paid in settlement when its insurer refuses to provide a defense:
If an insurer, with notice of the pendency of the underlying action, wrongfully denies coverage or improperly refuses to provide its insured with a defense, then "`the insured is entitled to make a reasonable settlement of the claim in good faith and . . . then maintain an action against the insurer to recover the amount of the settlement. . . . In a later reimbursement action against the insurer, based upon a breach of the contractual obligation to provide a defense, "a reasonable settlement made by the insured to terminate the underlying claim . . . may be used as presumptive evidence of [1] the insured's liability on the underlying claim, and [2] the amount of such liability."Pruyn v. Agric. Ins. Co., 42 Cal. Rptr. 2d 295, 303 (Cal.Ct.App. 1995) (citations omitted). National Fire does not dispute McClain was liable for $425,000 under the claims asserted against him in the Big Horn litigation. Rather, National argues that endorsements in its policy exclude coverage for these claims.
1. Subsidence Endorsement
National Fire first points to the following endorsement, entitled "Subsidence Exclusion":
In consideration of the premium charged, it is understood and agreed that this policy does not apply to any "bodily injury", "property damage" or "personal and advertising injury" arising out of, resulting from, caused, aggravated or contributed to, directly or indirectly by the subsidence, settling, sinking, slipping, falling away, caving in, shifting, eroding, mud flow, rising tilting, or any other movement of land or earth.
(Commercial Policy — Endorsement M-5059a (#80) Ex. S.) National Fire argues this exclusion operates to exclude coverage in light of an expert report authored by Geotechnical, Inc., which purports to show that the claims against McClain in the Big Horn litigation were all the result of "differential settlement of the soils supporting the pool and pool area structures." (Geotechnical Report (#65), Ex. H at 5.)
The court finds that this report is inadmissible hearsay and therefore cannot show that National Fire's subsidence exclusion precludes coverage for the Big Horn litigation settlement. National Fire argues that this report is an admission by a party opponent because it was prepared by Scottsdale, who assigned McClain its claims against National Fire. National Fire, however, provides no foundation for this contention. Therefore, the report does not meet Federal Rule of Evidence 801(d)(2)(C)'s threshold requirement that the report was made by a person authorized by Scottsdale to make a statement concerning the subsidence of soils at the condominium project.
Furthermore, while it is true McClain offers the same report in support of his motion for summary judgment, McClain never cites to the report or adopts any of its findings. Thus, this report is not a statement of which McClain has manifested an adoption or belief in its truth under Federal Rule of Evidence 801(d)(2)(B).
2. Subcontractor Endorsement
National Fire also argues coverage is excluded for the Big Horn settlement by virtue of National Fire's endorsement entitled "Independent Contractors and Sub-Contractors Coverage Requirement — Exclusion":
This insurance does not apply to "bodily injury," "property damage," or "personal or advertising injury" arising out of operations performed for you by independent contractors or sub-contractors unless:
(1) Such independent contractors or sub-contractors agree in writing to defend, indemnify, and hold harmless you and your affiliates, subsidiaries, directors, officers, employees, agents, and their representatives from and against all claims, damages, damages, losses, and expenses attributable to, resulting from, or arising out of the independent contractor's or sub-contractor's operations performed for you, caused in whole or in part by any act or omission of the independent contractor or sub-contractor or any one directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by you; and
(2) Such independent contractors or sub-contractors carry insurance with coverage and limits of liability equal to or greater than those carried by you, including commercial general liability, workers' compensation and employers' liability insurance; and
(3) Such commercial general liability insurance provides coverage for the independent contractors' or sub-contractors' indemnity obligations set forth in paragraph (1) above; and
(4) Such commercial general liability insurance names you as an additional insured with coverage consistent with the coverage provided in the ISO CG 2009 endorsement.
(Commercial Policy — Endorsement M-5095 (#80), Ex. S.) National Fire argues that this endorsement completely precludes coverage because McClain is known as a "paper contractor," a contractor who does not perform any work himself but rather subcontracts all of his work, and McClain (1) did not have written contracts with its subcontractors and (2) McClain was not named as an additional insured in any of his subcontractors' liability policies.
While National Fire's arguments are persuasive, they are not supported by admissible evidence. National Fire offers a letter purporting to show McClain did not require its subcontractors to provide insurance certificates that would indemnify McClain for the subcontractors' work. This letter, however, is not authenticated, and National Fire has made no threshold showing that the letter comes within an exception to the rule against hearsay.
3. Exclusion of Damages Covered by a Prior Insurance Policy
National Fire also argues that coverage for McClain's settlement is precluded under endorsement M-5076. In pertinent part, this endorsement reads, "If any insured requests an insurance company, including us, to defend, pay or indemnify an amount or otherwise respond to any claim or `suit' under any insurance policy incepting prior to the first day of the policy period of this Policy, this Policy shall not apply to damages sought in that claim or `suit'." (Commercial Policy — Endorsement M-5076 (#80), Ex. S.) The court finds that this endorsement is contrary to public policy and therefore unenforceable.
An insured will surely tender any claims against it to every insurer that possibly insures against the potential liability. Nevertheless, endorsement M-5076 would exclude National Fire's coverage for the mere act of requesting another insurance company to defend a suit against its insured. As stated above, "An `insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.'" Pruyn v. Agric. Ins. Co., 42 Cal. Rptr. 2d 295, 302-03 (Cal.Ct.App. 1995). In sum, this court cannot enforce endorsement M-5076 without seriously eroding the fundamental nature the duty to defend has in insurance law.
In conclusion, National Fire has failed to show by admissible evidence that the claims asserted against McClain in the Big Horn litigation are excluded from National Fire's coverage as a matter of law. McClain, however, has also failed to present evidence that the $425,000 settlement paid in the Big Horn litigation was reasonable. Therefore, McClain is not afforded an evidentiary presumption as to National Fire's liability at this juncture.
IV. Conclusion
The allegations contained in the Big Horn complaint were potentially covered under National Fire's policy. Accordingly, National Fire had a duty to defend McClain in the Big Horn litigation. Moreover, National Fire has failed to show by admissible evidence that its policy's endorsements exclude coverage for the claims asserted against McClain in the Big Horn litigation.
IT IS THEREFORE ORDERED that National Fire's motion for summary judgment (#59) is GRANTED in part and DENIED in part as explained above.
IT IS FURTHER ORDERED that McClain's motion for summary judgment (#61) is GRANTED in part and DENIED in part as explained above.
The court will issue its order referring this matter to the Magistrate Judge for purposes of a settlement conference. If settlement is unsuccessful, the parties shall submit a list of three agreed upon trial dates within twenty (20) days of the settlement conference.
IT IS SO ORDERED.