THE INSURANCE COMPANY'S DUTY TO PAY IN FULL FOR SETTLEMENTS
Reprinted from the August 8, 2000 issue of Mealey's Litigation Report: Insurance
Each insurance company providing coverage during a period of continuing injury has a separate, independent obligation to provide coverage up to the limits of its policy. When it comes time to settle such a case, the insurance company cannot offer to pay a pro-rata share and insist that the policyholder collect the balance due from some other insurance company.
Sometimes insurance companies just don't get it. That is especially true in cases involving continuous injury. Although the policyholder may have lots of coverage from different insurance companies, it is frequently difficult to get one insurance company to step up and pay the full amount of the settlement. Each insurance company wants some other insurance company to pay.
The policyholder is left in the middle to fend off the plaintiff and fight with its insurance companies. It should not be that way. In case after case, the courts in California have made it increasingly clear that each insurance company has a separate, independent obligation to pay. The burden is not upon the policyholder to chase and corral its insurance companies. The message has not always gotten through. An insurance company my commit bad faith by failing to pay the full amount due. See Shade Foods Inc. v. Innovative Products Sales & Marketing, 78 Cal. App. 4th 847 (2000), discussed below.
I. IN CLAIMS INVOLVING CONTINUOUS INJURY, EACH POLICY IN EFFECT DURING THE PERIOD OF ALLEGED DAMAGE HAS A SEPARATE, INDEPENDENT OBLIGATION TO PROVIDE A COMPLETE DEFENSE, NOT A PRO-RATA PORTION OF THE DEFENSE
The standard comprehensive general liability obligates the insurance company "to pay all damages which the insured shall become legally obligated to pay because of...damage to property...caused by an occurrence." (Part I, Liability).
In Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), the Supreme Court adopted the continuous trigger of coverage to claims involving continuous or progressively deteriorating damage. The court considered coverage under a "standard" commercial general liability policy for claims of contamination from a landfill that was in operation from 1956 to 1972. The court ruled that each policy in effect during this period provided coverage:
Id. at 689.
The Montrose case involved the duty to defend. Courts interpreting that decision have held that an insurance company must defend the entire case and cannot charge "pro-rata" a share of defense costs to the policyholder.
In Aerojet General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38(1997), the California Supreme Court ruled that each insurance company providing coverage during a period of a continues loss has a duty to defend the entire action. Aerojet had liability policies with various insurance companies during 1956 to 1976; from 1976 to 1984 it had a "fronting policy" with INA under which Aerojet agreed to pay its own defense costs.
The insurance companies argued that they should pay only a "pro-rata" share of defense costs and allocate a share to Aerojet, to reflect the years of no insurance. The court held that a percentage of defense costs could not be "pro-rated" to the policyholder: The court rejected this argument:
Id. at 71. The court emphasized that:
Id. at 72 (emphasis in original; footnote omitted).
The court therefore ruled that the insurance companies were not entitled to allocate defense costs to Aerojet for those years in which Aerojet had agreed to defend itself. Id. at 71 - 72. See County of San Bernadino v. Pacific Indemnity Co., 56 Cal.App. 4th 666, 690 (1992); Haskel, Inc. v. Superior Court, 33 Cal.App. 4th 963, 976 fn. 9 (1995).
II. EACH INSURANCE COMPANY HAS A DUTY TO PAY FOR A SETTLEMENT IN FULL
The Court of Appeal in Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996), specifically rejected attempts by the insurance companies to "pro rate" indemnity obligations. In Armstrong, the court made a distinction between an insurance company's rights vis-a-vis the policyholder and an insurance company's rights vis-a-vis other insurers:
Armstrong, at 56-57. In a later part of the same decision, the court reiterated this point, adding that there is no "pro-rata" allocation between a policyholder and its insurers. The insurers may allocate amongst themselves. But each insurance company has a single, undivided obligation to the policyholder:
Id. at 105-106.
The Supreme Court cited Armstrong with approval in Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38, 57, fn. 10 (1997). Although Aerojet dealt with defense costs, the Court discussed indemnity as when it gave the following example:
17 Cal.4th 38, 56-57.
In the course of this discussion, the Supreme Court explained further that once a policy is "triggered," that policy must "pay in full," up to its limits, by citing Armstrong with approval:
Id. at p. 57, n.10. Thus, there is no "pro rata" allocation of insurance proceeds over the years of continuous damage. Under the Supreme Court's example, the insurance company issued one policy for $1,000,000, but there is contamination taking place continuously over thirty years. The insurance company cannot "pro-rate" its obligation and offer 1/30 of its $1,000,000 policy, on the theory that the insurance company only has to pay for a portion of the damage. The insurance company must pay $1,000,000 to the policyholder. (It is true that the insurance company may then seek equitable contribution from other insurance companies which provided insurance during the thirty year period; but this issue is separate and distinct from the insurance company's obligation to pay the policyholder the full amount of the policy.) See also Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 1297 (1998) ("Where there are multiple primary insurance policies covering the same risk each insurance carrier has an independent obligation to indemnity").
III. THE POLICYHOLDER IS ENTITLED TO CHOOSE ONE POLICY TO PAY FOR A CLAIM INVOLVING CONTINUOUS INJURY
Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996) concerned insurance coverage for asbestos claims, which involved continues injuries over many years. The court ruled that for each continuous injury claim, the policyholder could designate one single "policy under which it is to be indemnified":
45 Cal. App. 4th at 50, fn. 15.
Armstrong and Aerojet were applied in California Pacific Homes, Inc. v. Scottsdale Insurance Company, 70 Cal. App. 4th 1187 (1999). That case involved insurance coverage for construction defects for continuous or progressively deteriorating property damage taking place from 1989 to 1995. The court ruled that all five policies in effect provided coverage. The issue in that case was whether the policyholder had to pay a "retained limit" of $250,000 in each policy year for five successive years. The policyholder settled a construction defect case for $1,750,000. The insurance companies argued that the policyholder had to pay five "deductibles" - for a total of $1,250,000 - before the insurance companies had to pay anything. The court ruled in favor of the policyholder, holding that the policyholder could choose one policy year to apply to the loss. The policyholder was therefore permitted to "put" the $1,750,000 settlement in on year, and pay one "deductible":
the insured made a demand under a single policy...How these insurers choose to proceed as between themselves is not before us.
Id., at 1195. See also FMC Corp. v. Plaisted & Companies, 61 Cal.App. 4th 1132, 1191 (1998) (if coverage "is triggered in more than one policy period FMC may select the policy period in which the policy limits are to be fixed.")
IV. AN INSURANCE COMPANY MAY COMMIT BAD FAITH BY REFUSING TO PAY A SETTLEMENT IN FULL
In Shade Foods Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847 (2000), the court upheld a jury verdict of bad faith because of an insurance company's refusal to pay the full amount of a settlement. Innovative Products sold almonds to Shade Foods, who in turn processed the almonds with other nots for sale to General Mills, which made "Clusters" cereal. General Foods found pieces of wood in the product delivered by Shade Foods and ultimately had to destroy its entire stock of contaminated cereal. General Mills then made a claim against the two companies for $1,347,932 representing the value of the destroyed cereal. Innovative Products and Shade Foods then requested coverage from Northbrook Insurance Company and Royal Insurance Company.
Royal insured Shade but refused to pay more than 5-10% to settle the claim. Royal's position was that Innovative Products rather than Shade was primarily responsible for the damage; and therefore that the other insurance company should pay the bulk of the settlement.
The court reviewed California case law and concluded that Royal engaged in bad faith when it refused to pay the entire claim:
Id. at 899.
The court concluded that Royal's failure to pay the full amount constituted bad faith:
Id. at 909.
The court summarized the evidence as follows:
Id. at 907.CONCLUSION
Insurance companies not only have a duty to settle, but a duty to pay for settlement in full. Insurance companies cannot legitimately refuse to pay the full amount of the settlement or put the policyholder in the position of collecting insurance from other insurance companies. That course of conduct may constitute bad faith.
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