Key Decisions

November 2012 – A Co-Insurer That Fails To Defend

(filed under: Key Decisions | November 20, 2012)

A Co-Insurer That Fails To Defend Takes On The Burden Of Showing It Had No Ultimate Duty To Indemnify

St. Paul Mercury Insurance Company v. Mountain West Farm Bureau Mutual Insurance Company
(Cal. Ct. of App., 2d Dist.), filed October 25, 2012

KEY FACTS

Jacobsen Construction Company, Inc. was the general contractor on a construction project. St. Paul Mercury Insurance Company insured Jacobsen in a series of general liability policies.

Teton Builders, Inc. was the framing contractor on certain parts of the project. Mountain West Farm Bureau Mutual Insurance Company insured Teton. Its policies named Jacobsen as an additional insured.

The project owner sued Jacobsen in a construction defect case. Jacobsen tendered its defense to both St. Paul and Mountain West. St. Paul defended Jacobsen. Mountain West would not defend.

The case settled in two phases. St. Paul paid the settlement of one phase. St. Paul and Mountain West contributed to the settlement of the other.

After the construction defect litigation was over, St. Paul sued Mountain West for contribution. The trial court found St. Paul was entitled to reimbursement for a portion of the defense costs and the settlement. It also found St. Paul was entitled to prejudgment interest.

HOLDING & REASONING

The Court of Appeal affirmed as to contribution, but reversed as to prejudgment interest.

The main issue was who had the burden of proof. The court found that Mountain West had a duty to defend as there was a potential for an award of covered damages. It also found that although Mountain West contributed to the settlement, it did not defend. Therefore, the court concluded that Mountain West was a nonparticipating insured. As a result, St. Paul had the burden to show a duty to defend and that Mountain West had the burden to show there was no duty to indemnify.

St. Paul met its burden, but Mountain West did not. As such, the trial court correctly found Mountain West was liable for contribution to both defense costs and the settlement.

The court found that the trial court had not abused its discretion in allocating the contribution shares as they were not out of reason. However, St. Paul was not entitled to prejudgment interest.

ANALYSIS

This case offers another example of the enhanced risk an insurer takes when it refuses to defend an insured. Typically in a case an insurer defends, the burden of proving actual coverage falls on the party seeking coverage — not the defending insurer.