In St. Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mutual Ins. Co., Case No. B229345 (Cal. Ct. App., October 26, 2012) (Second Appellate District), in an equitable contribution action, the Court of Appeal held that when a settling insurer establishes a potential for coverage exists under a non-participating co-insurer’s policy with a defense duty, the non-participating insurer must prove an actual absence of coverage to overcome the contribution action.
FACTS & HOLDING
St. Paul Mercury Insurance Company (“St. Paul”) provided general liability to Jacobsen Construction Co. (“Jacobsen”), a general contractor, in connection with a construction project. Mountain West Farm Bureau Mutual Ins. Co. (“Mt. West”) provided insurance to Teton Builders (“Teton”), a subcontractor on the same project. Mt. West’s policy included Jacobsen as an additional insured. Jacobsen was sued by the owner of the project for various construction defects, including work done by Teton, and tendered its claim to St. Paul, who tendered the claim to Mt. West, who denied coverage. When St. Paul settled the matter for over $2 million, Mt. West contributed $100,000.
St. Paul brought an equitable contribution action against Mt. West. The trial court ruled Mt. West improperly refused to participate in Jacobsen’s defense, and ordered Mt. West to pay $767,071.50 toward Jacobsen’s defense costs and $1.3 million to the settlement, and awarded St. Paul prejudgment interest.
On appeal, Mt. West argued St. Paul should have the burden of proving both that Teton was negligent and Mt. West's policy covered the owner’s claim. The Court of Appeal disagreed. Citing Safeco Ins. Co. of America v. Superior Court, 140 Cal.App.4th 874 (2006), the court explained that in an action for equitable contribution, the settling insurer has met its burden of proof when it makes a prima facie showing of potential coverage under the nonparticipating insurer's policy. The burden then shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy (i.e., as an affirmative defense).
The court noted Mt. West’s defense duty was not extinguished by its payment of $100,000 in contribution to the settlement, and found that Mt. West (as a “nonparticipating insurer”), did not carry its burden under Safeco of proving the absence of actual coverage. The court rejected Mt. West’s argument that it was a third-party beneficiary to the settlement between Jacobsen and Teton, and therefore released from any equitable contribution claims. The court also rejected Mt. West’s reliance on its additional insured endorsement, limiting coverage to the portion of Jacobsen's liability that arising out of Teton’s negligent work, noting that a “arising out of” language connotes only a minimal causal connection, which St. Paul easily established at trial. The court also found that based upon the application of a continuous trigger, Mt. West’s argument that the property damage in the underlying action did not occur during the policy period was without merit. Finally, the Court of Appeal found the trial court’s pro rata by time allocation to be fair and equitable given the facts in the case. The court found, however, that because Mt. West’s share of the loss was not “certain,” the trial court erred in awarding prejudgment interest.