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In Axis Surplus Lines Insurance Company v. Glencoe Insurance LTD., No. D058963 (Cal. Ct. App., April 11, 2012) (Fourth Appellate District), the California Court of Appeal held that in a contribution action between two primary insurers, an insured’s satisfaction of its self-insured retention (“SIR”) through a settlement payment shifts the burden to the non-settling insurer to prove an absence of actual coverage. The court further held that the “potential for coverage” standard is triggered when the nonparticipating insurer receives notice of the claim, not upon actual satisfaction of the SIR. Lastly, the court held when the two primary insurers issue policies that contain similar “other insurance” provisions, each requiring “equal share” allocation, equity may nonetheless require the insurer with more time on the risk to assume a greater portion of the liability.
FACTS & HOLDING
Axis Surplus Lines Insurance Company (“Axis”) issued primary CGL coverage to Pacifica Pointe L.P. (“Pacifica”), which had been sued in an underlying construction defect action. Glencoe Insurance LTD (“Glencoe”) issued a wrap-up policy to Pacifica covering the same construction site, but which contained an SIR in the amount of $250,000. Axis agreed to defend Pacifica subject to a reservation of rights.
Glencoe declined coverage, but monitored the construction defect suit and asked Pacifica to inform it once it satisfied the SIR. Upon settling the construction suit, Axis sued Glencoe for declaratory relief and equitable contribution to recover a portion of the $750,000 it paid in settlement. After a bench trial, the court found in favor of Axis and allocated 60% of Axis's settlement payment to Glencoe. Glencoe appealed, arguing Axis failed to prove a potential for coverage and that the allocation of the settlement was an abuse of discretion. The Court of Appeal affirmed.
The court cited Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal.App.4th 874, for the proposition that in an action for equitable contribution by a settling insurer against a nonparticipating insurer, 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 court also agreed with the reasoning of Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 151, which held that by settling, the parties forgo their right to have liability "established" by a trier of fact, and the settlement "becomes presumptive evidence of the [insured's] liability.” According to the court, because the settlement included Pacifica's payment of the SIR, the presumptive effect of the settlement applied to the SIR, and Axis did not have to prove the SIR applied only to a covered claim to obtain contribution from Glencoe.
The court also disagreed with Glencoe’s argument that Axis did not satisfy its Safeco burden because Glencoe’s duty to defend was only triggered after Pacifica satisfied the SIR. The court noted Glencoe appeared to be hiding behind the SIR, “gambling Pacifica would not satisfy it because Axis was providing the defense.” Based on the unique set of facts, the court found the timing of Pacifica’s payment of its SIR did not obviate a legal obligation to defend or indemnify. Lastly, relying mostly on principles of equity, the court found that the trial court did not abuse its discretion in allocating the cost of the settlement disproportionately to Glencoe. According to the court, the trial court’s allocation did not exceed the bounds of reason because it balanced “all the pertinent factors including the greater time on risk and limits by Glencoe.”
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