California Insurance - Where No Duty to Defend Ever Existed, Insurer Was Not Obligated to Pay an Award of Attorneys’ Fees in the Underlying Action Under its Policies’ Supplemental Payments Provisions
Golden Eagle Insurance Corp. v. Cen-Fed, Ltd., Case No. B179851 (Cal. Ct. App. Mar. 21, 2007).
The California Court of Appeal, Second District, Hon. H. Walter Croskey, held that an insurer that defended under a reservation of rights was not required to pay the award of attorneys fees in the underlying action under its policies’
supplementary payments provisions because the duty to pay under such provisions is an integral part of the defense obligation and the insurer owed no duty to defend.
The insured, Cen-Fed, Ltd., leased commercial property to Washington Mutual Bank (“WMB”). WMB sued Cen-Fed for breaching the lease, alleging that Cen-Fed had failed to maintain and repair the premises as required
by the lease. Cen-Fed tendered the lawsuit to Golden Eagle, which had issued general liability and umbrella policies to Cen-Fed. Golden Eagle defended Cen-Fed in the WMB litigation subject to a reservation of rights. In the WMB litigation,
the jury determined that Cen-Fed had breached the lease by failing to properly maintain the property in the condition required by the lease. Because the lease contained an attorneys’ fees provision, WMB was awarded its attorneys’
fees as the prevailing party in the litigation.
Golden Eagle sought a declaration that it had no duty to indemnify or defend Cen-Fed in the WMB litigation. In the declaratory judgment action, the trial court concluded that Golden Eagle owed no duty to defend or indemnify Cen-Fed
in the WMB litigation, but found that Golden Eagle was liable under the policies’ supplementary payments provisions for paying the costs of suit, including attorneys’ fees, that were awarded to WMB.
On appeal, the Court of Appeal first affirmed the portion of the trial court’s ruling that Golden Eagle owed no duty to defend or indemnify Cen-Fed in the WMB litigation. In this respect, the Court held that there was no actual
or potential coverage under the occurrence-based property damage coverage of the Golden Eagle policies because WMB’s claim rested entirely on Cen-Fed’s alleged breach of the lease and the resulting economic damage (diminution
in value of the lease), and did not seek to recover for damage to or the loss of use of tangible property, and that the breach of the lease agreement was not an “occurrence.” The Court also held that the policies’
personal injury coverage was inapplicable because the pertinent provisions applied where “persons,” not “organizations” like WMB, occupied the leased premises.
The Court of Appeal then reversed the trial court’s ruling that Golden Eagle was obligated to pay the award of costs and fees under the policies’ supplementary payments provisions. Under the provisions, Golden Eagle
promised to pay “with respect to . . . any ‘suit’ against an insured we defend, [a]ll costs taxed against the insured in the ‘suit.’” The trial court had held that since Golden Eagle had
actually defended (whether it owed a duty to defend or not), it was obligated to pay the award of costs under the supplementary payments provisions. But the Court of Appeal rejected what it called the trial court’s “literal
application” of the provisions, and instead held that Golden Eagle’s liability for a supplementary payment was an integral part of Golden Eagle’s defense burden, and that, since no defense obligation ever existed,
Golden Eagle was not liable for the supplementary payment. The Court noted that the trial court’s rule would undermine the policy of encouraging insurers to provide a defense even where coverage is doubtful or disputed, and
is inconsistent with an insurer’s right to seek reimbursement of defense costs where it is determined that no defense was owed and the insurer provided a defense under a full reservation of rights.