District Court Rules On The Measure Of Damages For Breaching The Duty To Defend A Mixed Action
KM Strategic Management, LLC v. American Cas. Co. of Reading, PA, 2016 U.S. Dist. LEXIS 98273 (C.D. Cal. July 25, 2016)
Categories: Duty to Defend – Mixed Actions – Damages – Allocation
In KM Strategic Management, an insurer was found to have breached its duty to defend two underlying lawsuits, and the district court was faced with cross-motions for partial summary judgment on the measure of damages. The insurer argued that it should have an opportunity to allocate and not pay over 95% of the defense expense incurred, which it contended was spent in connection with claims not even potentially covered by its policy. But the district court ruled that, having breached its duty to defend, the insurer must pay upfront as damages all reasonable and necessary fees and costs the insureds incurred to defend the underlying actions, including any fees and costs related to the defense of claims for which there was not even a potential for coverage. Nothing in the decision indicates that the policy at issue had any relevant express allocation provision.
The district court concluded that the proper measure of damages for breaching the duty to defend is the cost of the defense that the insurer would otherwise have had to pay had it began defending when its duty to defend was triggered. Pursuant to Buss v. Superior Court, 16 Cal. 4th 35 (1997) the general rule under California law with respect to “mixed” actions (meaning an action in which some claims are potentially covered while others are not even potentially covered), is that the insurer has a duty to “defend the entire ‘mixed’ action prophylactically.”
Considering the insurer’s argument that it should have an opportunity to allocate, the district court distinguished case law the insurer cited which, in the district court’s view, stands for the more limited proposition that, if an insurer fails to defend but then changes its mind and provides a complete defense subject to a reservation of rights, it may later seek reimbursement of amounts it paid after it undertook the defense, and solely with respect to those claims for which there was no potential for coverage. The district court stated that its ruling “does not preclude [the insurer] from later attempting to seek reimbursement for those fees and costs to which it believes it is entitled,” yet, at the same time, expressed “no view” on “the merits of any such effort or its likelihood of success.”
The district court noted some reasons why certain fees and costs may not be passed on to a non-defending insurer, “such as the fact that the attorneys’ fees claimed by the insured were ‘unreasonable’ or had been incurred solely in prosecuting affirmative claims.” And the court expressly noted that its ruling “does not preclude American Casualty from attempting to demonstrate that certain fees and costs incurred by plaintiffs were ‘unreasonable or unnecessary.’”
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