California Guidance on Complex Duty to Defend Disputes over Additional Insured Status

In McMillin Companies, LLC v. American Safety Indemnity Co. (4th Dist. Div. 1, No. D063586, January 22, 2015 (published in relevant part)), the California Court of Appeal for the Fourth District has provided some meaningful guidance on how a trial court should handle issues that regularly come up in cases where an alleged additional insured claims breach of the duty to defend by multiple insurers, including explaining the significance of an insurer’s unsuccessful attempt to obtain summary judgment on the duty to defend, the significance of other insurer settlements on claims against the remaining insurer, and the procedure for applying an offset to the policyholder’s claim for such settlements.

Most importantly, the decision corrects a common mistake made about the California duty to defend determination: the misperception that the trial court’s pre-trial denial of an insurer’s motion for summary judgment on the duty to defend establishes that the duty to defend is owed to the policyholder.  The seminal Montrose decision set forth the rule that an insurer can only get summary judgment that it has no duty to defend when it establishes by undisputed facts that there is no potential for coverage, and the Horace Mann decision added that, when coverage depends on an unresolved dispute of fact as to the claim, that dispute not only requires denial of the insurer’s motion but further establishes the potential for coverage and thus the duty to defend.  But that does not mean that every denial of an insurer’s motion for summary establishes the duty to defend.

In McMillin Companies, the trial court accepted the policyholder’s contention that the insurer’s earlier unsuccessful motion for summary judgment established the duty to defend, and so the trial court granted the policyholder’s motion in limine to bar evidence at trial as to whether the duty to defend was triggered under the insurer’s blanket additional insured endorsement.  The Court of Appeal reversed, noting that the insurer lost the summary judgment motion because it had not met its initial burden of proof, not because the judge had found any genuine issue of material fact as to the potential for coverage.  Because a denial for failing to meet the initial burden of proof does not establish an issue of material fact or the potential for coverage, the insurer was entitled to a retrial to contest the duty to defend.

The Court of Appeal also addressed how the trial court should have dealt with the policyholder’s prior settlements of its additional insured claims against other insurers. Where damages are disputed, the offset for such settlements should be treated as a limit on the policyholder’s eventual recovery and determined after trial had established the recoverable damages.  The Court of Appeal recognized the principle that a policyholder who is defended by another insurer has no damages for breach of the duty to defend (from cases such as Emerald Bay), but it explained that post-breach settlements do not directly reduce damages and so generally should not be applied to reduce the claim in a motion in limine before trial.

The decision includes discussion about appellate procedure that may be of interest to practitioners.  The unpublished portion of the decision has some strong criticism of both sides in the case for not providing adequate citation to the record with respect to the material issues in the case and applies the remedy of ignoring points not supported by record cites.  The decision also discusses the complexity of determining the appropriate standard of review when motions in limine are used to exclude all evidence and dispose of issues, instead of the preferred procedures of substantive motions (such as motions for summary judgment, nonsuit, and directed verdict).

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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