Signal Companies, Inc. v. Harbor Ins. Co.

612 P.2d 889, 27 Cal. 3d 359, 165 Cal. Rptr. 799, 19 A.L.R. 4th 75, 1980 Cal. LEXIS 179

• Court: California Supreme Court
• Decided: July 3, 1980
• Docket: L.A. 31201
• Status: Published

Opinions

Opinion

RICHARDSON, J.

Plaintiff, Pacific Indemnity Company (Pacific), a primary liability insurer, appeals from a judgment which relieved defendant Harbor Insurance Company (Harbor), an excess insurer, from any contribution for the costs of defense incurred on behalf of an insured of the parties. The issue presented is the proper allocation between insurance carriers of defense costs incurred in defending the insured when the amount of settlement of the underlying tort claim exceeds the limits of primary insurance coverage thus requiring some contribution by the excess insurer. We will affirm the trial court’s judgment which, under the circumstances, imposed the defense costs on Pacific, the primary carrier.

The Signal Companies and Signal Oil and Gas Company (Signal) purchased a policy of public liability insurance from Pacific. The policy, in effect from October 1, 1962, through September 30, 1965, provided that, for an annual premium of approximately $106,000, Pacific would afford primary insurance for liability for specified types of bodily injury and property damage to a limit of $25,000. Under the policy Pacific agreed that it would defend Signal in any civil actions against Signal arising under the insured risks, and would also pay defense costs in addition to the “applicable limit of liability” of the policy.

Shortly thereafter, Signal purchased from Harbor “Excess Bodily Injury and Property Damages” insurance. The Harbor policy provided that its excess coverage of $10 million would not attach until either the primary insurer had admitted liability or Signal had been adjudged liable and the full primary exposure had been paid and satisfied. The Harbor policy further recited that it was subject to the same terms and conditions as the primary policy “except as regards. . .the obligation to investigate and defend.” Defining “costs” as “understood to mean interest accruing after entry of judgment, investigation, adjustment, and legal expenses,” Harbor’s agreement further provided that if a claim or claims appeared likely to exceed the primary limits, Signal was required to obtain Harbor’s written consent before incurring costs. In the event that the settlement of any claim against the insured exceeded the limits of the primary policy, Harbor agreed, if it had consented “to the proceedings continuing,” to contribute a pro rata share of the defense costs based upon the proportion which its contribution bore to the ultimate settlement by, or judgment against, its insured.

On December 13, 1963, in the City of Los Angeles (City), the Baldwin Hills reservoir and dam collapsed. City and its Department of Water and Power (DWP) settled the individual claims of property owners arising from the disaster. City and DWP then filed two civil actions, one as subrogors of the individual claimants, the other on their own behalf, seeking approximately $25 million in damages resulting from the dam and reservoir failure. Signal was one of numerous oil companies which were named as defendants in the first amended complaint alleging that soil subsidence induced by subterranean oil well digging structurally weakened the dam. In 1967 service of the complaint was effected on Signal which thereupon forwarded copies of the complaint to its carriers, Pacific and Harbor.

Pacific, as the primary insurer, arranged for and provided Signal’s defense. The entire litigation against all defendants ultimately was settled in 1971 for approximately $3 million, of which $35,000 was contributed on behalf of Signal. Pacific paid its policy limits of $25,000 and Harbor contributed $10,000.

At all times during the pendency of the litigation, the attorney representing Signal on behalf of Pacific, William Currer, asserted that Signal was not liable to any plaintiff because of the distance of the Signal wells from the dam, and he so informed Harbor. Nonetheless, on February 4, 1970, Attorney Currer, on behalf of Signal, sent a telegram to Harbor which read in part: “This case may now be adjustable for a sum in excess of primary coverage.... We want to know how much in excess of the primary coverage you are willing to pay to adjust this claim. Otherwise proceedings must continue and Signal Oil and Gas Company will consider that you have consented to contribute to the cost including attorney fees and expert witnesses for the proceedings about to commence.”

The telegram was followed by a telephone conversation between Attorney Currer and John Callaghan, Harbor’s claims manager, in which Currer suggested to Callaghan that Signal contribute $30,000 to a proposed settlement with the plaintiffs. Callaghan promptly agreed that Harbor would contribute $5,000 of that amount. Currer then wrote to Callaghan, under date of February 6, 1970, confirming Harbor’s agreement to contribute, and asserting for the first time that Pacific believed that Harbor had an equitable duty to contribute to defense costs “in the proportion which the primary limits bear to the excess limits.” In a responding letter on February 10, 1970, Callaghan rejected Currer’s assertion that Harbor was required to contribute to the defense costs. Callaghan noted that Harbor possessed no information which pointed to Signal’s possible liability, and requested that Currer furnish Callaghan with certain information on the case. Currer replied by stating that he believed that plaintiffs’ case against Signal was very weak and that Signal might be dismissed from the suit upon motion after plaintiffs rested, and possibly after opening statements. A few days later, Currer advised Harbor that the case could be settled for $35,000 from Signal, which would require a $10,000 contribution from Harbor. Harbor again promptly agreed to pay $10,000, and the litigation against Signal was settled for $35,000.

Thereafter, Pacific renewed its demand that Harbor contribute to the $95,000 legal expenses incurred by Pacific for Signal’s defense. Harbor refused and this action followed. Signal, although a nominal plaintiff, had incurred no defense expenses and therefore, as noted by the trial court, had no basis for recovery. The litigation thereafter proceeded between the affected insurance carriers alone.

The trial court ruled that Harbor was not obligated to contribute to the defense expenses. The court reasoned that under the express terms of Harbor’s excess policy, Harbor was obligated to pay defense costs if the claim was settled for a sum in excess of the primary limits provided that Harbor had agreed to a “continuation of the proceedings.” Because Harbor had promptly agreed to contribute the amounts necessary on its part to settle the case, the court found that there was no “continuation” of the proceedings, thus absolving Harbor under the terms of its policy.

The court further concluded that the two policies could not be construed as one contract, and that Signal had no particular expectation as to which of its two insurers would provide a defense—only that a defense would be provided. Finally, the trial court rejected Pacific’s contention that the principles announced in Aetna Cas. & Surety Co. v. Certain Underwriters (1976) 56 Cal.App.3d 791 [129 Cal.Rptr. 47], were controlling.

Upon reviewing Pacific’s various contentions, we agree with the trial court’s conclusion that Harbor was not obligated to contribute to the defense costs which were incurred by Pacific before Pacific’s coverage was exhausted and before notification to Harbor that its participation in defending the action was desired.

We dispose of a preliminary question, namely, once a carrier (in this instance, Pacific) has paid its full policy limits has it thereby exhausted its obligation to defend its insured? There is disagreement among the authorities. (14 Couch on Insurance (2d ed. 1965) § 51:49 at pp. 542-543 and cases cited therein.) This issue, however, is presented to us only marginally because in the matter before us the exhaustion of primary coverage and the settlement of all claims occurred simultaneously.

Recently, in Transit Casualty Co. v. Spink Corp. (1979) 94 Cal. App.3d 124 [156 Cal.Rptr. 360] (disapproved in part in Commercial Union Assurance Cos. v. Safeway Stores, Inc. (1980) 26 Cal.3d 912 [164 CaI.Rptr. 709, 610 P.2d 1038]) Justice Paras summarized very well, within the context of an action alleging a wrongful refusal to settle, the relationship between excess and primary coverages: “The policyholder pays for two kinds of liability coverage, each at a different rate. The premium charged by the primary insurer supports more localized claims adjustment facilities than those of the excess carrier. It takes into account costs of defense, including legal fees, which the primary insurer normally provides. The excess carrier is less frequently confronted with loss possibilities and, when it is, may employ local adjusters. The primary insurer is assisted, not impeded, by the active participation of another carrier with a stake in the negotiations. Self-interest will impel the primary carrier to take the lead when settlement value is well within its policy limits, the excess carrier when the claim invades its own policy exposure. When settlement value hovers over the fringes of both policies, both carriers may collaborate.” (94 Cal.App.3d at p. 135.) Even if the carriers do not collaborate, as we recently noted in Commercial Union, supra, the primary carrier, in settling an action, owes a duty of good faith to the excess carrier based on the theory of equitable subrogation. (26 Cal.3d at pp. 917-918.)

In the case at bench the trial court refused to impose on Harbor any obligation to contribute to defense costs because no such costs were incurred following the settlement, and Pacific’s primary duty to defend did not terminate until settlement. Pacific has conceded that, except for insubstantial amounts, all of the defense costs for which it seeks Harbor’s contribution were incurred prior to Currer’s request that Harbor contribute to the settlement and costs of defense. Pacific responds, however, that once the excess insurer has been given notice that the tort claim against its insured might invade the excess coverage, and the amount of potential exposure is reasonably ascertainable, the excess insurer should be obligated to participate immediately in the defense, either directly with the claimant or, indirectly, by contribution to the primary carrier.

The acceptance of Pacific’s position, however, essentially would make Harbor a coinsurer with Pacific with a coextensive duty to defend Signal. Pacific relies on Aetna Cas. & Surety Co. v. Certain Underwriters, supra, in arguing that Harbor had a coextensive duty to defend Signal because Signal’s potential liability was in excess of the combined coverage afforded by both insurers. Aetna is clearly distinguishable, however. In that case, Union Oil Company (Union) had three insurance policies. Aetna Casualty and Surety Company (Aetna) provided primary coverage up to $50,000, and Harbor and Lloyds of London (Lloyds) each extended coverage for 50 percent of any excess loss to a limit of $475,000. Lloyds provided an additional $21 million of excess coverage. When a substantial property loss occurred due to a mishap involving a Union oil well located in the Santa Barbara Channel, Aetna undertook Union’s defense and paid its $50,000 primary coverage in settlement of various individual claims. Before exhausting its full limits of liability, Aetna advised Harbor and Lloyds that once its policy limits were paid, its duty to defend would thereupon terminate and Harbor and Lloyds would be required to assume that duty. The excess carriers refused to defend, and Aetna, reserving its right to deny liability for any further defense, continued its representation. Thereafter, Harbor paid its full policy limits and Lloyds paid more than $800,000 in claims.

Harbor and Lloyds, in denying their obligations to defend relied on language similar to that contained in the Harbor policy before us which provided that their obligation to investigate and defend differed from that of the primary carrier. Harbor and Lloyds each contended that there was no explicit obligation to defend. The Court of Appeal nonetheless found that the excess insurers had an implied duty to defend because their policies did not expressly exclude or deny such a duty. Additionally, the Aetna court held that “appellants [Harbor and Lloyds] as insurers have a coexisting and coequal obligation to defend as representatives and on behalf of the insured Union, with reference to all of the excess claims.” (Aetna, supra, 56 Cal.App.3d at p. 801, italics added.) The court further held that “under the facts at bench after the payment of the $50,000 of primary coverage, the primary carrier Aetna had no further duty to provide a defense without the right of reimbursement from the excess carriers. The amount of reimbursement is dependent upon facts relative to the total amount paid by all carriers, the proportion of each insurer’s payment to the total, all properly determinable by the trial court.” (Id., at p. 804, italics added.)

Although Aetna involved costs of defense when the primary carrier had clearly exhausted its policy limits and the proceedings continued, Pacific would apply the Aetna holding to require the excess carrier to participate in the defense of the insured as soon as it is notified of the claim, and even though the primary insurance coverage has not as yet been exhausted.

The foregoing result urged by Pacific is untenable for several reasons. First, Harbor’s policy explicitly states that its liability would not attach until the primary coverage has been exhausted. Next, the same policy provides that the duty to contribute to costs would arise only if Signal obtained Harbor’s written consent to incur costs which Signal neither sought nor obtained. Additionally, unlike the situation in Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168], relied on by Pacific, it is unnecessary to impose an immediate duty to defend on the excess carrier to afford the insured that to which it is entitled, namely, the full protection of a defense on its behalf. In Gray, we held that where “the potential of liability under the policy” exists, an insurer is obligated to defend because the duty to defend and the duty to indemnify were obligations under the policy and the duty to defend was not contingent on the ultimate duty to indemnify. {Id., at pp. 276-277; see also Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 [328 P.2d 198, 68 A.L.R.2d 883]; Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27 [17 Cal.Rptr. 12, 366 P.2d 455]; Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298 [54 Cal. Rptr. 116, 419 P.2d 180].) Unlike the situation in Gray, insofar as the duty to defend is concerned, the insured here was fully protected by the primary insurer.

Finally, Pacific’s fundamental contention would require Harbor to contribute to the defense costs incurred by the primary carrier even though excess liability might never attach and despite the explicit provisions of Harbor’s policy. This would be contrary to that line of cases which hold that where there is excess coverage, whether by virtue of an excess clause in one policy or otherwise, it is the primary insurer which is solely liable for the costs of defense if the judgment does not exceed primary coverage. (See, e.g., National American Ins. Co. v. Insurance Co. of North. America (1977) 74 Cal.App.3d 565, 576 [140 Cal.Rptr. 828], and cases cited therein; Universal Underwriters Ins. Co. v. Aetna Ins. Co. (1967) 249 Cal.App.2d 144, 152 [57 Cal.Rptr. 240].) These cases have held generally that even though the claim against the insured may be for a sum in excess of the primary coverage, the primary insurer is obligated to provide a defense and may not seek contribution from the excess carrier even though its successful settlement or defense relieves the excess insurer from indemnifying the injured party. (Ibid.)

Pacific further argues that because the excess coverage was ultimately invaded for purposes of settlement, Harbor was required to contribute to the defense costs. Pacific relies on Continental Cas. Co. v. Zurich Ins. Co., supra, wherein we held that “all obligated carriers who have refused to defend should be required to share in costs of the insured’s defense, whether such costs were originally paid by the insured himself or by fewer than all of the carriers.” (57 Cal.2d at p. 37.)

Continental presented significant factual dissimilarities, including three separate insureds and three separate policies, each providing primary coverage with a primary obligation to defend. The insurance companies, relying on various clauses in their respective policies requiring either that proration occur in the event of other coverage or that coverage would be deemed excess in the event of other primary coverage, each disputed which company was obligated to indemnify and defend. The insured defendant in the underlying tort action demanded a defense from all three companies. After determining the relative duties to indemnify and which companies were primary and which excess, we then held that the three companies were liable for defense costs on a pro rata basis determined by the amount of contribution to the judgment against the insured.

None of the Continental carriers was solely or explicitly an excess insurer. Each provided primary coverage with a concomitant duty to defend upon which the insured was entitled to rely. (See Gray, supra.) In addition, each of the carriers in Continental was tendered the defense and two of the three refused to participate after the tender. The insured potentially could have been left without a defense.

Unlike the situation in Continental, where the relative obligations of different carriers who have assumed the same primary risk must be adjusted, we are here concerned with the obligation of a carrier that is expressly designated as an excess insurer. In such a situation there is no reasonable basis for assuming that the reasonable expectations of either the insured or the primary carrier were that the excess carrier would participate in defense costs beyond the express terms of its policy.

We expressly decline to formulate a definitive rule applicable in every case in light of varying equitable considerations which may arise, and which affect the insured and the primary and excess carriers, and which depend upon the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers. (Cf. Gray, supra, 65 Cal.2d at pp. 276-277.) Moreover, we affirm the wisdom expressed in Amer. Auto. Ins. Co. v. Seaboard Surety Co. (1957) 155 Cal.App.2d 192, 195-196 [318 P.2d 84]: “The reciprocal rights and duties of several insurers who have covered the same event do not arise out of contract, for their agreements are not with each other.... Their respective obligations flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. As these principles do not stem from agreement between the insurers their application is not controlled by the language of their contracts with the respective policy holders.” (See also National American Ins. Co. v. Insurance Co. of North America, supra, 74 Cal.App.3d at p. 577.)

To impose an obligation on Harbor to reimburse Pacific in contravention of the provisions of its policy could only be justified, however, by some compelling equitable consideration. We find no such consideration here. Before seeking Harbor’s contribution to the settlement, Pacific acted in all respects for its own benefit. The defense costs at issue were incurred by Pacific in the performance of its contractual obligation to its insured to afford a defense. The expenses were incurred almost entirely prior both to settlement of the litigation and exhaustion of Pacific’s policy coverage. As we have noted, Pacific bore the primary obligation to defend and to protect both its insured and, through subrogation principles, the excess carrier from excess liability. (Commercial Union, supra.)

When the opportunity was presented to settle the tort claims against the insured and Pacific informed Harbor of that fact, the two carriers were then acting at arms’ length. Attorney Currer, Pacific’s counsel acting for Signal, consistently took the position that Signal’s liability was extremely doubtful. Had Harbor at that time refused to contribute to settlement, Pacific potentially could have incurred substantial additional costs in the expected two- to three-month trial. Harbor did not refuse to contribute, however, but instead promptly facilitated settlement by contributing $10,000. If, under these circumstances, Pacific intended at the time of demand for a settlement contribution to impose an additional obligation on Harbor to contribute also to defense costs as part of the overall settlement, Pacific should have obtained Harbor’s agreement to such contribution as part of the settlement. Because it did not do so, no equitable basis appears for shifting to Harbor costs which Pacific had previously incurred primarily on its own behalf, in discharge of its own contractual obligations.

Finally, we reject Pacific’s contention that the two insurance contracts should be read together as one instrument. Pacific argues that such a construction benefits the insured both by providing a single system for the handling of the defense and defense costs incurred on Signal’s behalf, and requiring that the primary and excess carrier share the costs of defense.

In support of this argument Pacific relies on section 1642 of the Civil Code which in aid of contractual interpretation provides “Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.” (Italics added.) However, Pacific’s argument ignores a basic prerequisite to unified interpretation, namely, that the parties to the contracts must be the same. This, of course, is untrue in the matter before us. Furthermore, nothing in the Pacific contract made it contingent upon, or required the existence of, excess coverage and nothing in the Harbor contract made it dependent upon the existence of the specific contract between Pacific and Signal, although a primary policy was required. The contracts were separately negotiated with the insured with different dates of inception and termination. We conclude that the two documents are separate contracts and must be independently interpreted.

In summary, Signal was protected by Pacific’s duty to defend. We cannot conclude that Signal reasonably expected that Harbor would be required to contribute to the costs of defense or to provide a defense prior to the exhaustion of Pacific’s policy limits. Nor can we conclude that Pacific was entitled to expect Harbor to contribute to Signal’s defense in the absence of a prior demand for Harbor’s assistance in the defense and without Harbor’s written consent to the costs incurred as provided in the Harbor policy. Although an excess carrier, once a good faith request is made, might in a given case be required to contribute to the continuing costs of defense after the primary coverage limits are exhausted, we cannot say, under the facts at bench, that Harbor breached any duty to defend. Having fulfilled its own contractual obligation to provide Signal a defense, Pacific is not entitled to Harbor’s contribution to Pacific’s costs incurred in Signal’s defense.

The judgment is affirmed.

Mosk, J., Clark, J., Manuel, J., and Newman, J., concurred.