Troutman Sanders | January 23, 2017
In Navigators v. Moorefield, the court addresses two coverage questions in the context of a commercial general liability insurer’s action for reimbursement of all amounts it paid toward the settlement of construction defect litigation against its general contractor insured. First, if the policy states that it covers property damage caused by an “occurrence,” meaning “accident,” does it cover damage resulting from a defect ultimately proven to have been known to the insured but left uncorrected? Second, if the policy includes a standard supplementary payments provision covering “[a]ll costs taxed against the insured” in any lawsuit the insurer defends, can the insurer be required to pay that part of the settlement attributable to the claimants’ attorneys fees even if it has no duty to indemnify any of the underlying damages?
Navigators issued commercial general liability insurance to Moorefield Construction, Inc., a licensed general contractor. The owner of a building Moorefield constructed sued Moorefield and the developer for breach of construction contract and negligence based on claims that the flooring had failed; the developer filed a cross-complaint against Moorefield and various subcontractors for indemnity. Navigators defended Moorefield under a reservation of rights. Evidence obtained in discovery showed that the most likely cause of the flooring failure was that flooring tiles had been installed on top of a concrete slab that emitted moisture vapor in excess of specifications; that Moorefield knew of the results of two tests showing excessive moisture vapor emission from the concrete, yet had directed the flooring subcontractor to install the flooring anyway; that the flooring subcontractor insisted upon and received a waiver from Moorefield to proceed; and that the cost to repair the flooring was $377,404. The owner and the developer claimed a right to attorney fees pursuant to the construction contract with Moorefield. The construction defect litigation settled for $1,310,000 total of which the owner received $885,000 and the developer received $425,000. Navigators contributed its $1 million policy limits, Moorefield contributed an additional $150,000, and subcontractors paid the rest.
Meanwhile, Navigators filed a coverage action seeking a declaration that it had no duty to defend or indemnity the underlying construction defect action, contending that the flooring failure was not a covered occurrence because it was not the result of an accident. Navigators was denied summary adjudication in its favor on the duty to defend, on the ground, among others, that there was a triable issue of fact because “[t]he opposition to the motion shows that, not only does the affected carpet make up only a tiny fraction of the entire floor, but that there were other possible causes for the problems reported by the landlord.” After the underlying action settled, however, the coverage matter proceeded to a bench trial, and Navigators obtained a judgment requiring Moorefield to reimburse Navigators the entire $1 million policy limit that Navigators had paid toward the underlying settlement plus interest.
The Court of Appeal affirmed the determination that the flooring failure underlying the construction defect action did not involve a covered “occurrence” or accident under the policy, while it “emphasize[d] that we need not and do not decide whether all construction defects are ‘occurrences’ under a standard CGL policy” and that “[w]e also do not address whether the moral hazard problem applies.” The court reasoned that, regardless of its hope or mistaken belief that the moisture vapor would not cause property damage, the insured made a “deliberate decision … with knowledge that the moisture vapor emission rate from the concrete slab exceeded specifications” and the resulting “damage was not produced by an additional, unexpected, independent, and unforeseen happening.” Therefore, Navigators had no duty to indemnify and was entitled to recoup that part of the settlement attributable to such damage.
Nevertheless, the Court of Appeal went on to conclude that the insurer was not entitled to reimbursement of everything it paid toward the underlying settlement. Rather, it held that the insurer had a duty to pay for that part of the underlying settlement attributable to the claimants’ attorney fees and costs of suit under the policy’s supplementary payments provision, which states that, with respect to any claim … or any ‘suit’ against the insured we defend,” the insurer will pay “[a]ll costs taxed against the insured.” The court stated, with citations: “[t]hree points are significant to the standard supplementary payments provision of the Policies. First, costs of suit include attorney fees when they are, or would be, taxable as costs of suit. Second, supplementary payments are tied to the insurer’s obligation to defend and, therefore, the insurer’s obligation to pay costs of suit arises only if the insurer has a contractual duty to defend. Third, an insured is entitled to recover costs of suit under the supplementary payments provision when the lawsuit settles if, and to the extent, the settlement includes costs of suit.”
The Court of Appeal reasoned that the pre-bench-trial “[d]enial of Navigators’s motion for summary adjudication established that Navigators had a duty to defend Moorefield under the Policies and, accordingly, that Navigators had an obligation under the supplementary payments provision to pay costs of suit, including attorney fees.” Additionally, the court emphasized that the underlying allegations had changed over time such that, although the insured was ultimately charged with having had flooring installed over concrete with excessive moisture, the initial complaints alleged that the foundation of the building had been defectively installed in that curing compound had been sporadically applied. The Court of Appeal distinguished cases in which it was determined that no duty to defend ever arose or where the insurer may have had a duty to defend the underlying suit but the claimant’s right to an attorney fee award against the insured was nevertheless dependent upon a particular claim that was never potentially covered, including Golden Eagle Ins. Corp. v. Cen-Fed, Ltd., 148 Cal. App. 4th 976 (Cal. App. 2nd Dist. Div. 3, 2007) (no duty to defend existed), and State Farm General Ins. Co. v. Mintarsih, 175 Cal. App. 4th 274 (Cal. App. 2nd Dist. Div. 3, 2009) (even if insurer had duty to defend mixed action, prevailing party attorney’s fee award against insured not covered as it depended solely on wage and hour claims for which there was never a potential for coverage).
Having concluded that the insurer had a duty to pay at least part of the underlying settlement, the Court of Appeal held that the burden of proving what part was attributable to uncovered damages rested with the insurer. The court then remanded the matter for a new trial “limited to the issue of the amount of the $1 million paid by Navigators that is attributable to damages, not attorney fees and costs of suit under the supplementary payments provision.”
As this case illustrates, even when an insurer obtains a determination that is has no duty to defend, it is important to consider (and can sometimes be difficult to discern) whether a duty to defend was triggered but then prospectively extinguished or whether it never existed at all.