27 Cal.3d 359, 31201, Signal Companies, Inc. v. Harbor Ins. Co.

Docket Nº:31201
Citation:27 Cal.3d 359, 165 Cal.Rptr. 799, 612 P.2d 889
Opinion Judge:[11] Richardson
Party Name:Signal Companies, Inc. v. Harbor Ins. Co.
Attorney:[7] Brewster L. Arms, William J. Currer, Jr., and Richard T. Kayaian for Plaintiffs and Appellants. [8] Morris & Polich, Landon Morris, John K. Morris, Robert S. Wolfe and Herbert S. Brumer for Defendant and Respondent. [9] Gibson, Dunn & Crutcher, John L. Endicott, Robert A. Miller, Hancock, Rot...
Case Date:July 03, 1980
Court:Supreme Court of California

Page 359

27 Cal.3d 359

165 Cal.Rptr. 799, 612 P.2d 889

SIGNAL COMPANIES et al., Plaintiffs and Appellants,

v.

HARBOR INSURANCE COMPANY, Defendant and Respondent.

L.A. 31201.

Supreme Court of California

July 3, 1980.

In Bank

Rehearing Denied Aug. 30, 1980.

Page 360

[Copyrighted Material Omitted]

Page 361

Brewster L. Arms, Beverly Hills, William J. Currer, Jr., and Richard T. Kayaian, Los Angeles, for plaintiffs and appellants.

Morris & Polich, Landon Morris, John K. Morris, Robert S. Wolfe and Herbert S. Brumer, Los Angeles, for defendant and respondent.

Gibson, Dunn & Crutcher, John L. Endicott, Robert A. Miller, Los Angeles, Hancock, Rothert & Bunshoft, Harlow P. Rothert, San Francisco, LaBrum & Doak,

Page 362

Edward C. German, Michael D. Gallagher, Philadelphia, Pa., Lewis, D'Amato, Brisbois & Bisgaard, Robert F. Lewis, Los Angeles, and M. Patricia Marrison, Rosemead, as amici curiae on behalf of defendant and respondent.

RICHARDSON, Justice.

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

Page 363

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 the 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

Page 364

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.

Page 365

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 (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 Cal.Rptr. 709) 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...

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