CNA Casualty of California v. Seaboard Surety Co.

Decision Date14 January 1986
Citation222 Cal.Rptr. 276,176 Cal.App.3d 598
CourtCalifornia Court of Appeals Court of Appeals
PartiesCNA CASUALTY OF CALIFORNIA, Plaintiff and Appellant, v. SEABOARD SURETY COMPANY et al., Defendants and Appellants. AO21608.

Raymond C. Oleson, San Francisco, for plaintiff and appellant CNA Cas. of California.

Graydon S. Staring, Thomas R. Dean, Gail M. Heckemeyer, Eric C. Bettelheim (of counsel), Lillick McHose & Charles, San Francisco, for defendant and appellant Seaboard Sur. Co.

John H. O'Reilly, Laurene A. Wheeler, Barfield, Barfield, Dryden & Ruane, San Francisco, for defendant and appellant Insurance Co. of North America.

Marvin A. Jacobs, San Francisco, Jay R. Mayhall (of counsel), Oakland, for defendant and appellant Pacific Indem. Co.

BARRY-DEAL, Associate Justice.

This appeal raises important issues regarding the extent of the responsibility of insurance carriers to provide their insured with a defense. Seaboard Surety Company (Seaboard), Insurance Company of North America (INA), and Pacific Indemnity Company (Pacific) (collectively appellants) appeal from a judgment ordering them under principles of equitable contribution to pay respondent and cross-appellant CNA Casualty of California (CNA) a portion of the legal expenses incurred by CNA in defending a lawsuit against their insured, Western States Bankcard Association (WSBA). We affirm the judgment.

Appellants argue that their insurance policies could not be construed to provide coverage for any of the causes of action alleged in the underlying antitrust complaint against WSBA, WSBA had no reasonable expectation of coverage under any of the subject policies, and they therefore had no duty to defend WSBA; that particular limitations and exclusions on the policies entitled appellants to refuse to defend WSBA; and that WSBA's failure to disclose the underlying claims at the time it took out the subject insurance policies exonerated appellants from any obligation to defend WSBA and barred CNA, as subrogee, from obtaining any contribution for that defense. In addition, Pacific contends that the evidence failed to establish that it had issued an insurance policy of the kind found by the trial court; that it was absolved from any duty to defend WSBA both by CNA's failure to tender a formal demand that Pacific share in that defense and by WSBA's failure to notify Pacific of threats of litigation occurring after issuance of Pacific's policy; and that CNA was not entitled to any defense costs incurred after the trial below.

CNA has cross-appealed from the judgment, contending that the trial court's method of apportioning the parties' individual contributions to the costs of defense was not equitable, and that CNA itself was entitled to receive its own attorneys' fees incurred in this action for equitable contribution.

I

In 1966, a number of major California banks formed WSBA to act as the regional clearinghouse for the Master Charge credit card system. Beginning in 1966 and continuing through 1977, Marsh & McLellan, Inc., insurance brokers, obtained for WSBA an extensive insurance program involving several insurance policies issued by a number of insurance companies. Among these insurance companies were appellants. The comprehensive general liability insurance policy of Pacific covered the period from 1966 to 1969; that of INA was for the period from 1969 to 1975; and CNA picked up the coverage in 1975. The Seaboard policy, which had a somewhat different focus of coverage, ran concurrently with the others from January 1967 to October 1977.

On March 21, 1977, Electronic Currency Corporation and Melvin Salveson filed suit in federal district court against WSBA, alleging an antitrust cause of action for violation of the Sherman and Clayton Acts and a second cause of action for intentional interference with contractual relationships (Electronic Currency Corporation et al. v. Western States Bankcard Association et al. (N.D.Cal.) No. C-772077-SW [the Salveson lawsuit] ). An amended complaint was filed on March 3, 1978. On May 24, 1978, the federal district judge dismissed the pendent second cause of action for lack of federal subject matter jurisdiction.

WSBA tendered the defense of the amended complaint to INA, Pacific, and CNA on July 10, 1978, and to Seaboard on October 2, 1978. INA, Seaboard and Pacific declined to undertake WSBA's defense. CNA, however, accepted the tender of defense. CNA incurred a major portion of defense costs, amounting to nearly $150,000 as of October 15, 1979. It then filed the present declaratory relief action on December 18, 1979, seeking contribution from appellants for the costs incurred in defending WSBA in the federal action.

On May 7, 1981, the federal court granted summary judgment for WSBA on the remaining antitrust cause of action in the Salveson lawsuit. Two months later, in July 1981, the instant action came to trial. On December 30, 1982, the trial court filed a statement of decision finding that appellants all had a duty to defend WSBA in the Salveson lawsuit; and it entered judgment ordering appellants to reimburse CNA for its post-tender costs of defense in the ratio that appellants' separate policy limits bear to the total limits of all four policies.

II

All the appellants join in arguing that the Salveson lawsuit against WSBA was purely a federal antitrust action, that their respective insurance policies do not provide coverage for such an action, and that they therefore had no duty to defend WSBA. We disagree.

The duty to defend is much broader than the duty to indemnify. An insurer's duty to defend must be analyzed and determined on the basis of any potential liability arising from facts available to the insurer from the complaint or other sources available to it at the time of the tender of defense. If the insurer is obliged to take up the defense of its insured, it must do so as soon as possible, both to protect the interests of the insured, and to limit its own exposure to loss. Unlike the duty to indemnify, which is only determined after liability is finally established, the duty to defend must be assessed at the outset of the case. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275-277, 54 Cal.Rptr. 104, 419 P.2d 168; Central Mutual Ins. Co. v. Del Mar Beach Club Owners Assn. (1981) 123 Cal.App.3d 916, 927-928, 176 Cal.Rptr. 895; Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 278-79, 142 Cal.Rptr. 681; Mullen v. Glens Falls Ins. Co. (1977) 73 Cal.App.3d 163, 173-174, 140 Cal.Rptr. 605.) Thus, we are not dealing with the question of whether the insurers were actually liable to indemnify WSBA for the wrongs alleged in the Salveson lawsuit, but rather with their duty to defend WSBA against Salveson's claims as of the time that lawsuit was filed. This distinction is critical. 1

The insurer's obligation to defend is not dependent on the facts contained in the complaint alone; the insurer must furnish a defense when it learns of facts from any source that create the potential of liability under its policy. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 275-277, 54 Cal.Rptr. 104, 419 P.2d 168; Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 217, 169 Cal.Rptr. 278; Mullen v. Glens Falls Ins. Co., supra, 73 Cal.App.3d at pp. 169-170, 140 Cal.Rptr. 605; Fireman's Fund Ins. Co. v. Chasson (1962) 207 Cal.App.2d 801, 804-805, 807, 24 Cal.Rptr. 726.) Indeed, the duty to defend is so broad that as long as the complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured even though it has independent knowledge of facts not in the pleadings that establish that the claim is not covered. In this case, each of the insurance policies at issue required the insurer to defend WSBA in any suit alleging an injury under the respective policy even if the suit is " '... groundless, false or fraudulent.' Under such a clause it is the duty of the insurer to defend the insured when sued in any action where the facts alleged in the complaint support a recovery for an 'occurrence' covered by the policy, regardless of the fact that the insurer has knowledge that the injury is not in fact covered. [Citations.]" (Remmer v. Glens Falls Indem. Co. (1956) 140 Cal.App.2d 84, 90, 295 P.2d 19; see Fireman's Fund Ins. Co. v. Chasson, supra, 207 Cal.App.2d at pp. 805-807, 24 Cal.Rptr. 726.)

In the seminal 1966 case of Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, the Supreme Court established the principles that we must follow in reviewing appellants' refusal to undertake their insured's defense. As here, the insurer in Gray argued that it did not need to defend an action "in which the complaint reveals on its face that the claimed ... injury does not fall within the indemnification coverage...." (Id., at p. 268, 54 Cal.Rptr. 104, 419 P.2d 168, fn. omitted.) In rejecting the insurer's position, the Supreme Court held that the insurer's duty is not measured by the technical legal cause of action pleaded in the underlying third party complaint, but rather by the potential for liability under the policy's coverage as revealed by the facts alleged in the complaint or otherwise known to the insurer. 2 "[E]ven if we ... define the duty to defend by measuring the allegations in the [third party complaint] against the carrier's liability to indemnify, ... the carrier must defend a suit which potentially seeks damages within the coverage of the policy.... [p] Defendant cannot construct a formal fortress of the third party's pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.... [C]ourts do not examine only the pleaded word but the potential liability created by the suit.... [p] To restrict the defense obligation...

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