CPS v. TIG Specialty Ins. Co.

• Citation: 126 Cal.Rptr.2d 908,29 Cal.4th 189,57 P.3d 372
• Decision Date: 14 November 2002
• Docket Number: No. S099647.,S099647.
• Court: United States State Supreme Court (California)
• Parties: CONSTRUCTION PROTECTIVE SERVICES, INC., Plaintiff and Appellant, v. TIG SPECIALTY INSURANCE COMPANY, Defendant and Respondent.

126 Cal.Rptr.2d 908

29 Cal.4th 189

57 P.3d 372

CONSTRUCTION PROTECTIVE SERVICES, INC., Plaintiff and Appellant, v. TIG SPECIALTY INSURANCE COMPANY, Defendant and Respondent.

No. S099647.

Supreme Court of California.

November 14, 2002.

As Modified November 14, 2002.

Superior Court, Los Angeles County; Michael B. Rutberg, Temporary Judge.¹

Devirian & Shinmoto and Donald B. Devirian, Los Angeles, for Plaintiff and Appellant.

Selman Breitman, Alan B. Yuter and Rachel E. Hobbs, Los Angeles, for Defendant and Respondent.

Wiley, Rein & Fielding; Laura A. Foggan, John C. Yang, Alexander K. Sun; Sinnot, Dito, Moura & Puebla, Randolph P. Sinnott, Los Angeles, Randy M. Marmor, Oakland, for Insurance Environmental Litigation Association as Amicus Curiae on behalf of Defendant and Respondent.

Horvitz & Levy, Mitchell C. Tilner, Encino, and Karen Bray for Fire Insurance Exchange, Farmers Insurance Exchange, Truck Insurance Exchange and Mid Century Insurance as Amici Curiae on behalf of Defendant and Respondent.

Hancock Rothert & Bunshoft, W. Andrew Miller, William J. Baron and Kathryn C. Ashton, San Francisco, for London Market Insurers as Amicus Curiae on behalf of Defendant and Respondent.

BROWN, J.

Code of Civil Procedure² section 431.70 provides in pertinent part: "Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the person's claim would at the time of filing the answer be barred by the statute of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this section shall not exceed the value of the relief granted to the other party." In other words, section 431.70 permits a defendant in a civil action to assert a claim for relief in its answer and allege, in effect, that the defense claim constituted prior payment for the plaintiffs claim and therefore should be set off against any award in the plaintiffs favor.

In this case, the parties ask us to decide whether a comprehensive general liability insurance policy that obligates an insurer to defend and indemnify its insured against suits seeking damages thereby obligates the insurer to defend and indemnify the insured against a setoff claim asserted under section 431.70 in an answer. Included within this issue is the question of what exactly a setoff claim is and whether a setoff claim can result in affirmative relief against the plaintiff (as can a cross-complaint) or is limited to reducing the plaintiffs recovery. We conclude that a section 431.70 setoff claim cannot result in affirmative relief. This conclusion is contrary to the conclusion of the Court of Appeal, and because the Court of Appeal relied on this point in finding a duty to defend and indemnify, we find it appropriate to permit the lower courts to reconsider the scope of the insurer's obligations based on a correct understanding of section 431.70. As we shall explain, however, plaintiff has adequately stated a prima facie right to relief, and therefore the Court of Appeal was correct to reverse the trial court's order sustaining a demurrer. Accordingly, we affirm the judgment of the Court of Appeal, without adopting that court's reasoning.

I. Factual and Procedural Background

On review of an order sustaining a demurrer without leave to amend, we take as true the well-pleaded factual allegations of the complaint. (Haggis v. City of Los Angeles (2000) 22 Cal.4th 490, 495, 93 Cal. Rptr.2d 327, 993 P.2d 983.)

Construction Protective Services, Inc. (CPS) provides security at construction sites, and TIG Specialty Insurance Company (TIG Insurance) was, at relevant times, its general liability insurer. SHC/Mark Diversified (SHC) was the general contractor for construction at the Castlemont High School in Oakland, and it hired CPS to provide security at the construction site. On or about October 19, 1996, during the course of construction, a fire broke out at the construction site, causing damage to SHC's work. SHC refused to pay CPS, but the complaint does not make clear whether this refusal reflected dissatisfaction with CPS's services on account of the fire. On or about May 20, 1998, CPS brought an action against SHC to recover payment for services in the amount of $26,790. SHC asserted as an affirmative defense under section 431.70 that CPS was legally responsible for the damage arising out of the fire and therefore that SHC was entitled to set off fire damages against any amount it owed CPS for security services. The complaint does not explain why SHC asserted its claim by way of a section 431.70 setoff rather than a cross-complaint.

CPS tendered SHC's setoff claim to TIG Insurance, asking TIG Insurance to defend CPS against the claim. TIG Insurance refused the tender and stated that it would not provide CPS with a defense to the claim or indemnify CPS for any setoff that was ultimately awarded. CPS then employed its own counsel to oppose the setoff claim, and on or about April 29, 1999, it settled its dispute with SHC, receiving the sum of $20,000. The complaint does not relate how CPS and SHC arrived at the settlement amount, or what value these litigants gave to the setoff claim.

On February 10, 2000, CPS brought this action against TIG Insurance, alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing, and asserting that TIG Insurance should have defended CPS against SHC's setoff claim and indemnified CPS for the setoff amount. On May 22, 2000, the trial court sustained TIG Insurance's demurrer without leave to amend and dismissed the complaint. The trial court concluded that "under California law, an insurer does not have a duty to defend against affirmative defenses raised in response to an insured's complaint against another party." The Court of Appeal reversed, concluding that a liability insurer's duty to defend includes defense of setoff claims like the one at issue here. The court reasoned that the setoff claim constituted a suit under our definition of that term in Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 77 Cal.Rptr.2d 107, 959 P.2d 265 (Foster-Gardner) and that the claim could possibly result in an award of damages against CPS. We granted review.

II. Discussion

CPS argues that TIG Insurance should not be able to avoid its contractual obligation to defend and provide liability coverage by the fortuity that SHC asserted its claim against CPS as a setoff rather than as a cross-complaint or an independent suit. In other words, if payment for security services had not been at issue and SHC had simply filed an action against CPS for damages resulting from the fire, the insurance policy would unquestionably have obligated TIG Insurance to defend that action and indemnify CPS. But because CPS happened to have a claim against SHC for unpaid services, SHC was able to assert its fire damages claim by way of setoff rather than a separate complaint. CPS asserts that this procedural nuance should not affect TIG Insurance's obligation as a liability insurer.

TIG Insurance, on the other hand, relies on the plain language of the insurance policy. The policy is not appended to the complaint, but the complaint alleges, and TIG Insurance concedes, that it is a comprehensive general liability policy obligating TIG Insurance to defend suits seeking damages. TIG Insurance argues that a setoff claim asserted in an answer is not a suit seeking damages, and it relies on our literal interpretation of the word "suit" in Foster-Gardner, supra, 18 Cal.4th at page 887, 77 Cal.Rptr.2d 107, 959 P.2d 265, where we stated that a "suit" is a "court proceeding initiated by the filing of a complaint." (Italics added.) TIG Insurance also points out that the insurance policy at issue here requires it to defend CPS in a "suit seeking ... damages." (Italics added.) TIG Insurance argues that SHC's setoff claim is not a "suit seeking ... damages," because, contrary to the Court of Appeal's holding, it could not result in an award of affirmative relief against CPS. Rather, it could only reduce the amount of CPS's recovery. In this regard, TIG Insurance cites section 431.30, subdivision (c), which provides: "Affirmative relief may not be claimed in the answer."

Because the Court of Appeal relied on its conclusion that a setoff under section 431.70 can result in an award of affirmative relief against the plaintiff, we focus on this question. We agree with TIG Insurance that relief by way of a section 431.70 setoff is limited to defeating the plaintiffs claim.

One important function of the section 431.70 setoff procedure is to provide partial relief from the statute of limitations. When two parties have opposing claims against one another, whether or not the two claims are related, one party might allow the statute of limitations to run on its claim, reasoning that the two claims have canceled one another out. If the second party then pursues its claim in a court action, the first party should be permitted to assert its expired claim defensively, arguing in effect that its earlier decision not to pursue the claim constituted a form of payment or compensation to the second party. But because the statute of limitations otherwise bars the first party's claim, the use of that claim should be defensive only, and the first party's recovery should be limited to offsetting any amount the second party might obtain on its opposing claim. The legislative history of section 431.70 suggests the Legislature intended the section to codify this principle.

Prior to July 1, 1972, former section 440 provided: "When cross-demands have existed between...