Hertzka & Knowles v. Salter
| Citation | 6 Cal.App.3d 325,86 Cal.Rptr. 23 |
| Court | California Court of Appeals Court of Appeals |
| Decision Date | 03 April 1970 |
| Parties | HERTZKA & KNOWLES, a corporation, Wayne S. Hertzka and William H. Knowles, individually and as co-partners doing business under the name and style of Hertzka & Knowles, Plaintiffs and Appellants, v. Stanley Clement SALTER, Underwriters At Lloyd's, London, Defendants and Respondents. Civ. 25972. |
Claude N. Rosenberg, Gayle N. Rosenkrantz, Bacigalupi, Elkus, Salinger & Rosenberg, San Francisco, for plaintiffs and appellants.
Philip M. Madden, William R. Ray, Wallace, Garrison, Pascoe, Norton & Ray, San Francisco, for defendants and respondents.
Plaintiff architects, as the assured under a certificate of errors and omissions insurance issued by Underwriters at Lloyd's, London, have appealed from a judgment in favor of the underwriters in an action in which they sought to recover damages for breach of contract. The action followed the final determination and payment of $374,914.43, a sum in excess of the policy limits, in satisfaction of an owner's claim for alleged breach of professional duty which had been made against the architects, and which had proceeded to arbitration at the instance of the underwriters, after the underwriters, with the knowledge and without objection from the assured, had rejected a $105,349 settlement offer that was within the $250,000 policy limits. 1
In making settlement with their assured the underwriters deducted the sum of $38,252.14 for costs and expenses incurred by them in investigating the owner's claim and in conducting the arbitration. The balance of the $250,000 sum insured was paid to the assured about a year after the dates of payment fixed in the arbitrators' award, and shortly after the assured had paid the owner the full award of $354,680.81, together with interest in the sum of $20,233.62. The assured claim, first, that under the circumstances of this case the underwriters were not entitled to deduct the costs and expenses incurred by them from the principal amount of the policy, and, second, that they are entitled to recover the interest they had to pay on the arbitrators' award because the underwriters failed to pay them the indemnity due under the policy at the time the award became payable. Collaterally they assert that they should have interest on the sum of $38,252.14 from the date it was due, insofar as it is not included in an award under their second claim.
It is concluded that in effecting settlement with the assured the underwriters improperly deducted from the sum insured and withheld from the assured, the amount of the costs and expenses incurred by the underwriters on their own behalf after rejecting the settlement offer, and that the underwriters properly refused to pay, in addition to the sum insured, interest which accrued on the sums awarded by the arbitrators from the time they were originally payable until the award was confirmed by final judgment of the superior court.
The facts found by the trial court are those set forth in the parties' stipulation entitled 'Submission of Controversy in Action on Agreed Statement of Facts and Issues.' The facts include those related above, and, with the policy provisions, will be referred to below where pertinent. The legal principles governing this review are set forth in Estate of Platt (1942) 21 Cal.2d 343, 131 P.2d 825, as follows:
The assured assert that the obligation of the underwriters to defend against claims is separate and distinct from, and broader than, the obligation to indemnify the assured against claims. The authorities upon which they rely, however, are cases involving policies where the insurer undertook not only to indemnify the insured against the claim, demand, liability or loss, but also expressly undertook to defend the insured. 2 With one exception, those cases involve the question of whether the acknowledged duty to defendant must be performed when it appears that the claim or liability asserted may be one which itself is excluded from or otherwise not covered by the insurance. Typical is the following statement from Karpe v. Great American Indem. Co. (1961) 190 Cal.App.2d 226, 11 Cal.Rptr. 908: (190 Cal.App.2d at pp. 233--234, 11 Cal.Rptr. at p. 913.) In any event, they do not elucidate the present question of whether the costs and expenses involved in furnishing such a defense are a part of the sum insured.
The certificate of insurance issued in this case 'indemnifies the Assured against any claim, or claims, for breach of professional duty in their capacity as ('Architects') which may be made against them during the period stated * * * by reason of any negligent act, error or omission * * *.' It extends to such claims made against them by reason of the negligence of any employee or the negligence of any firm of architects or engineers employed to carry out work for which the assured may be legally liable. 3
There is no express covenant in the certificate to defend any suit against the assured. The parties agree, however, that as a contract of indemnity (see Civ.Code, § 2772), the certificate should be interpreted in accordance with the rules laid down in section 2778 of the Civil Code. 4 The assured rely on the provisions of subdivisions 3 and 4 of that section. Subdivision 3 makes it clear that the assured as indemnitee would be entitled to be indemnified for any costs of defense which they incurred in good faith and in the exercise of reasonable discretion. However, there is no claim here for any costs expended by the assured. Moreover, the code section does not indicate whether or not such costs, if embraced in the total indemnity furnished the assured, affect the principal sum insured. Subdivision 4 provides that the underwriters, as indemnitors, must defend at the request of the assured, unless a contrary intention appears in the policy. The facts here do not show that the assured requested the underwriters to defend, but reveal that after the settlement offer was rejected by the underwriters, they 'assumed and exercised complete and exclusive control over the defense in said arbitration, including the selection and employment of attorneys and expert witnesses and expenditures for various other expenses incident to the arbitrarion.' In any event the latter subdivision does not purport to determine the question at issue here--whether the costs and expenses incurred by the indemnitor, whether requested to act or not, are to be considered part of the principal sum.
Reference to the terms of the policy fails to give a definitive answer to the question. The conditions of the policy 5 indicate several situations in which the costs and expenses of defense will be considered part of the principal sum insured, but contain no express reference to what should be done in the situation which the parties stipulated occurred in this case.
The underwriters rely upon condition '1' (see fn. 5 above). It definitely indicates that the liability of the underwriters shall not exceed $250,000 'for all claims under (the) Insurance in any one certificate year.' This clause does not indicate to what the (id.), that any one claim is encompassed in the 'measure of loss' which is defined as 'such amounts as may be assessed against the Assured * * * by arbitration * * * together with all costs or expenses incurred in connection therewith,' and that therefore they were entitled to reimburse themselves by withholding the amount of costs and expenses from the principal sum insured.
The assured assert with some justification that the claims referred to in condition '1' refer to claims which they as the assured make upon the underwriters for indemnity, and that such claims cannot include costs and expenses which were not either expended by the assured in their own defense, or incurred by the underwriters at the request or on behalf of the assured. 'Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability, arising from an unknown or contingent event.' (Civ.Code, § 2527.) 'Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.' (Civ.Code, § 2772.) In Somers v. United States Fidelity & Guaranty Co. (1923) 191 Cal. 542, 217...
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