Old Republic Ins. Co. v. Superior Court

• Decision Date: 20 August 1998
• Docket Number: Nos. B118920,B118923,s. B118920
• Citation: 66 Cal.App.4th 128,77 Cal.Rptr.2d 642
• Court: California Court of Appeals Court of Appeals
• Parties: , 66 Cal.App.4th 995A, 98 Cal. Daily Op. Serv. 6529, 98 Daily Journal D.A.R. 9015 OLD REPUBLIC INSURANCE COMPANY, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Nautilus Insurance Company, Real Party in Interest. FIRST GENERAL INSURANCE COMPANY, et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; Nautilus Insurance Company, Real Party in Interest.

Page 642

77 Cal.Rptr.2d 642

66 Cal.App.4th 128, 66 Cal.App.4th 995A,

98 Cal. Daily Op. Serv. 6529,

98 Daily Journal D.A.R. 9015

OLD REPUBLIC INSURANCE COMPANY, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent;

Nautilus Insurance Company, Real Party in Interest.

FIRST GENERAL INSURANCE COMPANY, et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent;

Nautilus Insurance Company, Real Party in Interest.

Nos. B118920, B118923.

Court of Appeal, Second District, Division 3, California.

Aug. 20, 1998.

As Modified Sept. 9, 1998.

Roper & Folino and Joseph L. Stark, Los Angeles, for Petitioner Old Republic Insurance Company.

Horvitz & Levy, Barry R. Levy, H. Thomas Watson, Encino, Federman & Gradwohl, Alan J. Gradwohl, Berman, Berman & Berman, Ronald S. Berman, Los Angeles, Mark E. Lowary, for Petitioners First General Insurance Company et al.

No appearance by Respondent.

White & Case, Bryan A. Merryman, Christopher W. Kelly and Ryan L. Roney, Los Angeles, for Real Party in Interest.

CROSKEY, Associate Justice.

In these consolidated writ proceedings, petitioners Old Republic Insurance Company ("Old Republic") (No. B118920) and First General Insurance Company ("First General") and Colonial Penn Insurance Company ("Colonial") (No. B118923) (collectively "petitioners") ask us to direct the trial court to enter summary judgment in their favor on a complaint for contribution and indemnification filed by the real party in interest, Nautilus Insurance Company ("Nautilus"). This case arose after Nautilus was found to be liable to provide a defense and indemnity to its insureds with respect to certain third party multi-year claims which had been asserted against them. Petitioners had also issued liability policies to the same insureds but, unlike Nautilus, they had denied coverage and refused to participate in a defense. By this action, Nautilus seeks to compel petitioners to contribute to the cost of the insureds' defense and indemnity which Nautilus has been required to provide. Petitioners moved for summary judgment on Nautilus' complaint on the ground that there was never any potential for coverage under the policies which they had issued to the insureds. When the trial court denied petitioners' motions, they petitioned this court for a writ of mandate.

We conclude that petitioners' denial of coverage was legally correct and there was never any potential for coverage under their liability policies. Therefore, petitioners cannot be liable to Nautilus for contribution or indemnification even though (1) petitioners' policies are substantially identical to the policy which Nautilus issued, and (2) there is a final judicial determination that coverage did exist under Nautilus' policy. ¹ We hold that petitioners' are not bound by that judicial determination because they were neither parties nor privies to the prior proceeding. We therefore will issue the requested writ relief.

FACTUAL AND PROCEDURAL BACKGROUND ²

This case begins with, and ultimately turns upon the obligations created by, a written commercial lease agreement. On December 8, 1981, Golden Crest, Inc., as lessor, entered into the lease with Arnold, Alfred and Sherri Schlesinger (the "Schlesingers"), as lessees. The Schlesingers maintained possession of the commercial lease premises located at 8300 Sunset Boulevard in Los Angeles, from February 1, 1982 until January 31, 1991. During that period of time, the Schlesingers operated a retirement home business at this location under the fictitious business name of Goldencrest Retirement Hotel.

The Schlesingers allegedly failed or refused to perform their obligations under the lease and, on or about October 6, 1992, the lessor filed an action ³ seeking damages against the Schlesingers for (1) breach of the lease agreement, and (2) waste (hereinafter, the "underlying action"). The lessor also sought an accounting for unpaid percentage rentals which were due under the lease. In the complaint, the lessor alleged that the Schlesingers had breached the lease in a number of particulars by (1) failing to pay the required minimum and percentage rentals beginning in September of 1990, ⁴ (2) failing and refusing to keep and maintain the leased premises (including described furniture, furnishings and fixtures) in good order, condition and repair and, upon the surrender of the leased premises (which in fact took place on January 31, 1991), to return them to the lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris with all damages repaired, ⁵ (3) failing to comply with all applicable laws and ordinances, (4) failing to keep the premises free of liens, encumbrances, claims and levies, (5) failing to timely pay real property taxes assessed upon the leased premises, and (6) entering into one or more subleases without the lessor's prior consent.

The lessor sought recovery of damages for these breaches of the lease in the sum of $426,000 in unpaid minimum rent, plus percentage rent found to be due pursuant to the accounting, together with interest, late charges and attorney fees. ⁶ For the damages to the real and personal property, the lessor sought recovery of $1.4 million, plus such additional sums as might be proven at trial. With respect to such damage claims, the lessor also included a third cause of action for waste. In that count, the lessor alleged that the above described breaches of the lease caused damage to the lessor in that "the value of the Property as an established retirement hotel has been diminished; the Property is in such severe need of repair that it is virtually worthless to the Plaintiffs; Plaintiffs are required to pay monthly rental for the Property to their loss and detriment; and Plaintiffs will be required to repair the Property so as to bring it back to the physical state in which it existed and to replace the furniture, furnishings and equipment. Plaintiffs are presently unaware of the full amount of damage which has been caused as a direct and proximate result of the acts of Defendants, and each of them, but are informed and believe and thereupon allege that such amount is in excess of One Million Eight Hundred Thousand Dollars ($1,800,000)." ⁷

The foregoing detailed summary of the charging allegations of the complaint filed against the Schlesingers in the underlying action is directly relevant and necessary to our consideration of the insurance coverage issues raised by these consolidated writ petitions. As we emphasize below, all of the lessor's claims arise from or depend upon the lease agreement and the Schlesingers' alleged breach thereof. The Schlesingers carried liability insurance with at least four different insurers during the leasehold period. ⁸

For purposes of the questions presented to us, each of these policies contained substantially the same language. ⁹ The policies promised that "the company will pay on behalf of the insured all sums that the insured shall become legally obligated to pay as damages because of ... property damage to which this insurance applies caused by an occurrence. ..." (Italics added.) Occurrence was defined to mean "an accident, including continuous or repeated exposure to conditions, which results in ... property damage neither expected nor intended from the standpoint of the insured." Property damage was defined to mean "(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period." The foregoing represents the insuring clauses which are relevant to the issues before us. Those clauses also included the promise to provide a defense for "any suit against the insured seeking damages on account of such ... property damage, ..."

The policies also contained certain exclusions. Two of those exclusions are of particular importance to us. With respect to the first of these, the policies provided that the promised insurance coverage did not apply "to liability assumed by the insured under any contract or agreement except an incidental contract...." (Italics added.) An incidental contract was defined to mean "any written (1) lease of premises, (2) easement agreement, except in connection with construction or demolition operations on or adjacent to a railroad, (3) undertaking to indemnify a municipality required by municipal ordinance except in connection with work for the municipality, (4) sidetrack agreement or (5) elevator maintenance agreement." (Italics added.) An endorsement to the policies extended the definition of an incidental contract to "include any contract or agreement relating to the conduct of the insured's business, ..." (Italics added.) ¹⁰ The second relevant exclusion provided that the insurance would not apply to "property damage to (1) property owned or occupied by or rented to the insured, ..." (Italics added.) ¹¹

The Schlesingers tendered defense of the underlying action to each of the four insurers. All denied coverage and all refused a defense except Nautilus which, on November 30, 1992, agreed to provide a defense, but only under a reservation of rights. ¹² On January 29, 1993, although Nautilus was then providing a defense to the underlying action, the Schlesingers filed an action against Nautilus for declaratory relief to determine the issue of coverage. On March 11, 1993, Nautilus filed its own declaratory relief action and named both the Schlesingers and their former lessor as defendants. These two actions were subsequently consolidated (hereinafter, the "coverage action"). Neither of these two complaints named any of the petitioners as defendants nor were they ever made parties to either action by cross-complaint or otherwise. ¹³

On March 31, 1994, following...