Select Ins. Co. v. Superior Court

• Decision Date: 21 December 1990
• Docket Number: No. D012412,D012412
• Citation: 226 Cal.App.3d 631,276 Cal.Rptr. 598
• Court: California Court of Appeals Court of Appeals
• Parties: SELECT INSURANCE COMPANY, et al., Petitioners, v. The SUPERIOR COURT of San Diego County, Respondent. Millwood A. CUSTER, et al., Real Parties in Interest.

Page 598

276 Cal.Rptr. 598

226 Cal.App.3d 631

SELECT INSURANCE COMPANY, et al., Petitioners, v. The SUPERIOR COURT of San Diego County, Respondent.

Millwood A. CUSTER, et al., Real Parties in Interest.

No. D012412.

Court of Appeal, Fourth District, Division 1, California.

Dec. 21, 1990.

Sedgwick, Detert, Moran & Arnold and Roger W. Sleight, Bruce D. Celebrezze and Graziella Walsh Coggan, San Francisco, and McInnis, Fitzgerald, Rees, Sharkey & McIntyre and James A. McIntyre and Kathleen Furness, San Diego, for petitioners.

No appearance for respondent.

Churchill, Kaplan & Roberts and Robert J. Kaplan and Hainline & Williams and Forrest A. Hainline, III, for real parties in interest.

BENKE, Acting Presiding Justice.

Select Insurance Company and Insurance Company of the Pacific Coast (insurers) seek extraordinary relief after the court partially granted a motion for summary adjudication of issues brought by real parties Canine Eye Registration Foundation, Inc., Dolly B. Trauner, individually and as executrix of the estate of Lawrence M. Trauner collectively "CERF"). The insurers claim the court erred by finding (1) the insurers had a duty to defend CERF's adversary, Millwood Custer, for antitrust violations and abuse of process in an underlying federal district court action brought by Custer and various veterinarians, and (2) the insurers could not utilize the defense of lack of notice.

We find the insurers' denial of coverage did not necessarily mean they would have refused to provide a defense had they received timely notice. Because the insurers' denial of coverage was consistent with a claim they had been prejudiced by the delay, the trial court erred in determining the insurer could not rely on Custer's lack of notice. Because the notice defense, if established, might also have relieved the insurer of its duty to defend, the trial court also erred in determining the insurer had a duty to defend.

FACTUAL AND PROCEDURAL BACKGROUND

On October 31, 1979, Custer sued CERF in federal district court, alleging antitrust violations by CERF in its registry of dogs free of hereditary eye diseases. CERF counterclaimed on January 28, 1980, for antitrust violations and abuse of process, alleging Custer sought to destroy the registry through boycotts and sham litigation. On November 17, 1981, the court entered a partial final judgment under rule 54(b) of the Federal Rules of Civil Procedure, dismissing all of Custer's claims against CERF. ¹ The court declared a mistrial on CERF's counterclaims because the marshal inadvertently sent "counsel only" transcripts to the jury room.

The court granted CERF's motion for summary judgment on the antitrust counterclaim on February 21, 1984, finding Custer Custer notified the insurers of the antitrust suit on June 18, 1984, and requested a defense and indemnity. On August 6, 1984, the insurers declined to defend, claiming the policy did not cover the acts as alleged and Custer's late notice caused them severe prejudice. ³ The insurers filed a complaint for declaratory relief and breach of the covenant of good faith and fair dealing against Custer on October 15, 1984. Later the insurers added CERF as a defendant.

                had violated the Sherman Act and that the lawsuit was a sham brought to further an overall scheme to violate antitrust laws. 2  The court awarded $1,250,681.90 in damages
                

On February 6, 1987, the district court granted CERF's motion for partial summary judgment on the issue of Custer's liability for abuse of process. Custer then stipulated to a judgment of $2,450,000 in CERF's favor on the abuse of process claim. The stipulated judgment was entered September 29, 1988. CERF agreed not to execute on any judgment in return for Custer's assignment of his causes of action against the insurers to CERF.

On March 10, 1990, CERF moved for summary adjudication of six issues in the declaratory relief action. The fourth and sixth issues, the subject of this petition, were framed as:

"4. [The insurers] had a duty to defend the CERF Parties' antitrust and abuse of process counterclaims;

"...

"6. [The insurers] may not attempt to defeat coverage based on its claimed lack of notice."

Relying on Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, the court granted issue number four, finding "An insurer's duty to defend is much broader than the duty to indemnify. The disputed nature of i) the scope of coverage pursuant to the policies, and ii) the effective dates of the policies, and iii) the applicability of exclusions under the policies, gives rise to the 'potential' of liability under the policies."

The court also granted issue number six, stating "Once an insurer denies liability under a policy which it has issued, the insurer waives any claim that the notice provisions of the policy have not been complied with (CNA Cas. of Calif. v. Seaboard Surety Co. (1986) 176 Cal.App.3d , 617 .)"

The insurers petitioned for extraordinary relief. We issued the order to show cause and calendared argument.

DISCUSSION

I

Because we believe our disposition of issue number six controls disposition of issue number four, we turn first to the insurer's right to rely on Custer's lack of notice.

In order to rely on an insured's lack of notice an insurer bears the burden of demonstrating that it was substantially prejudiced. (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 881-883, 151 Cal.Rptr. 285, 587 P.2d 1098; see also Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305-307, 32 Cal.Rptr. 827, 384 P.2d 155.) In Clemmer the insured shot and killed his employer. The employer's heirs brought a wrongful death action against the insured and obtained a default judgment against the insured in the amount of $2,003,421. The heirs then brought an action against the insurer, alleging it was obligated to satisfy the The trial court rejected the insurer's notice defense. It found the insurer was aware of the killing within a week of its occurrence, and that, although the insurer received no notice the wrongful death action had been commenced, the heirs had notified the insurer of the default hearing before it was held. The trial court further found that two weeks after the hearing the insurer advised its insured that it would not cover the claim. In upholding the trial court's ruling the Supreme Court stated: "The fundamental defect in [the insurer's] position here is that it has at no time suggested that, in the event that a timely tender of the defense of the wrongful death action had been made, it would have undertaken the defense. The record clearly suggests to the contrary. In these circumstances, applying the rule of the Campbell case, we must conclude that [the insurer] has failed to show that it sustained substantial prejudice as a result of the insured's failure to provide it with notice and tender. Accordingly, its defense based upon this failure was properly rejected." (Clemmer v. Hartford Insurance Co., supra, 22 Cal.3d at p. 883, 151 Cal.Rptr. 285, 587 P.2d 1098, fn. omitted.)

judgment. The insurer had declined coverage on the grounds its insured's acts were willful and hence under the terms of Insurance Code section 533 could not be covered. At trial the insurer also argued that the insured's failure to provide it with notice of the action relieved it from its obligation under the policy.

The result reached in Clemmer is consistent with a long line of California authority. (See, e.g., Grant v. Sun Indemnity Co. (1938) 11 Cal.2d 438, 440-441, 80 P.2d 996; CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at p. 617, 222 Cal.Rptr. 276; Eichler Homes, Inc. v. Underwriters at Lloyd's London (1965) 238 Cal.App.2d 532, 539, 47 Cal.Rptr. 843; Lagomarsino v. San Jose, etc., Title Ins. Co. (1960) 178 Cal.App.2d 455, 460, 3 Cal.Rptr. 80; Comunale v. Traders & General Ins. Co. (1953) 116 Cal.App.2d 198, 202, 253 P.2d 495; Kennedy v. American Fidel. & Cas. Co. (1950) 97 Cal.App.2d 315, 317, 217 P.2d 457.) As in Clemmer, in each of these cases an insurer had denied any coverage under its policy and later argued that in addition its insured had failed to satisfy either notice, tender or cooperation provisions of its policy. In each case the court held the insurer could not rely on the insured's failure to meet a condition of the policy when it had claimed that in any event no coverage was available under the policy. In Comunale v. Traders & General Ins. Co., supra, 116 Cal.App.2d at pp. 202-203, 253 P.2d 495, the court articulated the rule which has been repeated in later cases: "The law is established that where an insurance company denies liability under a policy which it has issued, it waives any claim that the notice provisions of the policy have not been complied with."

We believe that in applying the rule set forth in Comunale, it is important to remember the rationale set forth in Clemmer. In our view Clemmer makes it clear an insurer is not allowed to rely on an insured's failure to perform a condition of a policy when the insurer has denied coverage because the insurer has, by denying coverage, demonstrated performance of the condition would not have altered its response to the claim. (See also Havas v. Atlantic Ins. Co. (1980) 96 Nev. 586, 614 P.2d 1, 2.)

With these limitations on an insurer's right to rely on the notice provisions in its policy in mind, we reach the somewhat unique facts presented in this record. The record is clear that in its August 1984 letter to Custer's counsel the insurer both denied coverage on the grounds CERF's claims were outside the scope of the policy and asserted Custer's failure to provide the company with notice of CERF's claims. Were we to apply the rule stated in Comunale without reference to the rationale which supports it our task would be easy: we would hold that by denying coverage the insurer lost its right to rely on the insurer's lack of notice. However the problem is not so...