California Appellate Court Reinstates Case Finding 1) Settlement With Other Insurers Doesn’t Preclude Recovery, And 2) Denial Of Insurer’s Summary Judgment Motion Doesn’t Necessarily Establish Defense Duty

A California appeals court, applying California law, reversed and remanded a lower court ruling which had entered judgment in favor of the insurer in a coverage suit between McMillin Companies, LLC (“McMillin”), a general contractor, and American Safety Indemnity Co. (“ASIC”), the commercial general liability insurer of one of McMillin’s subcontractors. The lower court’s rulings had the effect of preventing McMillin from proving contract damages and precluded ASIC from disputing that it had a duty to defend the underlying litigation.

McMillin was the general contractor and B&B Framing, Inc. (“B&B”) was a subcontractor in a series of construction contracts for residential real estate development projects in Temecula, California. ASIC issued two commercial general liability policies to B&B for the period of January 18, 2002 to January 18, 2004. In October 2007, 117 homeowners filed an amended complaint against McMillin and others, alleging construction defect claims. ASIC denied McMillin’s tender of the defense of the claims. In February 2009, McMillin-related entities filed a complaint against ASIC and other insurers alleging breach of contract and the implied covenant of good faith and fair dealing. In January 2011, ASIC filed a motion for summary judgment arguing that the causes of action failed as a matter of law, which the court denied holding that ASIC “did not meet its initial burden of proof.” By October 2011, there were settlements with all insurers except for ASIC.  Out of a total settlement fund of $690,154, $416,000 was unallocated.

In October 2011, McMillin filed motions seeking to exclude testimony disputing that ASIC had a duty to defend and barring evidence about the settlement with the others insures, while ASIC filed a motion to preclude McMillin from arguing that the settlement proceeds cannot be applied to offset its damages. McMillin’s alleged damages were limited to: contract damages for breach of ASIC’s duty to defend and tort damages for breach of the implied covenant of good faith and fair dealing. The lower court granted McMillin’s motion to exclude testimony disputing that ASIC had a duty to defend, holding that the denial of ASIC’s summary judgment demonstrated that there was a disputed issue of material fact as to coverage, which, therefore, because of its broad nature, established the duty to defend.

With respect to the settlement issue, ASIC argued that McMillin suffered no contract damages because the unallocated settlement funds exceeded the remaining balance of the underlying fees.   McMillin argued that ASIC could not arbitrarily allocate remaining settlement funds to the contract claims.  The lower court granted ASIC’s motion without further explanation. The parties agreed that, as a result of the rulings, McMillin could not prove any contract damages and, therefore, McMillan could not maintain a cause of action for breach of the implied covenant of good faith and fair dealing. The parties further agreed that, based on the effect of the rulings, judgment could be entered in favor of ASIC.

McMillin appealed and the appellate court ruled that the lower court erred in granting McMillin’s motion to preclude evidence regarding ASIC’s duty to defend and that the trial court erred in granting ASIC’s motion to preclude McMillin from presenting evidence that the settlement proceeds are allocated to the contract fees. The court found that “denying a summary judgment motion because the moving party failed to meet its initial burden of proof is not the same as denying the motion based on an unresolved factual dispute.” The lower court did not find a factual dispute that necessarily established a possibility of coverage, but rather the ruling established only that ASIC did not meet its initial burden of proof. Therefore, ASIC’s obligations as related to any duty to defend had yet to be decided.

As to the settlement offset issue, the court disagreed with the parties’ characterization that the settlement proceeds were potential offsets to damages. The court stated that the settlement proceeds did not affect McMillin’s damages, but rather only McMillin’s right to recover the full amount of damages awarded at trial. Consequently, McMillin should be allowed to present at trial evidence of the contract damages it suffered. “The fact that the 11 other insurer defendants settled with McMillin should not, and does not, affect whether ASIC breached the duty to defend or the implied covenant of good faith and fair dealing.” McMillin Cos., LLC v. Am. Safety Idem. Co., No. 37-2009-00083837-CU-IC-CTL (Cal. Ct. App. Jan. 22, 2015).