CNA Casualty of California v. Seaboard Surety Co.

Citations: 176 Cal. App. 3d 598; 222 Cal. Rptr. 276; 1986 Cal. App. LEXIS 2463Docket: A021608

Court: California Court of Appeal; January 14, 1986; California; State Appellate Court

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The case involves an appeal from Seaboard Surety Company, Insurance Company of North America (INA), and Pacific Indemnity Company against a judgment requiring them to contribute to the legal defense costs incurred by CNA Casualty of California (CNA) for their insured, Western States Bankcard Association (WSBA). The appellants argue that their insurance policies did not cover the allegations in an underlying antitrust lawsuit against WSBA, asserting that WSBA had no reasonable expectation of coverage and that specific policy limitations and exclusions justified their refusal to defend. They contend that WSBA's failure to disclose claims when obtaining the policies absolved them of defense obligations, and Pacific also claims it was not responsible due to lack of formal demand for contribution and failure to be informed of litigation threats. CNA cross-appeals, arguing that the trial court's apportionment of defense costs was inequitable and that it was entitled to recover its attorneys' fees for the contribution action.

The case background includes the formation of WSBA in 1966 by major California banks to manage a credit card clearinghouse and the subsequent acquisition of various insurance policies from the appellants between 1966 and 1977. A federal lawsuit alleging antitrust violations was filed against WSBA in 1977, leading to WSBA's request for defense from the appellants, which was declined, while CNA accepted the defense.

CNA incurred approximately $150,000 in defense costs and filed a declaratory relief action on December 18, 1979, seeking contribution from appellants for defending WSBA in the federal Salveson lawsuit. On May 7, 1981, the federal court granted summary judgment for WSBA regarding the remaining antitrust claims. The trial for the current action began in July 1981, and on December 30, 1982, the trial court concluded that all appellants had a duty to defend WSBA, ordering them to reimburse CNA for defense costs based on their respective policy limits.

Appellants contended that the Salveson lawsuit was solely a federal antitrust action, arguing their insurance policies did not cover such claims, thus negating any duty to defend. However, it was determined that the duty to defend is broader than the duty to indemnify. An insurer's obligation to defend must be assessed based on any potential liability indicated by the complaint or other sources known at the time of defense tender. The duty to defend is triggered when the complaint suggests coverage under the policy, regardless of the insurer's independent knowledge that a claim may not be covered. Each policy required the insurer to defend WSBA in any lawsuit alleging an injury, even if the claims were considered groundless or fraudulent. Thus, insurers must defend actions where the allegations could fall under the policy's coverage, irrespective of known facts indicating otherwise.

In Gray v. Zurich Insurance Co., the California Supreme Court established that an insurer's duty to defend is determined by the potential liability under the policy, rather than the technical legal cause of action in the underlying complaint. The insurer must provide a defense whenever facts alleged in the complaint could potentially fall within policy coverage, regardless of how the complaint is framed. This principle emphasizes that the pleadings can be amended and do not strictly define the insurer’s obligations. Courts assess the potential liability based on the facts presented, not just the formal legal theories, ensuring that any doubt regarding the duty to defend is resolved in favor of the insured.

In the case involving WSBA, the amended Salveson complaint contained allegations that WSBA misappropriated property interests and trade secrets, which could be covered under the insurer's policies for piracy and unfair competition. Although the second cause of action for intentional interference was dismissed and the overall lawsuit was barred by the federal antitrust statute of limitations, the specific factual allegations in the complaint were significant enough to establish a duty for the appellants to defend WSBA. The undefined terms in the policy must be construed against the insurer, further supporting the conclusion that a duty to defend existed.

In Insurance Co. of North America v. Sam Harris Constr. Co., the court examined the obligations of appellants (insurance companies) to defend their insured, WSBA, against allegations in the Salveson lawsuit. The relevant claims included allegations of unfair competition and malicious prosecution, suggesting potential liability under the insurance policies for defamatory acts and false claims. The trial court correctly determined that the factual allegations warranted a duty to defend, regardless of the merit of the claims.

Appellants argued that the federal court’s dismissal of certain claims in the Salveson lawsuit barred them from asserting that the complaint contained potential common law tort claims. However, the court found this argument unmeritorious. The obligation to defend was triggered by facts in the first cause of action, regardless of its labeling as "antitrust." The appellants did not conduct any investigation into the allegations after the defense was tendered, which is a prerequisite for insurers to deny a defense. Consequently, the court held that the appellants were obligated to provide a defense to WSBA based on the allegations in the Salveson complaint.

Appellants lacked justification for believing that the Salveson lawsuit was 'incapable of amendment' concerning claims of malicious prosecution, libel, slander, defamation, disparagement, trade piracy, unfair competition, or idea misappropriation at the time of the defense tender. Their assertion, based on hindsight following the lawsuit's dismissal under antitrust statute limitations, does not reflect the standard for evaluating a duty to defend, which relies on known facts, pleadings, and available information at the time of tender. Even with the dismissal of a secondary cause of action, the potential for amending the complaint remained open, as federal courts often permit such amendments in antitrust cases. Relevant legal precedents emphasize the complexity of antitrust litigation and the necessity for flexibility in pleadings. Citing the case of Ruder, Finn v. Seaboard Sur., the court noted that allegations of 'false disparagement' warranted the insurer's duty to defend, aligning with the broader policy encouraging private litigation in antitrust matters. Therefore, it was unreasonable for appellants to assume that no amendments to the Salveson complaint would be allowed.

The Salveson complaint presents specific factual allegations that potentially invoke coverage under the insurance policies of three appellants, establishing their duty to defend WSBA. Appellants argue that policy limitations and exclusions allow them to refuse defense; however, the court disagrees. INA's exclusion related to personal injury from defamatory acts is contested, as the Salveson complaint only states that WSBA's alleged wrongful conduct began as early as 1966, without specifying exact occurrences before INA's coverage commenced in November 1969. The trial court found it unclear if WSBA made any disparaging statements prior to this effective date, supporting the notion that an insurer cannot deny defense based solely on a potential exclusion.

Seaboard claims it can refuse defense based on its policy's limitation to wrongful acts connected to advertising, yet the term "advertising" is not defined, necessitating a strict interpretation against the insurer. The Salveson complaint suggests potential misrepresentations related to WSBA's role in advertising for its member banks. The duty to defend is broader than the duty to indemnify, obligating Seaboard to defend WSBA due to the potential liability indicated in the Salveson lawsuit.

Seaboard also points to an exclusion for claims arising from false or misleading advertising, but this exclusion is deemed ambiguous, potentially excluding coverage for nearly all claims under its policy that covers libel, slander, and related issues in an advertising context.

Ambiguities in exclusionary clauses are interpreted against the insurer, favoring the insured. The literal interpretation of the exclusionary clause in this case would unreasonably limit Seaboard's policy coverage, rendering the clause inapplicable. The appellants contend that WSBA concealed important information regarding its history with certain banks, which should estop CNA from claiming coverage under the appellants' policies, including any duty to defend. However, there are doubts about whether CNA can bear all defenses that the appellants might have against WSBA, as CNA was the only insurer to acknowledge its duty to defend WSBA and incurred related costs.

Despite concerns regarding misrepresentations by the insured, substantial evidence supports the trial court's finding that WSBA did not materially conceal information sufficient to void the appellants' defense duties. Although WSBA did not disclose past disputes with Salveson prior to the lawsuit, these disputes largely involved individual banks and were resolved before WSBA's establishment. There were no claims or threats made by Salveson against WSBA during the ten years following the settlement agreement. The determination of whether WSBA committed material concealment is a factual question for the trial court.

On appeal, judgments are upheld if supported by substantial evidence, even if conflicting evidence exists. The appellate court must view the record favorably to the prevailing party and cannot draw its own inferences from undisputed evidence; it must defer to the trial court’s conclusions regarding conflicting inferences.

The trial court found that the respondents did not prove material concealment by WSBA, a conclusion supported by substantial and credible evidence. Pacific argues that CNA did not demonstrate that Pacific had issued a personal injury liability policy to WSBA, claiming the court erred in its finding. This challenge is fundamentally about the sufficiency of evidence, with Pacific acknowledging conflicting evidence but focusing on the burden of proof, which the court deemed irrelevant. Testimony from David Cuddeback, an account executive, indicated that Pacific utilized a standard personal injury endorsement form, corroborated by Pacific's own witness, further substantiating the trial court's finding.

Pacific also contended it was released from its duty to defend WSBA due to a lack of timely notice regarding claims made by Salveson. The trial court determined that Pacific had sufficient notice of potential liability, negating any substantial prejudice and allowing CNA to seek reimbursement. Marsh, McLennan notified Pacific of the Salveson lawsuit in July 1978, and Pacific's denial of defense was based on its belief of no coverage, which indicated no prejudice from CNA's failure to formally demand a shared defense. Furthermore, Pacific argued that WSBA's failure to inform it of threats from Salveson before a settlement relieved it of its defense obligation. However, established law states that an insurer waives compliance claims when it denies liability, which applies in this case.

Lastly, Pacific challenged the trial court's award of defense costs to CNA incurred after July 1981, asserting that by that time, Pacific had knowledge of the dismissal of the second cause of action in the Salveson complaint and the summary judgment ruling on statute of limitations grounds.

Pacific contends that the court's actions terminated any duty to defend WSBA, which subsequently eliminated CNA's rights to reimbursement for defense costs. This argument is raised for the first time on appeal, and generally, issues not addressed at trial are not considered on appeal. However, an appellate court may entertain unraised issues if they involve pure questions of law, noncurable defects, or matters affecting public interest. The issue presented, while based on undisputed facts, does not fit these criteria; hence, the court declines to consider it.

CNA's cross-appeal raises two main issues: the fairness of the trial court's apportionment of defense costs among four insurers and its entitlement to attorneys' fees for this action. All insurers were jointly responsible for defending WSBA in the underlying lawsuit, and defense costs must be allocated equitably, despite the absence of agreements among insurers. The trial court apportioned costs based on the relative policy limits, assigning 30% of the defense costs to CNA, INA, and Pacific (each with $300,000 limits) and 10% to Seaboard (with a $100,000 limit). CNA argues that this method fails to consider the concurrent and consecutive nature of the policies, which cover different periods and a continuous risk from 1966 to 1978. CNA proposes a more equitable allocation method based on the duration of coverage and liability limits, calculating approximate pro rata shares of defense costs as follows: Pacific (20.7%), INA (42%), CNA (12.6%), and Seaboard (24.7%).

The trial court's method of prorating defense costs among contributing insurers was upheld as consistent with California case law, which mandates that insurers covering the same risk share defense costs proportionately to their coverage. Numerous appellate decisions support this approach, while CNA's proposed method lacks any backing from California cases. The court found the trial court's allocation fair and reasonable, rejecting CNA's argument that recent decisions indicate a need for case-specific equitable considerations. Although the scope of an insured's coverage may extend beyond policy limits, the trial court did not abuse its discretion in applying the established allocation formula. Additionally, CNA's claim for attorneys' fees, based on a hypothetical subrogation to WSBA's rights, was denied due to a lack of factual foundation; WSBA had not made any claims against the other insurers, and CNA lacked a contractual relationship with them, thus preventing it from asserting a breach of the covenant of good faith and fair dealing. The judgment was affirmed, and CNA was awarded its costs on appeal.

The duty of an insurer to defend its insured is broader than its duty to indemnify, with any doubts regarding the existence of the duty to defend resolved in favor of the insured. An insurer's obligation to indemnify is limited by the terms of the insurance contract and depends on a definitive adjudication of coverage. In contrast, the duty to defend is based on the facts known to the insurer at the start of a third party's suit, requiring the insurer to defend whenever there are facts suggesting potential liability under the policy. This principle is reinforced by case law, emphasizing that the duty to defend exists even if the coverage is not ultimately determined until the resolution of the suit.

The Supreme Court's decision in Gray establishes that an insurer's duty to defend may arise from policy language that reasonably leads the insured to expect such defense, and any ambiguous exclusionary clauses must be clear and conspicuous. Although the appellants argue there is no exclusionary clause and that the insured had no reasonable expectation of coverage, these points are not necessary to address because the principle from Gray—that the duty to defend is triggered by potential liability—applies here.

The factual allegations in the amended complaint against the defendants include knowingly misappropriating trade secrets, issuing false statements to disrupt business relationships, making intentional misrepresentations to eliminate competition, and filing false counterclaims to punish the plaintiffs and maintain a monopoly in the commercial transaction card market.

INA contends that the Salveson complaint's allegations of 'false, frivolous and sham counterclaims' are not covered under the malicious prosecution provision of its policy because a prerequisite for such claims is a prior termination of the underlying proceeding in favor of the party alleging malicious prosecution. However, when an insurer is presented with a request for defense, it is not permitted to evaluate the merits of the underlying claim to deny coverage. INA's policy explicitly states that it has a duty to defend any suit seeking damages related to malicious prosecution, regardless of whether the allegations are groundless or false. Consequently, INA's knowledge of a strong defense against the malicious prosecution claim does not exempt it from its duty to defend its insured.

Pacific argues that WSBA breached its duty of good faith and fair dealing by not informing appellants of the dismissal of a secondary cause of action for 'intentional interference,' thereby estopping CNA, as subrogee, from claiming that the insurers should have investigated the Salveson lawsuit's coverage. This argument is without merit because the relevant allegations that might create liability under the appellants' policies were contained in the undismissed primary cause of action. The dismissal of the secondary claim had no impact on the potential liability related to the remaining parts of the Salveson complaint.

The case California Union Ins. Co. v. Club Aquarius, Inc. is cited by Pacific but is deemed inapplicable. In that case, the insurer sought declaratory relief following a full trial, where findings indicated that the lawsuit did not pertain to the risks covered by the policy. In contrast, the appellants in the current situation did not undertake a defense with a reservation of rights or pursue a declaratory relief action. The Salveson lawsuit did not proceed to trial, and the dismissal of the secondary cause of action did not definitively indicate that WSBA would not be liable for acts covered by the insurance policies. Even though an insurer may receive a favorable declaratory judgment, it is not retroactively relieved of its duty to defend until that judgment becomes final on appeal. Thus, the insurer must continue to fulfill its defense obligations until a final determination is made.

The insurer's duty to defend ceases once it is determined that a claim falls outside the policy's coverage. This duty is broader than the duty to pay, arising whenever allegations in a complaint fall within covered risks. Insurers must defend actions with alternative grounds, even if some are not covered, and are obligated to protect against poorly or artfully drafted cases. The determination does not depend on the complaint's ability to withstand a motion to dismiss or the insured's ultimate liability. Even if claims are groundless, the insurer must defend if the allegations, when liberally construed, fall within the policy's scope. 

In a referenced case, despite deficiencies in a federal antitrust claim, allegations of false disparagement suggested potential liability that could fall under the policy's coverage for defamation. The conceptual similarities between defamation and disparagement, along with rules resolving ambiguities against the insurer, support this interpretation. Additionally, the lack of a properly pleaded cause of action does not negate the insurer's duty to defend, nor does the absence of a basis for federal jurisdiction relieve the insurer's obligations.

Seaboard, citing public policy against coverage for willful torts, argues that defending the Salveson complaint would violate this policy. However, statutory prohibitions against indemnification for willful wrongdoing do not prevent defense against mere accusations of such conduct. The obligation to defend does not equate to encouraging willful torts, as these statutes only prohibit indemnification for resulting losses or responsibilities. Thus, the contract to defend does not violate public policy.

Seaboard's duty to defend WSBA is tied not to antitrust charges but to claims of defamation, unfair competition, and idea misappropriation, as specified in Seaboard's policy. Relevant provisions of the Insurance Code highlight that concealment of material facts, whether intentional or not, allows the injured party to rescind the insurance. Good faith communication of all material facts between parties is required, with materiality assessed based on the facts' influence on the contracting party's decisions.

Pacific claimed it raised an issue regarding post-trial defense costs in a letter to the trial judge, which was omitted from the clerk's transcript. However, this letter does not constitute a proper objection to the trial court's award and fails to comply with court rules, as it merely offers observations without formal objections.

Despite the federal trial court granting summary judgment in the Salveson lawsuit in February 1981, the case was still on appeal when the trial court awarded defense expenses to WSBA. California law stipulates that an insurer's duty to defend continues until the underlying action is conclusively resolved on appeal. 

Prior to the Brandt decision, attorneys' fees were not recoverable in a bad faith action against insurers without a specific agreement, following established legal principles that governed such cases.

In Brandt v. Superior Court, the California Supreme Court ruled that attorney's fees incurred to compel payment of policy benefits can be recovered when an insurer tortiously withholds those benefits. These fees are considered an element of damages resulting from the insurer's breach of the covenant of good faith and fair dealing, rather than recoverable as traditional attorney's fees. However, this ruling does not apply in cases where there are no allegations or proof of the insurer's tortious conduct or bad faith. The court clarified that an incorrect interpretation of an insurance contract does not automatically render the insurer liable for tort, as liability requires evidence of unreasonable conduct. Therefore, if no bad faith is proven, attorney's fees related to benefits withheld in good faith cannot be awarded.