Insurance Co. of North America v. Liberty Mutual Insurance

Citations: 128 Cal. App. 3d 297; 180 Cal. Rptr. 244; 1982 Cal. App. LEXIS 1230Docket: Civ. 20601

Court: California Court of Appeal; January 29, 1982; California; State Appellate Court

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Insurance Company of North America (INA) appealed a judgment of dismissal after the trial court sustained Liberty Mutual Insurance Company's (Liberty) demurrer without leave to amend. The case involved INA seeking declaratory relief following a previous action in which Her Majesty Industries (HMI), insured by Liberty, had successfully argued that INA's policy covered HMI due to a broad form vendors endorsement. In that earlier case, INA was ordered to pay HMI $254,000 for settlement and defense costs related to a personal injury claim involving a child injured by a product manufactured by HMI. 

INA's current action against Liberty sought reimbursement for amounts paid to HMI, claiming both insurers' policies included "other insurance" clauses requiring contribution towards losses. INA contended that, given the judgment in favor of HMI, its liability exceeded its policy limits with Jaftex, necessitating Liberty's reimbursement for amounts over those limits and half of the defense costs incurred. Liberty demurred on several grounds, including statute of limitations, laches, unclean hands, failure to file a compulsory cross-complaint, and res judicata and collateral estoppel, all of which were rejected by the appellate court, leading to a reversal of the trial court's decision.

The trial court dismissed all grounds of the demurrer except for res judicata and collateral estoppel. It mistakenly concluded that INA had a chance to argue "other insurance" in a previous case but chose to focus on "no coverage" under the vendors' indorsement clause, leading to the erroneous finding that the issue had been tried. Despite Liberty's claim that INA's failure to raise the "other insurance" issue in the former action barred it from succeeding in the current declaratory relief action, the court clarified that Liberty was not a party to the previous action, making the "other insurance" question irrelevant. The issues previously tried were strictly between HMI and INA regarding INA's duty to defend and indemnify HMI. Liberty's argument that INA should have raised defenses against HMI that pertained only to Liberty was incorrect. Liberty attempted to assert that the prior case was actually between itself and INA, but this assertion was dismissed due to HMI's strong denial of any connection between Liberty and the former action. Consequently, since Liberty was not a party to the prior case, claims of res judicata or collateral estoppel do not apply.

The doctrine of res judicata prevents relitigation of issues already decided in a prior judgment between the same parties. In this case, the current action for declaratory relief regarding "other insurance" differs substantially from a previous case concerning coverage under a vendor's endorsement and HMI's rights. The issue of other insurance was not raised or litigated in the prior action between INA and HMI, negating any claim of collateral estoppel. The trial court incorrectly upheld the demurrer based on these grounds.

Liberty contends that INA should have filed a compulsory cross-complaint in the former action since HMI's case involved both declaratory relief and damages. However, Liberty was not a party in that action, exempting INA from the obligation to file a cross-complaint regarding any claims against Liberty. Liberty also cannot be considered an indispensable party, as the prior litigation focused solely on INA's duty to defend HMI under the Jaftex policy.

INA's failure to file a permissive cross-complaint in the earlier case does not hinder its current pursuit of rights against Liberty. Liberty argues that INA cannot claim equitable subrogation because HMI lacks rights against Liberty. However, the assertion that Liberty fully performed its contractual obligations to HMI is contested; HMI's right to indemnification was not definitively resolved, and INA ultimately covered the entire $170,000 settlement and reimbursed Liberty for its defense costs.

Moreover, HMI's recognition of coverage under the INA policy and its subsequent defense tender does not absolve Liberty of its obligation to contribute to any judgment or settlement proportionately. Liberty's policy mandates payment for insurable damages and defense costs, and it retains a duty to share in these payments if other insurance is applicable.

Liberty has received full reimbursement for its contributions to the settlement and defense costs of HMI. HMI holds a claim against Liberty for its share of these costs, which is now subrogated to INA. Liberty argues that a carrier breaching its contract by refusing a defense should be liable for the entire judgment or settlement, relieving performing carriers of their obligations. However, no authority supports this position. The California Supreme Court case Continental Casualty Co. v. Zurich Ins. Co. established that all carriers, regardless of performance status, must contribute proportionately to judgments or settlements and defense costs. In that case, both Zurich and General, having wrongfully refused defense, were required to share liability with Continental on a pro rata basis, while Zurich was not penalized with full judgment liability. This principle has been consistently upheld in subsequent cases. Liberty's reliance on State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co. is misplaced, as Allstate's liability was contingent on the lack of other insurers for contribution, and it was not held liable for the entire judgment without a trial court determination of causation regarding its refusal to defend.

Liberty argues that previous cases permitting cost-sharing between performing and nonperforming insurers involved actions initiated by the performing insurers, not by those with "unclean hands." Liberty claims that INA's refusal to accept HMI's defense tender should prevent INA from pursuing equitable subrogation, suggesting that allowing this would reward INA for its failure to defend. The doctrine of unclean hands is primarily a factual matter, and the court found that INA's conduct did not clearly warrant denial of relief. INA's refusal to defend was based on uncertainties in the insurance industry regarding policy application, which Liberty itself acknowledged as lacking "bad faith." Insurers have an implied duty of good faith, and a refusal to defend can lead to liability for resulting harm to the insured. However, Liberty had no contractual expectation from INA to defend HMI, nor did it claim that INA’s actions increased HMI's liability. Liberty maintained control over HMI's defense and was reimbursed for expenses. The unclean hands doctrine applies only when the party invoking it was harmed by the alleged misconduct, and since INA benefited from its actions, it could not claim unclean hands. The court ruled that Liberty's demurrer regarding unclean hands should be overruled. Additionally, Liberty's choice to pursue reimbursement in HMI's name only has complicated the proceedings, and the judgment is reversed with instructions to the trial court to overrule Liberty's demurrer. The petition for a Supreme Court hearing was denied, with some justices dissenting in favor of granting it.

The judgment totaled $254,000, with $170,000 allocated to a settlement paid by HMI in a personal injury case and $84,000 for attorney's fees and costs incurred by HMI in that action. Liberty Mutual Insurance Company is identified as the real party in interest in a subrogation lawsuit against the Insurance Company of North America (INA) for reimbursement of amounts it paid under its policy. There is consensus that Liberty, as the equitable and contractual subrogee, qualifies as the party for the purposes of res judicata and collateral estoppel. Under California Code of Civil Procedure section 428.10, a party may file a cross-complaint against any person for a cause of action arising from the same transaction or controversy. INA's refusal to accept a defense tender from HMI, despite its belief that HMI was not an additional insured under INA's policy, constitutes a breach of contract. The central issue now is whether INA's wrongful refusal to defend means it must cover the entire settlement amount, or if Liberty, which accepted the defense, is also liable for part of the settlement costs.