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The California Court of Appeal, Second Appellate District, reversed a trial court's grant of summary judgment to an insurer who argued its insured's failure to provide timely notice of an underlying lawsuit precluded coverage under the policy's notice provision. The Court concluded such a provision can only be enforced where the insurer proves actual, substantial prejudice arising from the insured's breach. Since the insurer failed to establish such prejudice, the trial court erred granting summary judgment.
Clarendon America Insurance Company issued a commercial general liability policy to a general contractor, Namay. In 1999 Namay agreed to complete certain construction for a homeowner, Belz. A dispute later arose between Namay and Belz over alleged construction defects and damage in the new construction.
In December 2001, Belz advised Namay's insurance broker he was making a claim under Clarendon's policy for the damages and defects. Between January and September, 2002, Clarendon investigated the claim. Its investigator spoke with Belz but, despite repeated efforts, the investigator could not reach Namay. In September, 2002, Clarendon's investigator advised Belz Clarendon could not make a decision on the claim until the investigator spoke with Namay. Belz informed Clarendon's investigator he intended to sue Namay.
Three months later, Belz sued Namay. He alleged negligence and breach of contract. Namay was personally served but failed to respond or to notify Clarendon of the suit. In January, 2003, Belz filed a request for entry of default, which was entered. Namay also failed to report the request for default to Clarendon.
In late 2003 Clarendon hired a new investigator to investigate Belz's claim. The investigator contacted Belz in February 2004 and learned of the lawsuit and the default. Clarendon immediately retained counsel who sought to set aside the default. Belz opposed the motion and sought entry of default judgment against Namay. Clarendon's motion was denied and default judgment was entered against Namay for $191,395.90. Clarendon filed a motion for reconsideration with a declaration from Namay stating he did not notify Clarendon of Belz's suit because he had provided the summons and complaint to an attorney handling his bankruptcy petition.
The trial court denied Clarendon's motion. Namay later filed an appeal from the judgment which was dismissed as untimely.
Meanwhile, in May 2004, shortly after communicating with Namay for the first time, Clarendon wrote to Namay and declined coverage. It indicated there was no potential for coverage because, among other things, Namay failed to provide notice of the Belz Suit or to cooperate with Clarendon.
In June 2005, Belz filed an action against Clarendon, seeking to recover his judgment against Namay under Insurance Code section 11580. Clarendon moved for summary judgment. It relied on a provision in its policy that provided:
The Company shall not be liable for any cost, payment, expense (including legal expense) or obligation assumed or incurred by an insured without the Company's express consent. The Company further shall have no liability for any default judgment entered against any insured, nor for any judgment, or settlement or determination of liability rendered or entered before notice to the Company giving the Company a reasonable time in which to protect its and its insured's interests…
Belz opposed the motion, arguing Clarendon was required and had failed to prove Namay's failure to provide timely notice of the lawsuit prejudiced Clarendon. In its reply Clarendon argued it was not required to show prejudice or, alternatively, that Namay's conduct had prejudiced Clarendon because it prevented Clarendon from thoroughly investigating Belz's claim and from presenting a defense to Belz's lawsuit.
The trial court granted Clarendon's motion. It concluded Namay had breached the notice provision and Clarendon was not required to establish actual prejudice. Belz appealed.
The Court of Appeal concluded the central question was whether the Clarendon policy provision was properly characterized as a notice provision, a cooperation clause, or a no-voluntary payment provision. Under California law, courts decline to enforce notice provisions or cooperation clauses unless the insurer can prove actual, substantial prejudice resulting from the alleged breach. In contrast, California courts enforce no-voluntary payment provisions without a showing of prejudice. The Court concluded Clarendon's provision was a notice provision and therefore Clarendon was required to prove prejudice arising from Namay's lack of notice.
The Court rejected Clarendon's contention that its policy provision was a no-voluntary payments provision because payment of a judgment is equivalent to payment of an insured's pre-tender, unilateral defense and settlement expenditures. The Court held no-voluntary payment provisions apply to affirmative acts by an insured. In contrast, Belz's suit involved a default judgment against Namay, not a voluntary payment by him. The Court concluded Belz's default judgment against Namay was therefore the result of Namay's lack of timely notice and/or cooperation with Clarendon. It was not attributable to voluntary payment of a settlement or defense costs.
The Court also rejected Clarendon's contention that the policy provision was a no-voluntary payments provision in light of the first sentence, which stated Clarendon would not be liable for any cost or expense incurred without its express consent. The Court agreed this first sentence was a traditional no-voluntary-payment provision. However, the second sentence was plainly a notice provision and its placement in the same paragraph with a no-voluntary payment provision did not alter this result.
Thus the Court held Clarendon was required to show actual, substantial prejudice to rely on the notice provision. This meant Clarendon was required to show a substantial likelihood that, with timely notice, and notwithstanding any denial of coverage or reservation of rights, Clarendon would have settled the claim for less or taken steps that would have reduced or eliminated the insured's liability. Since Clarendon failed to make such a showing, the trial court erred in granting summary judgment, and the Court reversed the trial court's judgment.
This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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