Transcontinental Insurance Co. v. Insurance Co. of the State of Pennsylvania
__ Cal.App.4th __
07 C.D.O.S. 3244

An Excess Carrier With A Duty To Defend Must Reimburse The Primary Insurance Carrier's Payment of Uncovered Defense Costs Through Equitable Subrogation.

This appellate decision arises from an insurance coverage dispute between a primary insurer and an excess insurer over the obligation to defend a housing developer in a construction defect case. The developer, Barratt American Inc., Windsong Partners and Pacific Gateway Homes (collectively "Barratt") required its subcontractors to obtain commercial general liability insurance naming Barratt as an additional insured. Ten of the subcontractors obtained additional insurance for Barratt from CNA Affiliated Companies (collectively "CNA"). These policies provided that Barratt would be indemnified for liability arising out of the subcontractors' own work. Barratt also obtained excess insurance policies from Insurance Company of the State of Pennsylvania ("ISOP"), containing a defense obligation.

A construction defect lawsuit was filed against Barratt exhausting its primary coverage. Barratt then tendered its defense to the CNA and ISOP. Both carriers began defending Barratt. ISOP, claiming that its excess policy had not been triggered until exhaustion of the CNA policies, stopped defending. CNA continued to defend under a reservation of rights to seek reimbursement from ISOP.

After the case settled CNA sued ISOP for declaratory relief and equitable contribution seeking reimbursement for Barratt's defense. ISOP moved for summary judgment. The trial court denied the motion and determined that ISOP had a defense obligation. ISOP filed a petition for writ which was denied. The parties then entered into a stipulated judgment from which this appeal was taken.

The court of appeal affirmed holding that because some of the claims against Barratt did not arise out of the subcontractors' work on the project they were not potentially covered under the CNA policies. In particular, two of the causes of action (negligent misrepresentation by Barratt and Barratt's breach of fiduciary duty to the development's homeowner's association) did not potentially "arise out of" the subcontractors' work. These causes of action fell within ISOP's insuring agreement.

Buss v. Superior Court (1977) 16 Cal.4th 35 entitles CNA to reimbursement for the defense of claims not potentially covered under its policy. The proper theory of recovery for CNA is equitable subrogation which applies between different insurance carriers covering different risks and liabilities. Equitable contribution did not apply because CNA and ISOP did not "share the same level of liability and were not obligated to defend the same loss or claim." The court found that CNA satisfied the elements of equitable subrogation and was entitled to reimbursement of defense costs allocated to claims not potentially covered under its policies.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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