Duty to Defend Not Effected by Denial of Motion for Summary Judgment

Defense Can’t Be Avoided by Use Of Limine Motions

The duty to defend owed by an insurer is very broad and requires an insurer to defend even if there is only a potential for coverage on the facts of the case and the policy wording. Usually, an order denying a motion for summary judgment seeking an order that there is no duty to defend will usually be sufficient to reveal the potential for coverage and a requirement for defense – at least under a reservation of rights – to those insured. In McMillin Companies, LLC v. American Safety Indemnity Company, — Cal.Rptr.3d —-, 2015 WL 270034 (Cal.App. 4 Dist., 1/22/15) the right to claim no duty to defend will still exist even after a motion for summary judgment is denied if the motion order is not dispositive of the claims made by the motion for summary judgment. It also criticized the use of a motion in limine (to limit testimony allowed at trial) when it had the effect of a motion for summary judgment without the protections of a motion for summary judgment.

FACTS

The parties cross-appeal from a final judgment of the superior court in an insurance coverage dispute between a general contractor and the commercial general liability insurer of one of its subcontractors.

ISSUES IN THE CROSS–APPEALS

The Present Insurance Coverage Litigation

In February 2009, eight McMillin-related entities (but not McMillin) filed the underlying complaint against ASIC and 11 other insurance companies. The plaintiffs alleged that each of the defendants was an insurer to one or more of the subcontractors on the projects, that each of the plaintiffs was an additional insured under each of the respective policies, that each of the defendant insurers owed each of the plaintiffs a duty to defend the Baker litigation, and that by denying the tender of the defense of the Baker litigation each of the defendants breached a contract of insurance and its implied covenant of good faith and fair dealing.

The Motions in Limine

In October 2011, in anticipation of trial, the parties filed motions in limine. One dealt with ASIC’s alleged duty to defend.

With regard to the duty to defend, the SAC plaintiffs filed a motion to exclude testimony and argument disputing that ASIC had a duty to defend the Baker litigation.

Duty to Defend

Relying on Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1078, 17 Cal.Rptr.2d 210, 846 P.2d 792 ( Horace Mann ), and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 ( Montrose ), McMillin argued that the denial of ASIC’s motion for summary judgment established, as a matter of law, that ASIC had a duty to defend them in the Baker litigation. Opposing the motion, ASIC disputed the legal effect of the denial of its summary judgment motion, contending that because the court did not deny the motion by expressly finding a disputed factual issue, the effect of the ruling did not establish the duty to defend as a matter of law.

In denying summary judgment, the court had ruled that, with regard to four allegedly undisputed issues, “ASIC has not met its initial burden of proof.” During the in limine proceedings, ASIC argued that the court could not consider the denial of the summary judgment, relying in part on Judge Nevitt’s following comments at the conclusion of the hearing in which he denied ASIC’s motion: “However, I remind counsel that this ruling is of no evidentiary value later. I don’t know what other evidence may be presented to the Court when these issues are next presented. Whether foundations may have been laid for things, not laid here, and so forth. And so should this issue come before the Court again under different circumstances and with potentially different evidence, you should not necessarily count on the same result.”

DISCUSSION

The trial court erred in granting McMillin’s motion in limine to preclude evidence or argument that disputed ASIC’s duty to defend; the trial court erred in granting ASIC’s motion in limine to preclude McMillin from presenting evidence or argument either that the Settlement proceeds are not an offset to McMillin’s Baker fees or that the Settlement proceeds are allocated to Brandt fees; and we are unable to affirm that portion of the judgment in favor of ASIC on McMillin’s cause of action for breach of the implied covenant of good faith and fair dealing.

An insurer owes a duty to defend any lawsuit “which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) Since the duty arises whenever the claim against the insured seeks damages on any theory that, if proved, would be covered by the policy, the insurer is relieved of its duty only when “‘the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”‘ (Montrose, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

Horace Mann instructs: Where “factual issues exist precluding summary judgment in the insurer’s favor …, the duty to defend is then established, absent additional evidence bearing on the issue.” (Horace Mann, supra, 4 Cal.4th at p. 1085, 17 Cal.Rptr.2d 210, 846 P.2d 792.) Denying a summary judgment motion because the moving party failed to meet its initial burden of production is not the same as denying the motion based on an unresolved factual dispute. Accordingly, the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation.  In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC’s alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin’s proof.

Judge Alksne erred in rejecting McMillin’s presentation (that unallocated Settlement proceeds be allocated to resolving the tort claim) and accepting ASIC’s presentation (that unallocated Settlement proceeds be allocated first to resolving the contract claim), leaving McMillin without evidence of damages. In making such a ruling in limine, the trial court essentially granted a nonsuit as to the issue of McMillin’s alleged damages without requiring the statutory procedural protections associated with nonsuit proceedings, thereby precluding McMillin from trying its case.

The Orders Granting the Motions in Limine Are Reversed

Using an in limine motion as a substitute for a potentially dispositive statutory motion produces substantial risk of prejudicial error. The disadvantages of such shortcuts are obvious. They circumvent procedural protections provided by the statutory motions or by trial on the merits; they risk blindsiding the nonmoving party; and, in some cases, they could infringe a litigant’s right to a jury trial.

ZALMA OPINION

This case clarified earlier duty to defend rulings that dealt with dispositive motions for summary judgment. When a court rules that there is a potential for coverage in a partial motion for summary judgment the issue of duty to defend is established. However, in a case like this one where the motion for summary judgment does not rule on any issue and just denies the motion for failure to produce evidence sufficient to rule, the duty to defend is not established. By wrongfully using a motion in limine to prevent the presentation of evidence concerning the duty to defend deprived the party of the right to present evidence to prove its case without any of the safeguards and evidentiary requirements of a motion for summary judgment. The judgment was reversed, the orders in limine were reversed and the case was sent back to be tried.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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