If an Insurer Wants to Defeat Coverage it Should Collect Convincing Evidence
Travelers Property Casualty Company (“Travelers”) sued for declaratory relief concerning the defense costs incurred and default judgment obtained against its insured, Bayo Vista Condominium Association (“BVCA”), in a declaratory relief action. In Travelers Property Casualty Company Of America v. 127 Bayo Vista Condominium Association- Oakland, et al., Case No. 19-cv-04697-SI, United States District Court Northern District Of California (May 28, 2021) the USDC considered multiple grounds to avoid defense and indemnity and found them wanting.
Travelers Property Casualty Company (“Travelers”) sued for declaratory relief concerning the defense costs incurred and default judgment obtained against its insured, Bayo Vista Condominium Association (“BVCA”), in a declaratory relief action. Travelers seeks recission of the policies that it issued to BVCA based upon alleged misrepresentations by BVCA on its application for insurance. In the alternative, Travelers seeks a declaration that it did not have a duty to defend BVCA in the Underlying Action and that it does not have a duty to indemnify BVCA for the default judgment, as well as reimbursement of its defense costs from Farmers Insurance Exchange (“Farmers”) and Continental Casualty Company (“Continental”).
In the Underlying Action, David Toda, the owner of Unit 306 at 127 Bayo Vista in Oakland, California, sued BVCA, the condominium owners’ association, regarding damage to Unit 306 that he alleged was caused by a leaking roof. Toda asserted claims for breach of contract, breach of fiduciary duty, and declaratory relief. Toda alleged that he reported the damage to BVCA beginning in 2009, and that he had discussions with BVCA board members about the damage to the unit from 2009 until he filed suit in January 2018. Toda sought damages including lost rental income, the costs of inspections and removal of building materials, interest, litigation costs, and attorneys’ fees.
BVCA allowed a default judgment for $384,852.93 to be entered by not responding to the suit. Travelers received notice of the Toda lawsuit on March 7, 2019, and assumed control of BVCA’s defense on March 20, 2019. Travelers filed a substitution of counsel in the Underlying Action on March 27, 2019. On April 18, 2019, the Alameda County Superior Court denied the motion to set aside the default judgment.
On August 12, 2019, Travelers filed this action against BVCA, David Toda as an individual and trustee of the Mary Flynn Trust (“Toda”), Farmers and NAM.
The court found that Continental met its burden on summary judgment to show that there is no possibility of coverage for the Toda lawsuit under its policy and therefore that it did not have a duty to defend BVCA against that lawsuit.
Travelers sought a declaration that it owed no coverage to, had no duty to defend, and has no duty to indemnify its insured, BVCA, for the default judgment entered in the Toda lawsuit. Travelers contends that it is entitled to summary judgment in its favor on the bases that:
- BVCA concealed material facts during its application for insurance with Travelers, warranting rescission of the policies and an award in favor of Travelers for the defense costs and fees that it has incurred;
- the claims asserted in the underlying Toda action do not fall within the Insuring Agreement of the policies issued by Travelers;
- BVCA breached a condition precedent to coverage by failing to provide timely notice of the claims and the Toda lawsuit, resulting in actual prejudice to Travelers; and
- in the alternative, Farmers and/or Continental owed a duty to defend BVCA in the underlying action and therefore Travelers is entitled to equitable contribution from those insurers.
Travelers contended that the undisputed facts showed that BVCA obtained the policies through misrepresentation and concealment of material facts and that the policies are therefore void ab initio as a matter of law. Travelers asserted that BVCA concealed and failed to disclose in its application for insurance the condition of the roof and exterior walls, the ongoing unresolved dispute with Toda, and Toda’s threat of litigation. BVCA also contends that there are questions about materiality because Travelers renewed the policy after it had knowledge of the Toda lawsuit. Before the court will rescind it looks to three factors in determining whether an insurance company has the right to rescind:
- whether the insured misrepresented or concealed information in its application for insurance;
- whether the information misrepresented or concealed was material; and
- whether the insured knew that it had made a material misrepresentation or concealment.
Applying these factors to the instant case, the Court concluded that there were genuine issues of fact as to all of these elements, and thus that summary judgment on Travelers’ claim for rescission is not warranted.
Coverage Defenses/Reservation of Rights
Invoking the known loss doctrine, Travelers contended that there is no coverage under its policies because the claims asserted in the Toda lawsuit were known events prior to the issuance of the policies. Travelers also contends that there is no coverage because the property damage occurred outside of the policy periods.
The court concluded that there were questions of fact regarding whether Travelers defended pursuant to a reservation of rights and whether Travelers is estopped from asserting policy defenses.
Notice and Actual Prejudice
Travelers contends that BVCA failed to provide it with timely notice of the Toda lawsuit and that it suffered actual and substantial prejudice as a result because a default judgment was entered in that lawsuit. Travelers argued that if BVCA had provided timely notice, Travelers could have investigated the claims made and the damages sought. Travelers also contends that the default judgment award to Toda exceeded the amount of damages to which he would have been entitled under California law.
Where a default judgment results from a lack of notice by the insured,
- the insurer is liable on the judgment unless it suffered actual, substantial prejudice, and
- the mere inability to investigate the claim thoroughly or to present a defense in the underlying suit does not satisfy the prejudice requirement.
- Prejudice is a question of fact on which the insurer has the burden of proof.
- The insurer establishes actual and substantial prejudice by proving more than delayed or late notice.
- The insurer must show a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.
The Court concluded that Travelers did not demonstrate that it was entitled to summary judgment on its late notice defense. Since Travelers could have moved to set aside the default and default judgment based on jurisdictional grounds the Court cannot conclude that such a motion would have been futile.
In the alternative, Travelers sought summary judgment on its claim for equitable contribution but it failed because Farmers, among other things, there are questions of fact as to coverage under the Farmers policies.
D & O Coverage
Farmers contends that there is no coverage under the Directors & Officers policy because that policies do not apply to “property damage.” The policies provide that “This insurance does not apply to ‘claims’: 1. For any ‘bodily injury’, ‘property damage’, or ‘personal and advertising injury.’” Farmers argues that there was no possibility of coverage under the D&O policy because the Toda lawsuit sought damages based on property damage.
Farmers did not met its burden on summary judgment to show that there was no possibility of coverage under the D&O policies. The policies provide that “This insurance does not apply to ‘claims’ . . . for any ‘property damage.'” However, the court concluded it is not obvious to the Court that a claim “for” property damage encompasses a claim for breach of fiduciary duty, and Farmers did not cite any cases where courts analyzed more narrow policy language like that at issue here. Accordingly, the Court concluded that Farmers is not entitled to summary judgment.
For the reasons stated above, the Court granted Continental’s motion for summary judgment and denied the motions for summary judgment filed by Travelers and Farmers.
Trial courts really hate to grant motions for summary judgment because such judgments are often reversed by appellate courts. Travelers and the other insurers had some serious defenses to the claims made by the insured all of which were dismissed by a finding that there are issues of fact that were not resolved to the satisfaction of the USDC. They either filed really poor motions or were met with a judge who preferred trial. If the arguments made by the insurers are capable of being backed up with admissible evidence they will succeed and if they don’t have the evidence they will lose.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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