Being the last insurer to the settlement table may have lost some of its luster in California.
On January 22, 2015, California's intermediate appellate court decided McMillin Companies, LLC v. American Safety Indemnity Co., in which McMillin, a contractor, sued 12 liability insurers for breach of contract and breach of the covenant of good faith and fair dealing after the insurers refused to defend McMillin against underlying construction defect lawsuits.
By the time the coverage litigation was ready for trial, McMillin had settled with all the insurers except American Safety Indemnity Co. ("ASIC"). ASIC argued that any judgment against it should be reduced (or "equitably offset") by the amounts McMillin had already received in settlements with the other insurers. The trial court granted ASIC's motion, concluding that although ASIC had indeed breached its duty to defend, the settlement proceeds offset McMillin's contractual damages in full, and that without any contractual damages, McMillin could not maintain a cause of action for bad faith.
The Court of Appeal reversed. It found that offset of the settlement amounts did not affect the amount of damages that McMillin suffered as a result of ASIC's breach of the duty to defend, but only McMillin's recovery of such damages. It held that at trial, McMillin must be allowed to present evidence of its contract damages and of ASIC's bad faith in denying coverage. While any damages awarded would be subject to offset by the settlement amounts McMillin had received, the Court of Appeal found that only those settlement amounts specifically allocated to defense costs could be applied in offset.
The appellate court distinguished the facts in McMillin from the situation where a policyholder is provided a complete defense at all times by a participating insurer, and therefore suffers no unreimbursed defense expenses. In that situation, the policyholder generally cannot assert a breach of contract claim, because an essential element of that claim—damages—is lacking. But it is a different story where the policyholder has not been defended. In that case, the policyholder can properly assert breach of contract claims for any unreimbursed defense costs, although the amount of any recovery will ultimately be subject to the insurer's right of offset. Importantly, this distinction preserved McMillin's right to pursue its bad faith claim against ASIC.
The Court of Appeal also purported to clarify what effect the denial of an insurer's motion for summary judgment on the duty to defend has upon the insurer's defense obligation. It found that a court's denial of such a motion on grounds that the insurer did not meet its initial burden to show the absence of any potential for coverage—rather than grounds of disputed issues of fact—is not sufficient to establish the insurer's duty to defend. This ruling appears to conflict with prior California law on this issue, and while insurers may seize on it to escape their duty to defend, the ruling should have no impact in cases where the policyholder files its own motion for summary adjudication to establish the insurer's duty to defend.
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