Judge: Mark H. Epstein, Case: 22SMCV01207, Date: 2022-12-14 Tentative Ruling

Case Number: 22SMCV01207    Hearing Date: December 14, 2022    Dept: R

Plaintiffs sued for negligence caused by water leaks that occurred during a rainstorm taking place while the roof was being repaired.  Defendant ADCO (the contractor) tendered the defense to its carrier (AIIC), which rejected it based upon an exclusion that precluded coverage when damage was caused by an “open roof.”  ADCO claims that AIIC’s response was improper because the exclusion did not apply and that the denial of coverage was in bad faith.  ADCO filed a cross-complaint joining AIIC to the instant action.  AIIC demurs based on a “no action” clause in the insurance contract.  That clause states that AIIC cannot be brought into a cause of action between the insured and the person suing the insured. 

The no action clause states (in pertinent part) that “No person or organization has a right under this Coverage Part: [¶] a. To join us as a party or otherwise bring us into a ‘suit’ asking for damages from an insured.”  AIIC contends that this means that ADCO can sue it, but it must do so in a separate action.  ADCO argues that this clause is meant to bar the plaintiff who suffered damage from bringing the carrier into the underlying lawsuit, citing to The Rutter Guide as so providing.  The policy behind such clauses is to stop the third party and the insured from colluding and stipulating to a final judgment for a large sum.  According to the Rutter Guide, the clause is not meant to bar the insured from bringing the carrier into the underlying action. 

The Rutter Guide might well be correct as a general matter.  But the court must look to the specific language in the policy, and thus the court cannot simply rely on the Rutter Guide and the cases cited therein without some additional analysis.  Here, the language in the policy is that “No person or organization” can join AIIC into the underlying case.  AIID contends that ADCO is a “person or organization” and thus comes within the no action clause’s plain terms.  Further, according to AIIC, if it is forced into the case, it will be prejudiced in that the jury will likely take the fact that ADCO is ensured into account when deliberating even though it is improper to do so.  AIIC also contends that issues of whether there is a duty to defend and bad faith will be improperly conflated with the merits.  The court agrees with AIIC that the words “person or organization” on their face would apply to ADCO (which is an organization at a minimum).  But the policy refers to ADCO specifically as the “Named Insured.”  Where the carrier intended a clause to bind the Named Insured, it said so expressly, as it did in the insured versus insured clause.  Reading the contract as a whole, the court does not believe that this was meant unambiguously to apply to ADCO. 

The court notes that typically such suits are brought separately.  In other words, where the insured claims that there is a duty to defend what commonly occurs is that a separate action for declaratory relief is filed to resolve that matter.  That can be joined with a bad faith action.  But the fact that a separate action is the typical way to resolve the matter is not dispositive and the court is unsure why that was not followed here.

The case law authority is not dispositive here.  But the major point is that if AIIC were attempting to craft a clause that would change the general rule, one would think AIIC would do so with greater clarity, such as saying that “No person or organization, including the Named Insured, has a right . . .”  That would have unambiguously made it clear that ADCO could not add AIIC to the instant case.

That said, AIIC persuasively argues that there is a danger of undue prejudice.  Without doubt, there are many aspects of the case that are somewhat upside down.  For example, as AIIC points out, plaintiff might well want to establish that ADCO did not properly secure the site knowing that a rainstorm was coming, leaving the roof open.  ADCO would want to contend that it did no such thing, but AIIC’s interest would be to favor plaintiff in that attempt (as doing so would trigger the exclusion) even though that argument would tend to harm the insured.  That sort of thing places AIIC in an untenable position in this litigation, and the court is far from convinced that simple bifurcation will solve the problem.  Further, the question whether there is a duty to defend and whether there was a bad faith denial are different (though not wholly dissimilar, at least regarding the duty to defend) as the issues in the main case.

The court therefore will discuss with the parties why ADCO did not follow the traditional approach and file a separate lawsuit to determine the duty to defend and bad faith.  If it can be done, the court would far prefer the traditional approach—two cases that could, perhaps, be deemed related, or, alternatively, the court might sever these two aspects of the case and allow each to proceed along a separate path.  If there is a good reason not to do that, the court’s view is that the policy is not clear enough, but the parties and the court will need to fashion appropriate safeguards to protect AIIC from undue prejudice. 

One problem is that a demurrer is a crude instrument to deal with this problem.  The insured and insurer do have to work this issue out—by agreement or by litigation.  The question is the appropriate way to do so, and the court will (briefly) discuss that issue with the parties.  Better still, the court would like the parties to meet and confer and see if they can resolve something themselves.