STONEWALL INSURANCE COMPANY, an Alabama Corporation, Plaintiff, Appellant and Respondent, v. CITY OF PALOS VERDES ESTATES, etc., et al., Defendants, Appellants and Respondents.
In an underlying action against the City of Palos Verdes Estates (the City) charging negligence, nuisance and inverse condemnation Michael T. Papworth was successful on all theories charged. The jury awarded Papworth $1,188,946 as damages for negligence and nuisance and $1,881,621 as compensation for inverse condemnation, all arising out of a continuous and repeated course of conduct of the City from 1971 into 1981. Judgment was entered for the latter amount. Pending appeal the Papworth matter was settled by payment of $1,600,000 accompanied by a stipulation confirmed in a court order which vacated the judgment “for all purposes.” The settlement was funded by $350,000 paid by the City, $300,000 contributed by The Jefferson Insurance Company of New York (Jefferson) which was the City's primary carrier in the period November 1, 1975 until November 1, 1978, and $950,000 contributed by Stonewall Insurance Company (Stonewall) which was its excess carrier for the period November 1, 1976 until November 1, 1977. Other insurers of the City whose policies covered the period of continuous and repeated exposure refused to participate in the settlement.
The two actions which give rise to this appeal followed. The City filed suit against all of its insurers who had issued primary or excess liability policies in the period 1971 through 1983. The City's action asserts joint and several liability for breach of contract of all of its primary and excess liability insurance carriers over the period and seeks recovery of the $350,000 it paid to settle the Papworth claim less a $1,000 deductible. It also seeks damages for bad faith of some of the insurers for failure to settle the Papworth claim. Stonewall filed a contemporaneous action against the City and the other liability insurance carriers. The Stonewall suit contests its liability and seeks recoupment of the $950,000 paid by Stonewall to fund the settlement. This suit and cross complaints filed by the other insurers also seek a declaration of the relative liability, if any, of each of the issuers of liability insurance to the City during the period of exposure to harms resulting from the City's conduct and apportionment of the liability among the insurers.
The trial court first consolidated the two actions. Later it bifurcated the proceedings and deferred action in what it denominated “Phase II” dealing with the City's bad faith claims until after determination of the remaining issues in “Phase I.” In Phase I the trial court held that the City's liability was covered by insurance save for $53,000 in deductibles and allocated liability for this coverage equally to Jefferson and Admiral Insurance Company (Admiral) which had issued policies the court deemed primary covering the period November 1, 1975 to July 1, 1980. Stonewall was exonerated from liability and adjudged entitled to recover from Jefferson and Admiral the $950,000 it had paid on the theory that as an excess carrier Stonewall had no obligation to indemnify the City until the City's primary insurance was exhausted. Carriers who had issued policies covering periods prior to September 2, 1976 were exonerated because of the trial court's interpretation of the Government Claims Act. Carriers after February 1, 1980 were exonerated because of the trial court's determination that this date, having been stipulated in the Papworth action as the date of taking in inverse condemnation, fixed the time when the Papworth property was a total loss.
While Phase II has not been tried, appeals from the trial court's judgment in Phase I are now before us. We directed a letter to the parties requesting additional briefing on the question of the appealability of the Phase I judgment in view of the pendency of Phase II of the instant case. All parties who responded argue that the appeal should go forward. As we explain below we accept as correct the parties' argument that the Phase I judgment is appealable.
Fundamental to the determination of the correctness of the trial court's judgment in Phase I are questions to which there are not easy answers. These include: (1) the coverage contracted by successive insurers over a period of years of liability of the insured resulting from continuous and repeated exposure to harms to property; (2) the application of deductible provisions to this coverage; (3) the point at which risk is no longer contingent so to be uninsurable; (4) the effect of a claim filed under the Government Claims Act upon contingency; (5) the effect of the stipulation in the Papworth action fixing the date of taking for purposes of inverse condemnation upon insurance coverage; (6) the impact of inverse condemnation exclusions in policies of comprehensive liability or municipal liability insurance where the involved inverse condemnation is founded in negligence and nuisance; (7) the effect of the limitations bar of the Government Claims Act on the liability of insurers whose policy periods cover occurrences at times when harm to property was occult rather than manifest; (8) the relative liability of the primary and excess insurers who are involved over the period; and (9) the relative liability of primary insurers covering the loss.
We recognize that many of these issues are susceptible to more than one resolution, that at present some are the subject of conflicting appellate court authority, and that the resolution of some of the issues is public policy influenced. Some of these questions are now pending in the Supreme Court as the result of its grant of review in Montrose Chemical Corporation of America v. Admiral Insurance Company (1992), 3 Cal.App. 4th 1511 [5 Cal.Rptr.2d 358] review granted May 21, 1992 (S026013). Respectfully suggesting that grant of review in this case along with Montrose will contribute to certainty of California law by expanding consideration beyond the area of liability insurance coverage for toxic pollution involved in Montrose, we reach the conclusions which follow. We note instances of conflict in the current decisional law and in some instances note arguments in opposition to our conclusions to aid our Supreme Court's consideration of whether review is appropriate.
1. While Court of Appeal decisions are in conflict on the issue, where liability insurance coverages are of an “occurrence within the policy period” “occurrence” is defined to include “continuous or repeated exposure to conditions which result in property damage”, and action by the insured periodically and consistently over the period contributes to eventual damage all insurers who are on the risk during the period of continuous or repeated exposure are obligated to indemnify the insured for liability as a consequence of the damage which results.
2. While there may be a good argument to the contrary, respect for stare decisis counsels that for the purpose of determining applicable deductibles the City is entitled to select primary policies which cover its risk and to be subjected only to the deductibles in these policies.
3. While Court of Appeal opinions are also in conflict on the point, Insurance Code sections 22 and 250 limiting insurability to liability resulting from a contingent or unknown event, past or future, should be construed as follows. So long as liability from the damage causing event is contingent or unknown, liability is insurable. Insurance policy language, such as that present here, which excludes from the definition of occurrence damage which is expected or intended has a similar meaning. The trial court's determination that the City's liability to Papworth was contingent, unintended and unexpected is supported by substantial evidence.
4. The filing of a claim under the Government Claims Act does not as a matter of law establish that future damage arising out of the course of conduct alleged in the claim is not contingent or is expected or intended. The claim is evidence of these facts, but where substantial evidence establishes that neither the claimant nor the insured City believed that the liability causing events had occurred and was in progress the trial court's conclusion that liability was contingent and neither intended not expected cannot be reversed on appeal.
5. The stipulation into which the City entered in the Papworth action establishing a date of taking for the purposes of inverse condemnation, while a judicial admission binding the City and evidence, does not per se determine the time that the loss ceased to be contingent. However, it is conceivable that the stipulation accomplished a merger of the City's obligation; that from the date of stipulated taking the City was no longer liable for damages to Papworth. Understandably in light of the trial court's ruling this point is not raised in any of the briefs. Because we determine that the matter must in any event be remanded to the trial court, and because the question of merger may be fact dependent, we leave initial determination of this question to that court on remand.
6. Recognizing that language in one court of appeal opinion seems contrary, where an underlying action has determined liability and damages for negligence and nuisance as well as compensation for inverse condemnation, insurers whose policies include valid inverse condemnation exclusions are nevertheless obligated to indemnify their insured for the proportion of the insured's loss attributable to liability for negligence and nuisance. The dismissal of an underlying action and vacation of a judgment based on both negligence and inverse condemnation pending appeal does not result in coverage of the entire award by carriers with such an exclusion.
7. Where liability insurance is written to cover “occurrences within the policy period” the time limitations on government claims is irrelevant where action on the damage which results later from earlier occurrences is not barred.
8. As among the insurers, all primary insurance must be exhausted before the excess carriers are liable. Where, as here, the primary insurance is sufficient to indemnify the insured, the primary carriers as a group bear the entire loss.
9. As among the primary carriers the loss must be allocated on equitable principles.
Addressing other issues raised by various of the parties we reach the following additional conclusions.
1. A Fireman's Fund Insurance Company (Fireman's) policy does not incorporate a valid inverse condemnation exclusion. All of the other relevant insurance policies contain such a valid exclusion. Jefferson, having assumed the defense of the Papworth action and not having declared its reservation of right to assert its inverse condemnation exclusion until shortly before trial, is estopped to assert it. Hence all liability of insurers to the City in excess of that attributable to negligence should be allocated to Fireman's Fund and Jefferson. The City's contention that Stonewall Insurance Company (Stonewall) had issued a policy excess to that of Jefferson had also waived the right to assert its inverse condemnation need not be addressed because Stonewall, an excess carrier, has no liability.
2. The City's contention that the various insurers are barred from asserting their inverse condemnation exclusions because they did not take advantage of opportunities to settle the Papworth action before judgment relates to issues now pending before the trial court in Phase II and hence is not judiciable on this appeal.
3. Jefferson's contention that although its policy covered a three year period with a policy limit of $300,000 per occurrence it is liable only to the extent of one policy limit is not supported by the record.
4. Jefferson's contention that the trial court erred in not reallocating some of its defense costs to another carrier or carriers was not raised in the trial court and is hence not available on appeal.
5. Admiral's contention that it was an excess rather than a primary carrier is not supported by the record.
6. The contention of various parties that the trial court erred in granting the motion for summary judgment pursued by Canadian Indemnity Company (Canadian) because the stipulated taking date in the underlying action established that the Papworth property was a total loss before the inception of the Canadian policy is valid. However, the trial court determination may have been correct for a different reason, i.e. that the stipulation establishes a merger of the rights of obligor and obligee in the City so as to preclude further liability. In light of our determination that the matter be remanded to the trial court for determination of this question Canadian's motion for summary judgment must be similarly reconsidered.
7. The contentions of The Central National Insurance Company of Omaha (Central National) and Employers Reinsurance Corporation (Employers) that as to them this appeal was not timely filed need not be addressed. The trial court was correct in entering judgment for Central National and Employers on opening statements because they are excess carriers.
8. The contention of insurers who issued policies after Papworth filed his government claim that they are absolved from liability because of the City's failure to disclose the claim on its application for insurance must be rejected for failure to raise the issue in pleadings in the trial court.
In resolving the issues raised by this appeal we treat as established the facts stated in court's Statement of Decision where no party has challenged the finding. Where such a challenge is made we recite the evidence adduced in the trial court in the light most favorable to the judgment. Because of the unusual number of issues involved we recite additional facts which are pertinent to each issue in conjunction with the discussion of it which follows.
With the trial court having entered its judgment in Phase I while reserving trial of insurance bad faith issues for the still pending Phase II there exists the possibility that the appeal from the judgment in Phase I violates the single judgment rule—that resolution of insurance bad faith issues against some insurers may affect liability of these insurers to the City and allocation of the liability among insurers. We agree with the parties responding to our letter raising the question that the single judgment rule does not bar this appeal.
The trial court clearly did not abuse its discretion in severing for a later trial the insurance bad faith issues. Guntert v. Stockton (1974) 43 Cal.App.3d 203, 117 Cal.Rptr. 601 and Highland Dev. Co. v. Los Angeles (1985) 170 Cal.App.3d 169, 215 Cal.Rptr. 881 hold that the single judgment rule does not bar appeal from a judgment in a properly severed portion where hearing the appeal on the merits contributes to judicial efficiency or avoids hardship to the parties. Here the matter is appealable from a final single judgment as to those of the insurers who are not involved in Phase II. Resolution of this appeal as to all parties rather than piecemeal as to some only promotes judicial efficiency.
INSURANCE COVERAGEA. Facts Relevant to Insurance Coverage of Liability Resulting From Continuous and Repeated Exposure.
The Papworth property, situated on a plateau overlooking the sea and bounded by a cliff leading to the beach, is located in the Bluff Cove area of the City. It was purchased by Papworth in August of 1971. The property adjoins a steep channel located on “parkland” owned by the City in which the City during the relevant period operated, a storm drain. The evidence establishes that beginning at least as early as 1966 activity of the City in the design and maintenance of its storm drain system periodically and consistently contributed both to relatively minor erosion damage to the Papworth property in 1978 and to activation of a deep-seated landslide which effectively destroyed the property in 1981. Dating from the year prior to the time of Papworth's acquisition into 1979 the City periodically but negligently engaged in futile efforts to mitigate the deficiencies in its drainage system.
During the relevant period the City was insured against liability for property damage by general comprehensive liability or municipal liability policies issued by the following carriers, all parties to the consolidated actions.1
1. Fireman's which issued a primary insurance policy for the period July 1, 1971 to July 1, 1974 with limits of $500,000 per year and an excess policy for the same period with limits of $5 million.
2. Central Mutual Insurance Company (Central Mutual) which issued a primary policy for the period July 1, 1974 to November 1, 1975 with limits of $300,000 per occurrence and in the aggregate.
3. Employers Reinsurance Corporation (Employers) which issued an excess policy for the period July 1, 1974 to July 1, 1975 with a limit of $5 Million.
4. Jefferson which issued a primary policy for the period November 1, 1975 to November 1, 1978 with limits of $300,000 which as we explain later in this opinion are yearly limits.
5. Admiral which issued a primary policy for the period November 1, 1978 to July 1, 1980 with limits of $1 million per occurrence per calendar year.
6. Central National which issued an excess policy for the period July 1, 1975 to November 1, 1976 with limits of $10 million.
7. Stonewall which issued an excess policy for the period November 1, 1976 to November 1, 1977 with limits of $4.7 million.
8. Maine Bonding & Casualty Company (Maine Bonding) which issued an excess policy for the period November 1, 1977 to November 1, 1978 with limits of $5 million.
9. Puritan Insurance Company (Puritan) which issued an excess policy for the period November 1, 1978 to November 1, 1979 with limits of $4 million.
10. Canadian which issued a policy with limits of $1 million per occurrence over self insured retention of $50,000 for the period July 1, 1980 to July 1, 1982.
11. Midland Insurance Company which issued a policy excess to that of Canadian for the period July 1, 1981 to July 1, 1982 which was exonerated from liability in the trial court and against whom no appeal has been taken.
With insignificant variations in language all of the insurance policies included (or in the case of some excess policies incorporated by “following form”) coverage language drawn from forms developed by the National Bureau of Casualty Writers and the Mutual Insurance Rating Bureau in 1966 and revised in 1973 by their successor the Insurance Services Office (ISO). (See California Insurance Law and Practice §§ 49.01[2, 49.04, pp. 49–6.1–49–7, 49–13.) The pertinent language of the Fireman's primary policy provides:
“The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay because of ․ property damage to which this insurance applies caused by an occurrence.”
“Property damage” is defined in the policy as: “injury to or destruction of tangible property.” “Occurrence” is defined as:
“[A]n accident, including injurious exposure to conditions which results, during the policy period, in ․ property damage neither expected nor intended from the standpoint of the insured.”
The Fireman's excess policy covering the same period as its primary policy and the other insurance policies here involved contain with insignificant variations a different definition of “occurrence” substantially the same in all of these policies. Fireman's makes no argument that the definition of “occurrence” contained in its primary policies should be construed differently than the definition in its excess policies. As exemplified by the Jefferson policy the term “occurrence” is defined as:
“[A]n event or a continuous or repeated exposure to conditions which causes ․ damage to property during the policy period that is neither knowingly nor intentionally caused by or at the direction of the insured․ All ․ property damage arising out of a continuous or repeated exposure to substantially the same general conditions shall be considered one occurrence.”
B. Coverage Afforded by Successive Insurance Policies in the Situation of Repeated Exposure to a Continuing Condition.
Understandably various insurer parties argue for different triggers of coverage each asserting the position which benefits it.2 Each of the arguments finds support in some California appellate decision. Nine years ago Division One of the Second District of the Court of Appeal, having completed a detailed canvas of then existing California authority dealing with liability insurance coverage by successive carriers in the case of continuous and repeated harms, stated in California Union Ins. Co. v. Landmark Ins. Co. (1983) 145 Cal.App.3d 462, 193 Cal.Rptr. 461, “It is difficult, if not downright impossible, to reconcile the foregoing authorities.” Since the time of California Union the conflict in appellate court decisions has continued.
California Union (supra ) held: (1) “[I]n a ‘one occurrence’ case involving continuous, progressive, and deteriorating damage, the carrier in whose policy period the damage first becomes apparent remains on the risk until damage is finally and totally complete notwithstanding a policy provision which purports to limit coverage solely to accidents/occurrences within the time parameters of the stated policy term” (145 Cal.App.3d at 476, 193 Cal.Rptr. 461); and (2) an insurance carrier coming on the risk after such damage becomes apparent is also liable for indemnification of the insured where the “damaging causing force” already in motion causes further damage. (145 Cal.App.3d at 476, 478, 193 Cal.Rptr. 461.)
California Union is roundly criticized by dictum in Home Ins. Co. v. Landmark Ins. Co. (1988) 205 Cal.App.3d 1388, 1395, 253 Cal.Rptr. 277, a case involving first-party/property damage insurance and not liability insurance. This criticism was repeated by the same division of the Court of Appeal in Fireman's Fund Ins. Co. v. Aetna Casualty & Surety Co. (1990) 223 Cal.App.3d 1621, 1626, 273 Cal.Rptr. 431, a case dealing with apportionment of liability among insurers who covered the risk insured by liability policies.
While this disparity in Court of Appeal opinions remained unresolved, our Supreme Court in 1990 defined a framework of analysis which points to a resolution of the coverage issue. In Prudential–LMI Commercial Insurance v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230, the Court while limiting its holding to the situation of first-party/property damage insurance, and expressly reserving judgment on the question of third-party/liability insurance, reached a result similar to Home Insurance, supra. The Court looked to the reasonable expectations of the insured and predictability to insurers in establishing reserves in reaching its conclusion. (51 Cal.3d at 699, 274 Cal.Rptr. 387, 798 P.2d 1230.)
Insureds in first-party/property damage cases generally calculate their insurance needs with a view to the current situation of their property. They thus look primarily to the insurance at the time the loss is manifest for indemnity. These policies typically, as did the policy involved in Prudential LMI, require the insured to submit proof of claim within sixty days after the loss, and in the event the insurer does not pay, to bring action within twelve months of the loss' inception. (Prudential LMI 51 Cal.3d at 679–680, 274 Cal.Rptr. 387, 798 P.2d 1230.) Insurers can better predict reserve requirements if manifestation is the trigger because they will neither be liable in first-party cases for damage first manifesting itself after their policy periods expire nor liable for premanifestation harms predating their policies. (Ibid., at 699, 274 Cal.Rptr. 387, 798 P.2d 1230.) This corresponds with the expectation of the insured who has purchased insurance based on current property values.
We conclude that Prudential–LMI 's analytical framework requires that in third-party/liability insurance involving continuous and repeated exposure to a continuing series of loss causing events of the same character a “continuous trigger” of coverage applies: all carriers on the risk from inception of harm to the time the loss is no longer contingent are liable to the insured.
The definition of “occurrence” in the relevant policies including as it does “continuous exposure” led the City reasonably to expect that the insurance policies of all the insurers here involved would cover loss from occurrences in their respective policy periods. On the record here the City's conduct operating to cause the landslide and erosion caused repeated and continuing damage through the period from 1971 until the Papworth property was effectively destroyed. The damage was physical and tangible although in its earlier stages it was occult rather than manifest. (See Holtz v. San Francisco Bay Area Rapid Transit District (1976) 17 Cal.3d 648, 131 Cal.Rptr. 646, 552 P.2d 430 holding that loss of lateral support to real property is tangible physical damage.) No time limitation on proof of claim or suit upon the insurance policies commencing with inception of loss limits this expectation.
In establishing reserves the insurance industry was aware of the occurrence definition contained in general comprehensive and municipal liability policies including the special provision of that definition for continuous and repetitive exposure causing property damage. It was aware from the distinction drawn in the policies between occurrence and legal liability of insureds that conduct of insureds meeting the definition of occurrence could result in liability of the insureds years later.
When the relevant policies were written, comment emanating from one of the draftsman of the 1966 occurrence language had alerted the industry to the fact that, “In some exposure type cases involving cumulative injuries it is possible that more than one policy will afford coverage.” (Elliott, The New Comprehensive General Liability Insurance Policy (S. Schreiber ed. 1968).) The industry was aware also that under the form General Comprehensive Liability Policy there would be instances of injury taking place over an extended period of time before injury was evident and that the definition of occurrence serves to identify the time of loss as that which occurs within the policy period.3 (Ibid., at 12–15; see American Home Prod. v. Liberty Mut. Ins. Co. (S.D.N.Y.1983) 565 F.Supp. 1485, 1500–1502 [describing this drafting history].) The insurer parties here involved could have avoided the exposure created by their policies by writing them in the claims made form, but they did not and presumably calculated reserves and premiums accordingly. If the insurer parties calculated premiums in light of what was published they will reap a windfall if the teaching of the publications is ignored. If they did not take note of the publications they will be relieved of a deliberately risky management decision.
Unquestionably the long tail of coverage occasioned by the 1966 adoption of the occurrence concept substantially decreased predictability in establishing insurer reserves. The longer the period a reserve must cover the greater the chance of the development of new liability creating legal doctrine and the discovery of novel factual bases of liability fitting existing doctrine. The greater the time span covered the greater is the uncertainty created by the prospect of inflation affecting the amount of claims that must be paid.
Hence it is conceivable that Prudential LMI could be construed to relieve insurers of the impact of what seems to us to be a rather clear, but not necessarily compelled, meaning of the occurrence liability insurance policy. A public policy favoring predictability to insurers in setting reserves with a corresponding anticipated reduction in the cost of insurance might control. The question essentially is whether insurer or insured is to bear the consequences of the unexpected: a conflict between the reasonable expectations of the insured which paid premiums in consideration of transferring risk to the insurer and the interests of the insurers and the public in avoiding overreserves to cover potential risk of the unexpected with insurance premiums calculated accordingly. This question seems at present to be firmly resolved in favor of insureds by our Supreme Court. Liability insurance covers “forms of liability ․ created after the formation of the policy.” (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) We see no significant difference between the effect on predictability of insurer reserves of uncertainty in legal doctrine and uncertainty in facts creating liability.
We thus conclude that, subject to substantial limitations which we discuss below, the policies of insurers issued to the City from 1971 onward covered the City's liability to Papworth.
THE APPLICATION OF DEDUCTIBLES
Having concluded that the Government Claims Act barred Papworth from seeking damages for actions of the City prior to September 1, 1976 and that the Papworth property was a total loss on February 1, 1980, the stipulated date of constructive taking in the Papworth action, the trial court held that only the carriers on the risk between these dates were responsible for indemnification of the City. It thus allocated the obligation of indemnification to Jefferson whose policy periods spanned the time from November 11, 1975 until November 1, 1978 and Admiral whose policy periods spanned the time from November 1, 1978 until July 1 1980.
The trial court then concluded that the obligation of Jefferson was limited by $3,000, the sum of the $1,000 deductibles applicable to occurrences in each of its policy periods. It concluded also that the obligation of Admiral was limited only by $50,000, the self insured retention of the City in Admiral's policy period November 1, 1978 to November 1, 1979, despite a trial court conclusion that Admiral's policy for the subsequent year was also triggered. In this appeal the City contends that only one deductible in the amount of $1,000 was applicable while Admiral contends that its obligation should have been reduced by $100,000, the sum of the retentions in both of its policy periods.
There is something to be said in favor of each of these contentions. The City's position is supported by language in California Union Ins. Co. v. Landmark Ins. Co., supra, 145 Cal.App.3d 462, 193 Cal.Rptr. 461 and Snapp v. State Farm Fire & Cas. Co. (1962), 206 Cal.App.2d 827, 24 Cal.Rptr. 44 and by Keene Corp. v. Ins. Co. of North America (D.C.Cir.1981) 667 F.2d 1034 upon which California Union relies. These cases all declare that carriers covering a loss from repeated and continuous exposure are jointly and severally liable for the loss, and Keene holds in addition that the insured “may select the policy under which it is to be indemnified.” (667 F.2d at 1049–1050.) Once the insured has selected a policy the insurer whose policy is selected it entitled to equitable subrogation and contribution from other insurers on the risk. (667 F.2d at 1050.) Conversely, the liability of an insurer to its insured is contractual, and included in Admiral's two policy periods which the trial court found covered the loss are two self insured retentions of $50,000 each.
If we were approaching the problem afresh and if we agreed with the trial court's conclusion that carriers on the risk before September of 1976 were not obligated for indemnity we might well accept Admiral's contention. The deductible and self insured retention provisions of the relevant insurance policies are clear and unambiguous in the context here involved,4 and the City makes no argument to the contrary. One could conclude that while all insurers are jointly liable the amount of liability for indemnity is reduced by the cumulative amount of deductibles in all policies which cover the risk.
However we are not writing on a clean slate. The rule of Keene has apparently been accepted in California and respect for stare decisis counsels that we follow it. This does not, however, mean that the City's contention is entirely correct. While it may select the policy or policies which indemnify it, the indemnity obligation is restricted to the limits of the triggered policy or policies. The Jefferson limits for example are $300,000 per year for each of three years.5 As we explain below primary liability policies must be exhausted before excess policies are triggered so that the City may not look to the Central National, Stonewall, and Maine Bonding policies which are excess to Jefferson to support its contention that only one $1,000 deductible should apply.
While addressing the contentions of the City and Admiral the foregoing does not resolve the question of the impact of deductibles in this case. In other portions of this opinion we hold that the trial court was in error in determining that only insurers on the risk after September 1, 1976 are responsible for indemnity and remand the matter for further determination of the February 1, 1980 cut-off date. Application of the Keene approach thus dictates that the City is entitled to select for indemnity any of the primary insurance policies on the risk sufficient to cover the indemnity obligation. The deductibles in the selected policies will apply. The insurer or insurers whose policies are selected will then be entitled to equitable subrogation and contribution from other insurers on the risk in the manner which we explain later.
THE LIMITATION THAT ONLY A CONTINGENT RISK IS INSURABLEA. The Facts Relevant to Contingency of Risk.
The City was aware of deficiencies in its storm drain system for at least eight years prior to Papworth's 1971 acquisition of his property. In 1963 a Storm Drain Deficiency Study conducted by the City found in general that the system lacked adequate capacity and in particular that the portion of the storm drain system located in the City parkland adjacent to the Papworth property (the parkland drain) was deficient. Two years later a geological study commissioned by the City found that the geology of the steep walled gully in which the parkland drain was located posed a minimum hazard although deterioration of berms and drainage devices could lead to destructive erosion of the slope below the lot subsequently purchased by Papworth. The recommendations of the 1963 study were not implemented because of the City's determination that funds were not available.
In 1970 Papworth's predecessor in interest complained to the City of erosion in the parkland and requested that the corrugated storm drain pipe there located be extended. In response to this complaint the drain was extended from its original outlet to a point on the beach shortly before Papworth purchased his property.
Papworth purchased the relevant property in August of 1971. In the winter of 1971–72 there was a break in the storm drain pipe. Papworth became concerned that the drain was causing erosion in the parkland area and communicated his concern to the City. Due to the City's prioritization of funds to other purposes which precluded more effective repair, and as a temporary measure, the outlet of the drain was extended with gunited mesh. In 1972 cracks appeared in the Papworth dwelling but were attributed by him to settling of fill, a condition for which the City was not responsible. No problems were encountered with the gunite extended drain in 1972 and 1973, and in August of 1973 Papworth informed the City that the temporary repair to the drain seemed sufficient.
The same year Papworth having retained a soils engineer advised the City that if the storm drain situation were not permanently corrected by relocating the drain the Papworth home would eventually be destroyed by erosion. The then City Engineer was of a contrary opinion. Later the gunite began to deteriorate, and Papworth repeatedly over the next four years complained to the City that the drain was deficient. Over this period there was further cracking in the walls and foundation of the Papworth house and cracking in the adjacent street as well. This was also attributed to settlement of fill.
On September 2, 1977 Papworth filed a claim against the City pursuant to Government Code sections 905 et seq. Founded in negligence and nuisance, the claim asserted that the storm drain was undermining the Papworth property and eroding the cliff adjacent to it. The claim asserted further that the erosion would continue absent appropriate action by the City. It sought compensation of $150,000 for the estimated loss in value of the Papworth property because of erosion in the parkland and the lack of a clear prospect that the erosion would be stabilized and the consequent risk that the Papworth house would be undermined and destroyed. The filing of the claim was motivated by Papworth's “five years of frustration” in dealing with the City on the problem of the storm drain. Because of the claim the City expected to be sued.
The winter of 1977 and 1978 was one of exceptionally heavy rainfall. The parkland drain pipe burst, the guniting was destroyed, and erosion extended from the parkland onto the Papworth property destroying six feet of the back yard and undermining the back fence. Papworth believed this was a “one time event.” The City repaired the burst pipe and regunited the storm drain channel.
On February 1, 1978 Papworth filed suit on his claim against the City asserting the theories of negligence and nuisance, among others, but not including a cause of action for inverse condemnation. The complaint also sought an injunction to compel an adequate storm drain. This complaint was not served.
A 1978 repair guniting the storm drain failed in 1979 and was repeated after the 1979 failure. The 1979–1980 season was also one of unusually heavy rain. Water from the storm drain ran over the Papworth property and damaged fences, uprooted trees and undermined its lateral support. In January of 1980 there was further damage to the Papworth property from a burst underground concrete pipe, and further cracking of the residence. A geological report prepared in 1980 described its findings of the cause of the damage to the residence as inconclusive. On March 4, 1980 Papworth filed and subsequently served an amended complaint which added a cause of action for inverse condemnation. By 1981 the Papworth home was effectively destroyed. The bedroom wing built beneath the remainder of the house had moved by over one foot, and the house had deformed dramatically. In the trial of Papworth's action against the City the parties stipulated that for the purposes of inverse condemnation the date of taking was February 1, 1980. Apparently because of the stipulation the trial court made no findings with respect to post stipulation damage.
Late in 1981 further geological examination developed for the first time the fact that the damage to the Papworth house and the repeated failures of the storm drain system were caused by a large, deep-seated landslide that had become active as early as 1966. The landslide had been activated because of deficiencies in the storm drain system as constructed in the 1920's. A failure to extend the drain to the beach resulted in both leakage of water into the underground structure and removal of lateral support both of which accelerated the slide and consequent eventual destruction of the Papworth property. The landslide “picked up speed” in years of heavy rainfall and had gained in intensity during the heavy rains from 1977 into 1980.
On this evidence the trial court concluded and found:
“The landslide which ultimately caused the destruction of the Papworth home was a contingent and unknown event and could be insured. Even before Papworth purchased the property in 1971, the City was on notice that the drain in the gully next to the property was causing erosion. However, until 1981 ․ no one was aware of the existence of the landslide which caused the damages ․ which Papworth recovered against the City․ This known erosion could have continued for many years without destroying the Papworth residence had it not triggered the undiscovered (until 1981) landslide.”
No party questions this finding as lacking evidentiary support.
B. The Law Relevant to the Question of Contingency.
Insurance Code section 22 defines insurance as “a contract whereby one undertakes to indemnify another against, loss, damage or liability arising from a contingent or unknown event.” Insurance Code section 250 limits insurability to events which are “contingent or unknown, whether past or present.” 6 “Contingent or unknown” as used in sections 22 and 250 is not a self defining term, and recent Court of Appeal opinions are in conflict as to the appropriate definition.
Fireman's Fund Ins. Co. v. Aetna Casualty & Surety Company, supra, 223 Cal.App.3d 1621, 273 Cal.Rptr. 431 gives broad meaning to the terminology. Insurance is prohibited “where the forces which eventually lead to a loss were an immediate threat of loss when the policy was issued.” (223 Cal.App.3d at 1625 fn. 2, 273 Cal.Rptr. 431.) “[I]t is the damage which must be ‘contingent or unknown’ and not the liability of the insured or cause of the damage.” (223 Cal.App.3d at 1627 fn. 5, 273 Cal.Rptr. 431.) (See also Pines of La Jolla Homeowners Association v. Industrial Indemnity (1992) 5 Cal.App. 4th 714, 721, 7 Cal.Rptr.2d 53.)
We respectfully disagree with the narrow definition of contingency enunciated in Fireman's Fund v. Aetna. First, we cannot conceive how a loss covered by third party liability insurance can be uninsurable when liability is unknown. Insurance Code sections 22 and 250 are worded in the disjunctive. To be insurable the risk must be either contingent or unknown.
Second, section 250 recognizes that insurance is available for unknown past events, and in the context of liability insurance it is the unknown liability of the insured for past exposure that is relevant. (Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 27–29, 148 Cal.Rptr. 653; Keene Corporation v. Ins. Co. of North America (D.C.Cir.1981) 667 F.2d 1034, 1041.)
Third, our conclusion is compatible with our Supreme Court's decision in Sabella v. Wisler (1963) 59 Cal.2d 21, 34, 27 Cal.Rptr. 689, 377 P.2d 889) and the Court's characterization of Sabella in Prudential–LMI Com. Insurance v. Superior Court, supra, 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230. “[E]ven if it were inevitable that the damage would have occurred at some time during ownership of the house, the loss was covered because such loss was a contingency or risk at the time the parties entered into the policy.” (Ibid., at 696, 274 Cal.Rptr. 387, 798 P.2d 1230.)
Fourth, the term “contingent or unknown” must be read in context. For example, in life insurance to which sections 22 and 250 apply contingency and knowledge cannot apply to the fact of death. What is permissibly insured is not the known and uncontingent fact but rather when the inevitable will occur. Contingency is defined in terms of when and not in terms of if. In the context of liability insurance the phrase “contingent or unknown” should be read in the context of the contingency and knowledge of claims against the insured at the inception of a relevant policy period.
So long as at the time that the insurance is issued it is contingent whether activity of the insured will result in a claim within the policy period the risk is insurable. (Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 830, 24 Cal.Rptr. 44 cited with approval in Prudential–LMI Insurance v. Superior Court, supra, 51 Cal.3d at 695, 274 Cal.Rptr. 387, 798 P.2d 1230.) The degree of the risk is a matter left to the parties in establishing after appropriate disclosure the premium paid to transfer the risk.
Applying the test which we here adopt the conclusion of the trial court that the risk of the Papworth claim was contingent or unknown at least until September 2, 1977 when Papworth filed his government claim against the City must be accepted. Our Supreme Court has recently declared, “Determining when appreciable damage occurs such that a reasonable insured would be on notice of a potentially insured loss is a factual matter for the trier of fact.” (Prudential–LMI Com. Insurance v. Superior Court, supra, 51 Cal.3d 674, 687, 274 Cal.Rptr. 387, 798 P.2d 1230.) While enunciated in the context of first-party/property damage insurance this proposition appears equally applicable to the question of contingency in third-party/liability insurance. Here the factual predicate for the trial court's conclusion is supported by substantial evidence. Papworth, the City, and everyone else concerned, were unaware of the deep-seated landslide that eventually destroyed the Papworth property. The evidence shows that the City had embarked on good faith albeit ill advised efforts to stem the damage from erosion. This evidence supports inferences of contingency and lack of knowledge. That the City was negligent in these efforts does not preclude insurance which indemnifies for the consequences of the negligence.
C. The Consequences to Contingency of the Papworth Government Claim and the Subsequent Filing of the Papworth Lawsuit Against the City.
The insurer parties with policies incepting after September 2, 1977 argue that whatever might have been contingency of the City's loss incident to the damage caused to Papworth prior to that date the contingency was removed when Papworth's government claim against the City was filed. This argument is founded primarily upon the definition of contingency contained in Fireman's Fund Ins. Co. v. Aetna, supra, 223 Cal.App.3d 1621, 1627, 273 Cal.Rptr. 431 to the effect that it is the damage which must be contingent or unknown and not the liability of the insured or the cause of the damage. The argument finds support in the fact that the City expected that it would be sued on the claim.
We have concluded, however, that the appropriate test of insurability is lack of knowledge or some significant contingency. Here Papworth's government claim asserted a liability of the City of a wholly different character than that established in Papworth's action. The claim was based upon erosion within the parkland channel which diminished the value of the Papworth property by the threat or erosion to it and the removal of lateral support. The trial court found that there was a loss when the claim was filed due to stress cracks and removal of lateral support. But when the claim was filed it was unknown to everyone that the real threat was not merely of these harms, but rather that the entire property including the improvements would be devastated by the landslide. The difference in degree is so great as to be a difference in kind. Applying the test which we adopt this latter threat, the one that in fact materialized to cause the great bulk of the Papworth damage, was contingent.
We thus conclude that, except for that quantum of damage which was directly incident only to erosion and removal of lateral support from a portion of the Papworth property in 1978, the filing of Papworth's government claim did not remove contingency so as to prevent insurability. Insurers whose policies incepted after the date of this erosion are entitled to a finding by the trial court that their policies did not cover the amount of this erosion loss if there is evidence in the record supporting apportionment.
Admiral and other insurers whose policies incepted after the Papworth government claim argue that they should be relieved of the obligation to indemnify the City because the claim was not disclosed in the City's applications for insurance. It is certainly possible that these insurers might have been entitled to escape liability by rescinding their policies upon an appropriate showing. (Ins.Code, §§ 331–338.) But the insurers asserting this proposition do not accompany it with the requisite showing that their pleadings in the trial court raised the issue of rescission. As to Admiral the trial court concluded: “No such defense was raised in the pleadings, nor was any prejudice shown.” This finding is not attacked in this appeal.
THE “EXPECTED OR INTENDED” LIMITATION
All of the relevant insurance policies limit the definition of “occurrence” to damage which is neither intended nor expected from the standpoint of the insured. California law is clear that in the instant case the Papworth damage was not intended by the City. Even a conscious disregard of the safety of others does not render the resulting harm intentional so as to preclude insurability. (Peterson v. Superior Court (1982) 31 Cal.3d 147, 158, 181 Cal.Rptr. 784, 642 P.2d 1305.) Here the City's ineffectual efforts to correct the deficiencies in its storm drain were negligent. However these efforts nevertheless support an inference of lack of intent to cause harm.
Nor can it be said on this record that the Papworth loss for which the City was held liable in the underlying action was expected within any relevant policy period prior to sometime in 1981. The relevant policy language treats the expectation as that of the insured. There is testimony of the then City Manager and the then City Engineer that they did not expect the loss. This and the proposition that the true cause of the destruction of the Papworth property was unknown until 1981 support the trial court's conclusion that the loss was unexpected.
We recognize the presence of a counterargument. There is evidence in the record that the futile efforts of the City to stem the effect of erosion were due to its fiscal decisions from as far back as 1963. A public policy encouraging governmental entities to face fiscal responsibility conceivably could counsel a different interpretation of the expected damage limitation in the situation of municipal liability insurance. No legislative or Supreme Court enunciation of such a policy has been called to our attention, however, and it is not our place as an intermediate court to take this step.
THE IMPACT OF INVERSE CONDEMNATION EXCLUSIONSA. The Facts Relevant to Inverse Condemnation Exclusions.
The Fireman's Fund policies exclude from coverage liability “arising under Article I Section 14 of the Constitution of the State of California.” 7 The other relevant insurance policies are more specific with respect to exclusion of inverse condemnation liability. Minutes of a meeting of the Palos Verdes Estate City Council in 1974 disclose that the City declined to purchase inverse condemnation coverage because it involved an additional premium of $1,073. The City was aware that after 1974 no carrier issued coverage for inverse condemnation.
The City tendered defense of the Papworth claim to Jefferson shortly after Papworth filed his amended complaint on March 4, 1980. Jefferson undertook the defense of the claim without a reservation of rights and retained Bruce Gridley as the attorney representing the City in the Papworth action. Jefferson did not inform the City of a reservation of rights because of its inverse condemnation exclusion until September 2, 1982, three weeks before trial was scheduled.
The trial court found and concluded:
“All carriers take the position that there is no coverage for damages for inverse condemnation. The Court agrees that inverse condemnation was validly excluded from coverage, that the City was aware that it had no such coverage, and that the City could not have reasonably expected such coverage․
“․ [T]he court finds that [the] attempted disclaimer [of inverse condemnation coverage by Jefferson] was not effective. A carrier cannot accept the defense without a reservation of rights or disclaimer and shortly before trial, when it would be impractical for the insured to obtain counsel to effectively represent it, inform the insured that it will not pay damages attributable to a specific claim of which it had knowledge for some two years.”
Jefferson does not assert in its briefs that it requested further detail in the statement of decision.
B. The Validity of the Policy Provisions Excluding Inverse condemnation.
To the extent that its finding of validity of the inverse condemnation exclusion in all of the policies includes those issued by Fireman's, the finding is not supported by substantial evidence. An identical exclusion of liability arising under Article I section 14 of the California Constitution has been held ineffective to exclude liability for inverse condemnation. (General Ins. Co. of America v. City of Belvedere (N.D.Cal.1984) 582 F.Supp. 88.) There the court reasoned:
“[T]he language in the policy is to be construed as a layman would read it, not as an attorney or insurance agent might read it․ [I]t is questionable whether the reasonable person of ordinary education and intelligence upon being referred to Article I, Section 19 [as renumbered from 14] would emerge with any conviction that what was meant was inverse condemnation. Although such actions do indeed ‘arise under’ that provision, neither the old section 14 nor the present section 19 make specific reference to inverse condemnation. In fact the words appear neither in the Constitution nor ․ in the index to the Constitution. In order to inform himself that the Section covers inverse condemnation actions, the reasonable layman would either have to consult an attorney or familiarize himself with California law.” (Ibid., at 90.)
We are cited to nothing in the record that indicates that inverse condemnation coverage was unavailable at the inception of the Fireman's policies or that it was available only at an increased premium. On the record we must thus conclude that these policies did not exclude liability for inverse condemnation. Indeed Fireman's makes no argument to the contrary. The only reference to inverse condemnation in Fireman's briefs is a footnote which makes the cryptic statement that inverse condemnation liability is not tort liability and hence not covered. This statement lacks argument which supports this conclusion and hence must be rejected.
C. The Impact of Jefferson's Delay in Notifying the City of Its Reservation of Rights.
An insurer's assumption of the defense of its insured without giving notice of a reservation of rights may preclude the insurer from denying coverage because of that which could have been reserved. (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754, 161 Cal.Rptr. 322.) This preclusion results from either a known waiver by the insurer or estoppel where the insured is prejudiced by the insurer's failure. (Ibid., at 754–755, 161 Cal.Rptr. 322; see also Ins. Co. of the West v. Haralambos Beverage Company (1987) 195 Cal.App.3d 1308, 1320, 241 Cal.Rptr. 427; Val's Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 126 Cal.Rptr. 267.)
Here the record supports the inference that the City detrimentally relied on Jefferson's nonassertion of its reservation of rights. By not reserving its rights with respect to inverse condemnation Jefferson placed the counsel it had selected in a conflict of interest in the preparation and pretrial conduct of the City's defense of the Papworth action. By the time the notice of reservation of rights was sent trial was at hand, and the harm inherent in compromise of attorney-client confidentiality had accrued. (See Glacier General Assurance Co. v. Superior Court (1979) 95 Cal.App.3d 836, 157 Cal.Rptr. 435.)
Jefferson argues that the City was not prejudiced because it knew that the Jefferson policy did not cover its inverse condemnation liability. This argument misses the point. What the City did not know was that Jefferson was going to assert the exclusion, and what it was entitled to believe was that Jefferson would not.
D. The Effect of the Inverse Condemnation Exclusions.
As to the relevant insurers other than Fireman's Fund and Jefferson—those with a valid and enforceable inverse condemnation exclusion—the question remains as to the impact of the exclusion upon the obligation of the insurers to indemnify the City for its liability to Papworth. The trial court found with respect to this issue:
“[T]he judgment [in the Papworth action] was vacated and the funds paid in settlement of the Papworth claim were to dispose of the case and were not designated as payment of an inverse condemnation judgment. The parties had their own reasons to want the judgment vacated, and those reasons may have been compelling, but the effect of the stipulation and order vacating the judgment is that the funds paid in settlement of the claim cannot now be said to have been paid to satisfy a judgment for inverse condemnation.”
The City argues in support of these findings and conclusions that the court order based on the stipulation settling the Papworth action pending its appeal vacated the Papworth judgment for all purposes, and hence the judgment and jury verdict on which it was based are nullities. Persuasive case law is to the contrary.
Unlike the doctrine of res judicata, issue preclusion by collateral estoppel requires only that the prior adjudication upon which it is based be “sufficiently firm to be accorded preclusive effect.” (7 Witkin, California Procedure (3d ed. 1985) Judgments, § 216, p. 653 quoting Second Rest. of Judgments § 13.) “Where an appeal is settled favorably to the plaintiff and then dismissed the Restatement analysis and reason itself dictate that the trial court judgment reemerges with sufficient finality to permit application of collateral estoppel.” (Sandoval v. Superior Court (1983) 140 Cal.App.3d 932, 937, 190 Cal.Rptr. 29; see also Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 911, 226 Cal.Rptr. 558, 718 P.2d 920; McClain v. Rush (1989) 216 Cal.App.3d 18, 264 Cal.Rptr. 563.)
Where an underlying action against a governmental entity proceeds solely on the theory of inverse condemnation, a judgment is entered against the entity, and pending appeal the case is settled with a stipulation that the judgment be vacated, and the appeal is abandoned, collateral estoppel precludes the entity's denial that its liability was in inverse condemnation. (City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 276 Cal.Rptr. 438.)
City of Laguna Beach, decided after the trial court's judgment demonstrates that the trial court's conclusion that the settlement of the Papworth action pending appeal eliminated its preclusive effect was erroneous. The question remains, however, of the impact of issue preclusion in the case at bench.
E. The Impact of the Enforceable Inverse Condemnation Exclusions.
The judgment in the Papworth action recites jury verdicts awarding Papworth damages of $1,188,791 on his negligence and nuisance claims against the City and that damages awarded on Papworth's inverse condemnation claim were $1,881,946. The difference is attributable to prejudgment interest, attorney's fees, and repair costs allowable on the inverse condemnation claim. Judgment was entered for the larger amount and for this reason the record is silent with respect to costs allowable on the negligence nuisance claims. The nature of the jury verdict raises the question of the scope of the inverse condemnation exclusion in the relevant insurance policies—whether it applies to the entire Papworth settlement of $1.6 million, only proportionally, or not at all.
The City argues that it is impossible to attribute any part of the settlement to either inverse condemnation or negligence/nuisance liability so that the exclusion is inapplicable. This argument ignores the fact that the record includes a jury verdict from which allocation between insured and uninsured liability may be inferred once costs allowable to the negligence/nuisance claim are determined.
Although arguing for application of their inverse condemnation exclusions to the entire Papworth settlement the insurer parties whose policies incorporate the exclusion argue in the alternative for apportionment. We conclude that their alternative argument should be accepted.
The insurers' argument for application of the inverse condemnation exclusion to the entire settlement finds support in City of Laguna Beach, supra. There the Court of Appeal held that the municipality was not entitled to produce evidence of its negligence where the underlying action proceeded only on the theory of inverse condemnation. (226 Cal.App.3d at 833, 276 Cal.Rptr. 438.) While the City of Laguna Beach court expressed no rationale for this conclusion, it appears that a significant interest in avoiding relitigation of issues determined in the underlying action supports it. In this respect the instant case is distinguishable in that a jury verdict delineating the quantum of damages awarded for negligence and nuisance reemerged after settlement along with the inverse condemnation award. While of no preclusive effect against the insurers who were neither parties nor represented by a party on the issue in the underlying action, the negligence/nuisance award is part of that which results in issue preclusion favorable to them. Benefitted by issue preclusion incident to the jury award supporting the vacated judgment, the insurers must take the bad with the good.
Inverse condemnation is sometimes the sole basis of a cause of action as where liability is imposed without fault because it is proximately caused by the use of public improvements deliberately planned and built. (Yee v. City of Sausalito (1983) 141 Cal.App.3d 917, 919–920, 190 Cal.Rptr. 595.) In other cases inverse condemnation is an alternative to negligence as a theory of recovery. (Bozaich v. State of California (1973) 32 Cal.App.3d 688, 693 fn. 2, 108 Cal.Rptr. 392.) In the latter instance the inverse condemnation theory is significant only as it relates to the remedy—to the measure of damages. To the extent of the measure of damages for negligence and nuisance the City incurred a legal obligation to compensate Papworth irrespective of inverse condemnation, and this form of legal obligation is covered by the relevant insurance policies.
The net result is that Fireman's and Jefferson cover the entire $1.6 million settlement of the Papworth claim. The other insurers whose policies apply cover only that proportion of the settlement which the jury's award of damages for negligence/nuisance as adjusted for costs bears to the entire judgment in the Papworth action.
THE EFFECT OF THE LIMITATIONS PERIOD OF THE GOVERNMENT CLAIMS ACT
The trial court held:
“(1) ․ [T]he [Papworth] claim dated August 19, 1997 established the parameters of the liability of the City; and (2) ․ since no damage which occurred prior to August 19, 1976 could be recovered (the claim was filed September 2, 1977 and that date would control, but it is inconsequential here) carriers providing coverage prior to that date are not liable.” !Aug. CT 8!
This holding is erroneous. It treats liability of the insured within a policy period as dispositive when in fact the policies cover “occurrences” within a policy period although liability occasioned by the occurrence arises later. Papworth was not precluded by the time limitations of the Government Claims Act from asserting liability against the City for damage appearing at the culmination of the City's activity because the damage causing events occurred more than one year before the culmination.
United States v. Dickinson (1947) 331 U.S. 745, 67 S.Ct. 1382, 91 L.Ed. 1789, quoted and cited with approval by our Supreme Court in Pierpont Inn, Inc. v. State of California (1969) 70 Cal.2d 282, 292–293, 74 Cal.Rptr. 521, 449 P.2d 737, authoritatively establishes this proposition. In Dickinson the United States Supreme Court dealt with continuous and repeated damage incident to a public improvement, there periodic increases in water levels created by a dam. In holding that the damaged landowner need not sue periodically as the damage occurred or be barred by the statute of limitations from suing on the earlier damage the Court announced:
“The source of the entire claim—the overflow due to rises in the level of the river—is not a single event; it is continuous․ [A]s there is nothing in reason, so there is nothing in legal doctrine, to preclude the law from meeting such a process by postponing suit until the situation becomes stabilized.” (331 U.S. at 749, 67 S.Ct. at 1385.)
Bellman v. County of Contra Costa (1960) 54 Cal.2d 363, 5 Cal.Rptr. 692, 353 P.2d 300 and similar cases relied upon by Fireman's as supporting the bar of the Government Claims Act are inapposite. As explained by our Supreme Court in Pierpont Inn, Inc.,
“[E]ach of the cited decisions demonstrates an awareness that situations might arise wherein a property owner should not be permitted purposely to withhold notice from a governmental agency which he knows is proceeding mistakenly, but innocently, to damage his property in order to augment his damages and increase his recovery.” (70 Cal.2d at p. 291, 74 Cal.Rptr. 521, 449 P.2d 737.)
Here Papworth was during the relevant period unaware of the harm caused by the City. Hence Dickinson and Pierpont Inn make clear that in the case at bench the time limitation of the Government Claims Act does not immunize the earlier insurers from liability on their policies to Papworth. Subject to the other limitations we state in this opinion all primary insurers in whose policy period there was an occurrence up to the point where the loss to the City was no longer contingent are responsible for indemnification to the City.
THE RELATIVE LIABILITY OF PRIMARY AND EXCESS INSURERSA. The Principles Governing Allocation of Liability as Between Primary and Excess Carriers.
The relative obligation of primary and excess insurers of the City to indemnify it for the Papworth loss arises in two contexts. First, it is relevant to the City's contention that it is entitled to indemnity subject to only one deductible for only one policy period. Second it is significant to allocation of the liability of insurers of the City as among themselves.
As to the obligation of excess insurers to the City the question is one of contract. The Fireman's Fund excess policies state:
“The Company shall be liable for payment under this policy only after the insured and the insurers affording coverage under the primary policies ․ have paid or become obligated to pay the applicable amount or amounts of such insurance following final judgment ․ or by written agreement of the insured, the claimant, the Company and the aforesaid insurers”
Some of the other excess policies contain similar provisions and some are express that the primary policies are those listed on the pertinent declarations. There is, however, a latent ambiguity in these provisions because none cover the situation here—that in which several primary policies cover the eventual liability of the insured. Here there is ample primary coverage to fund the City's liability to Papworth. California Union, Snapp, and Keene while establishing a principle of joint and several liability of primary insurers should not be construed as creating an otherwise nonexistent liability of excess insurers, and it seems clear from the City's assertion that all of its primary insurers covered its liability that the City's reasonable expectations treated the excess policies as a secondary source.
As between the primary insurers on the one hand and the excess insurers on the other there is no privity. The allocation of liability among insurers covering a loss is a matter of equitable principles and public policy. (Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal.3d 359, 369, 165 Cal.Rptr. 799, 612 P.2d 889; Olympic Insurance Co. v. Employees Surplus Lines, Inc. (1981) 126 Cal.App.3d 593, 178 Cal.Rptr. 908.) “Liability under a secondary [excess] policy will not attach until all primary insurance is exhausted, even if the total amount of primary insurance exceeds the amount contemplated in the secondary policy.” (Ibid., 126 Cal.App.3d at 600, 178 Cal.Rptr. 908; see also North River Ins. Co. v. American Home Assurance Co (1989) 210 Cal.App.3d 108, 112, 257 Cal.Rptr. 129; Hartford Accident & Indemnity Co. v. Sequoia Ins. Co. (1989) 211 Cal.App.3d 1285, 1302, 260 Cal.Rptr. 190.)
We thus conclude that none of the excess insurers is obligated to indemnify the City for its liability to Papworth.
B. The Status of Admiral As a Primary or Excess Carrier.
Admiral contends that having issued policies to the City with a $50,000 self insured retention it is an excess carrier. While there is support in the cases for Admiral's position (see e.g. Nabisco, Inc. v. Transport Indemnity (1983) 143 Cal.App.3d 831, 192 Cal.Rptr. 207) we are here dealing with allocation of the responsibility as among the insurers for indemnification of the City. As to this question the trial court found that Admiral was referred to as a primary carrier in an agreement entered into at the time of the Papworth settlement. This finding is not challenged by Admiral and supports the trial court's treatment of Admiral as a primary carrier.
ALLOCATION OF LIABILITY AMONG THE PRIMARY INSURERS
With allocation as among them of the liability of the primary insurers to Papworth determined by principles of equity and public policy the formulation of a principle of allocation is no easy task. Equity indicates that all insurers whose policies covered the loss should participate in the cost of indemnifying the insured. Public policy may point in another direction.
Privately obtained liability insurance is the mechanism through which our tort system is primarily financed. The transaction costs of this system are such that almost one dollar of such cost is incurred in order to pay one dollar of compensation. (J. Kakalik & N. Pace, Costs and Compensation in Tort Litigation, Rand Corporation Annual Report 1985–1986.) A principle of allocation which reduces transaction costs by avoiding intrainsurer litigation through the use of a bright line designation of a single insurer liable for the payment may be indicated. If data support the proposition that over the long haul various insurers are likely in different cases to be so positioned that in the end the financial consequences to them of a bright line rule will have essentially the same overall financial impact as equitable apportionment in individual cases then a bright line rule is in order. This data is not before us, and neither the Legislature nor our Supreme Court has declared the public policy consideration to which we refer. In this state of affairs recognition of the role of our court counsels that we not reach the conclusion that public policy controls.
In Home Insurance Company v. Landmark Insurance Company (1988) 205 Cal.App.3d 1388, 253 Cal.Rptr. 277, a first-party/property damage insurance case the Court of Appeal opted for a bright line rule. It held that “as between two first-party insurers, one of which is on the risk on the date of the first manifestation of property damage, and the other on the risk after the date of first manifestation of damage, the first insurer must pay the entire claim.” (205 Cal.App.3d at 1393, 253 Cal.Rptr. 277.) However the Home Insurance Company court reached this result not in reference to the form of data to which we have referred but rather by reasoning:
“Our approach promotes certainty in the insurance industry and allows insurers to gauge premiums with greater accuracy. Presumably this would reduce costs for consumers because insurers will be able to set aside proper reserves for well defined coverages and avoid increasing reserves to cover potential financial losses caused by uncertainty in the definition of coverage․”
Home Insurance Company differs from the instant case in that it involves first-party insurance, a distinction deemed significant by our Supreme Court in Prudential–LMI v. Superior Court, supra, 51 Cal.3d 674, 698, 274 Cal.Rptr. 387, 798 P.2d 1230, but in a different context. More significantly the Home Insurance opinion does not include support for its statement of the impact of its conclusion upon insurer reserve practices and consumer costs. In the situation of the third-party/liability insurance involved in the case at bench this impact is at best unknown absent supporting data, and we have not been furnished with any support. Under the Home Insurance approach current insurers would be required to establish reserves to account for the uncertainty that they would be solely liable for long ago unknowable occurrences in other insurers' policy periods. Whether this will result in lesser reserves and lower premiums than would be the case if liability is apportioned among all insurers on the risk is at best problematic.
We conclude therefore that with no empirical support for the policy statement in Home Insurance its rule should not be applied in third-party/liability insurance. Liability as among the insurers here involved should be apportioned as follows. First, the excess insurers are not responsible for any indemnification obligation; the obligation is that of the primary insurers. Second, all indemnification of the City's obligation to Papworth attributable to the proportionate excess of inverse condemnation liability over negligence/nuisance liability is the responsibility of Fireman's and Jefferson. Third, remaining indemnification should be apportioned among all the primary insurance carriers whose policies incepted while the Papworth liability was contingent. Fourth, as between Fireman's and Jefferson with respect to inverse condemnation indemnification and all of the primary insurers with respect to the remainder of the indemnification the trial court possesses discretion to allocate the obligation utilizing a method which is on the whole fair and reasonable. (CNA Cas. of Cal. v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 620, 222 Cal.Rptr. 276.)
OTHER ISSUESA. The Failure of the Insurers to Settle the Papworth Claim.
The City contends that because before trial some of its insurance carriers did not take the opportunity to settle the Papworth claim for a lesser amount than the actual award, these carriers are now barred from asserting any exclusions from coverage. This issue remains open, in Phase II of the litigation. It must be resolved there.
B. The Period or Periods of the Jefferson Policy.
The Jefferson policy is for the three year period from November 1, 1975 to November 1, 1978. It covers liability for property damage with limits “per Endorsement CSL–1 (3/75375) attached.” There are three separate endorsements for the years 1975 through 1978 each including a limit of $300,000 per occurrence and in the aggregate and a deductible of $1,000 per claim. There are three separate “Declarations” each for a separate policy period.
The trial court concluded that the Jefferson policy covered three separate periods with a limit of $300,000 for each period, an aggregate of $900,000 in coverage. In this appeal Jefferson argues that its policy included one $300,000 limit applicable to the entire three year period.
We conclude that the trial court's determination is correct. At least the policy is ambiguous and the ambiguity must be read against the Jefferson. Moreover the ambiguity is resolved against Jefferson in a stipulation between it and Maine Bonding providing:
“The subject policies of insurance issued by ․ Jefferson ․ provided coverage of $300,000 per occurrence per year as respects property damage․”
Jefferson makes no claim that it sought in the trial court to be relieved of the stipulation.
Jefferson claims also that its policy language defining occurrence limits its exposure to $300,000. This language (like that in the other relevant policies) states that all damage arising from continuous and repeated exposure is deemed a single occurrence. This argument ignores the fact that: (1) the policy covers liability for occurrences within a policy period; and (2) Jefferson issued policies covering three separate periods. Reading as we must the Jefferson policy in a fashion resolving ambiguities against it the language on which Jefferson relies must be construed as referring to one occurrence in a policy period.
C. Reallocation of Defense Costs as Between Jefferson and Other Carriers.
Jefferson contends that the trial court erred in not allocating some portion of its defense costs to Admiral. Jefferson did not raise the issue in the trial court. It cannot now raise the issue on appeal. (Doers v. Golden Gate Bridge, Highway & Trans. Dist. (1979) 23 Cal.3d 180, 184–185, 151 Cal.Rptr. 837, 588 P.2d 1261.)
D. Canadian's Motion for Summary Judgment.
The trial court granted Canadian's motion for summary judgment on the theory that it was undisputed that the Papworth property was a total loss in February of 1980, a date before the inception of the Canadian policy. This conclusion was based upon the trial court's determination that the stipulated date of taking for the purposes of Papworth's inverse condemnation claim established the time of total loss. We conclude that as against anyone other than the parties to it the stipulation is not conclusive, and opposition to the motion includes a factual showing of substantial damage to the Papworth property in 1981 after Canadian's inception. The trial court thus erred in granting the motion for summary judgment.
There is, however, a substantial remaining problem not raised in light of the trial court ruling. The ruling may have been correct but for a different reason than that given by the trial court. It may be that undisputed facts disclose that the stipulated date of taking may have accomplished a merger of the City's obligation to Papworth. If the constructive taking encompassed all of Papworth's interest, then as of its date the City may have been both obligor and obligee of any obligation arising after the date and its post merger obligation liability extinguished. The matter must be remanded to the trial court for reconsideration of its ruling on Canadian's motion for summary judgment and determination of this issue.
Canadian did not participate in the trial of the action. However, its briefs disclose a position on coverage issues similar to that asserted by other carriers and discussed in this opinion. We leave to the trial court the question of the nature of further proceedings with respect to Canadian if its motion for summary judgment is denied on reconsideration. It may be that absent an offer of proof by Canadian of evidence of a tenor not in the record with respect to the nature and cause of the Papworth loss a full trial will not be necessary.
E. Timeliness of the Appeal as to Central National and Employers.
Judgments were entered in favor of Central National and Employers on opening statement. They contend that as to them this appeal was not timely filed. We need not address this contention. Both Central National and Employers are excess carriers and hence not liable for indemnity to the City or for contribution among the primary carriers.
Those portions of the judgment in favor of Stonewall, Employers, Central National, Maine Bonding, Puritan, Covenant Mutual, and Midland are affirmed. The remainder of the judgment is remanded to the trial court for further findings and conclusions consistent with this opinion and if necessary for further proceedings similarly consistent including retrial in the case of a party granted judgment prior to trial or on opening statement if necessary to protect its rights by introducing evidence. Stonewall, Employers, Central National, Maine Bonding, and Puritan, and Covenant and Midland if they incurred these costs, are entitled to costs on appeal payable jointly by the other parties to the appeal except the City. Apportionment of the sum dueStonewall shall be apportioned among the insurer parties responsible to indemnify the City for its loss in the same fashion as the obligation for indemnity is apportioned. The other parties are to bear their own costs.
1. Covenant Mutual Insurance Company which issued a special public entity difference in condition comprehensive liability insurance policy covering the period November 1, 1976 to November 1, 1977 was granted a motion for judgment pursuant to Code of Civil Procedure section 631.8. No party has challenged this ruling on appeal so that the judgment in favor of Covenant must be affirmed.
2. Fireman's argues that its coverage is triggered only when the liability of its insured arises within the period of its policies. This argument confuses the Fireman's policies with claims made insurance. It ignores the fact that it is an occurrence within the policy period and not liability of the insured within the period that is covered.
3. In response to our request to supply publications relating the drafting history of the “occurrence” and “repeated and continuous language as adopted by the Insurance Service Office and its predecessors all insurer parties responding except for Central National objected to our consideration of this history. These objections assert: (1) the material is outside the record of the trial court; (2) the language of the relevant insurance policies is unambiguous so that extrinsic evidence is inadmissible to construe them; (3) the existing publications are an incomplete recitation of drafting history; and (4) unilateral intent is irrelevant to interpretation of a contract. Central National and the City have responded with the material we requested, and no other party has claimed that the fact of publication of the matter submitted by Central National and the City is reasonably subject to dispute or that the material submitted does not accurately reflect what was published. [¶] The objection that the matter we requested is outside the trial court record is misplaced. Judicial notice may be taken on appeal (Evid.Code, § 459) and the material supplied to us is appropriate for judicial notice. (Evid.Code, § 452.) The objecting parties have not questioned either the truth of the fact of publication or that the language of the publications supplied by Central National is correctly quoted. The contention that the relevant insurance policy language is unambiguous if correct supports our conclusion but is belied by the varied interpretations given it by the insurer parties themselves. [¶] All this aside the objections miss the point. We do not consider the drafting history as directly relevant to intent of the insurers. The history is important because after trial of the instant case our Supreme Court in Prudential–LMI declared that one of the factors to be considered in resolving coverage in cases of continuing harm is the impact of the result on insurer reserves. Whether reflecting the intent of the insurers or not, the publications loudly and clearly put them on notice of what was to be considered in calculating their reserves. To return the matter for retrial for consideration of undisputed information, relevant because of a Supreme Court case decided post trial, makes little sense where the information points to one conclusion only.
4. As we explain below Admiral's self insured retention is not conclusive to categorize Admiral as an excess carrier when apportioning liability among the insurers.
5. Later in this opinion we discuss and reject Jefferson's contention that its was a three year policy with one limit of $300,000.
6. Insurance Code sections 22 and 250 coalesce in what has come to be known as the “known loss” or “loss in progress” rule. (See Home Insurance Company v. Landmark Insurance Company, supra, 205 Cal.App.3d at 1393, 253 Cal.Rptr. 277. This rule holds that the insurer on the risk when it ceases to be contingent is liable for future as well as past losses and that insurance is not available to indemnify against losses which are not contingent. (Ibid.)
7. Section 14 of Article I has since been renumbered Section 19.
THOMPSON, Associate Justice, Assigned.* FN* Retired Justice of the Court of Appeal assigned by the Chairperson of the Judicial Council.
LILLIE, P.J., and FRED WOODS, J., concur.