The SIGNAL COMPANIES, a corporation, Signal Oil & Gas Company, a corporation, and Pacific Indemnity Company, a corporation, Plaintiffs and Appellants, v. HARBOR INSURANCE COMPANY, a corporation, Defendant and Respondent.
On December 14, 1963, a dam maintained in the Baldwin Hills area by the Department of Water and Power (DWP) of the City of Los Angeles (City) gave way. Water from the reservoir created by the dam flowed down a canyon causing extensive property damage and personal injury.
The City paid claims in excess of $13,000,000 and obtained assignments from the claimants. Further, the City estimated that the loss of the dam and reservoir itself caused an additional $12,000,000 in damages an aggregate loss to the City of approximately $25,000,000.
Proceeding on the theory that the dam collapse was caused by the combined effect of the drilling operations of several oil companies in the Baldwin Hills area, the City commenced an action against those oil companies to recover the above mentioned damages. Two of the defendants named in that litigation were the Signal Companies, a corporation, and Signal Oil & Gas Company, a corporation. We shall, for convenience, refer to those companies collectively as Signal.
Signal ultimately settled, without trial, its portion of the litigation for $35,000.1
Pacific Indemnity Company (Pacific), Signal's primary liability insurer, contributed $25,000 the limit of its policy to the settlement. Harbor Insurance Company (Harbor), Signal's excess liability insurer, contributed $10,000 under a policy with a limit of $10,000,000.
The instant action is essentially between Pacific and Harbor2 and deals with the question of payment of $94,788.58, which all parties agree was reasonably expended, for investigation and defense of the City's claim against Signal. The trial court ruled that Pacific the primary insurer must bear the entire cost.
Pacific's primary policy is a typical comprehensive liability policy containing a specific covenant To defend Signal against claims within the ambit of the coverage even though groundless.
Harbor's policy, which is clearly stated to be an excess policy, makes various references to the primary coverage, but contains no specific covenant to defend.
In Aetna Cas. & Surety Co. v. Certain Underwriters, 56 Cal.App.3d 791, 129 Cal.Rptr. 47, this court dealt with a dispute which, except for certain procedural differences which we will discuss, Infra, was identical to the case at bench. There the language of the primary and excess policies was the same at the policies here. In fact, Harbor was a party to the action in Aetna, supra.
That case involved an oil well “blow out” in Santa Barbara which caused extensive property damage to a large number of individuals. The limits of the primary policy were $50,000. The limits of the excess policies ran in excess of $20,000,000.
There, as here, settlement of claims exceeded the limits of the primary coverage. In the face of a refusal by the excess insurer to defend, the primary insurer continued defense of the insured beyond its policy limits. The ultimate settlement was well below the limits of the excess coverage. The primary insurer then sought contribution from the excess insurer for the costs of the defense.
Insofar as is relevant to this case, our holding in Aetna, supra, was (1) that, absent a “clear and certain” statement in the excess policy negating a duty to defend, there is an implied duty on the part of the excess insurer to defend claims which exceed the primary coverage (Aetna, p. 801, 129 Cal.Rptr. 47), and (2) after the primary insurer had paid the limits of its policy to third party claimants, it has no further duty to defend “without the right of reimbursement from the excess carriers.” (Aetna, at 804, 129 Cal.Rptr. at 55.)
Finally, in Aetna, on a theory of equitable subrogation we approved of an apportionment formula which required all of the insurers (there were three, one primary and two excess) to contribute to the costs of defense in the proportion that their contribution to the payment of the loss bore to the total loss.
We now turn to the above mentioned procedural differences between Aetna and the case at bench. First, in Aetna, the claims were lodged by a number of individuals. Hence, they were settled piecemeal. Aetna, the primary insurer, settled several claims which, in the aggregate, totalled $50,000 the policy limit before tendering the defense to the excess insurer. At that time there remained pending numerous other claims and the bulk of the costs of defense accrued after that point.
Secondly, in Aetna, the amounts paid out by the excess insurers After the exhaustion of the primary coverage were many times greater than the $50,000 primary coverage. As a consequence, the excess insurer's contribution to the costs of defense were considerably larger than that of the primary carrier.
In the case before us the entire claim against Signal was settled at one point in time and no costs accrued thereafter. The trial court's view of the matter apparently was that Harbor's duty to defend arose and terminated simultaneously with the termination of Pacific's duty to defend and thus Harbor was not chargeable with any costs which were incurred prior to that fixed moment.
In our opinion, such an analysis is too narrow and overlooks the practicalities of the situation. The preparation, investigation and negotiations that led to the settlement proceeded in an atmosphere which was necessarily affected by the presence of the Harbor excess coverage.
Pacific contends that the principle of equitable subrogation, as applied in Aetna Cas. & Surety Co. v. Certain Underwriters, supra, should apply here and that the rationale of Aetna is too broad and pervasive to be circumscribed by the fortuitous chronology of the settlement process.
Further, Pacific argues that while prorating on the ratio of contribution to loss achieved equity in Aetna, the more equitable approach, and one which best serves the overriding interest of the insured, is to equate the duty to defend with the exposure of the insurer. This approach would apply a contribution formula based on the comparison of policy limits.
The parties stipulated to a number of facts. The following are significant. (1) the City in fact suffered damage which exceeded $25,000, (2) if the City were successful in establishing liability against the various oil companies, the recoverable damage would reasonably have exceeded $10,025,000 the aggregate of Signal's two policies, (3) Harbor had an interest in seeing that Signal was competently defended, and (4) Harbor benefited from the defense provided to Signal by Pacific.
Evidence established that at a time well before the settlement was effected, Pacific requested Harbor to share in the costs of the defense of Signal and Harbor declined. Harbor's position was that the loss was occasioned by subsidence and that Harbor's policy did not provide coverage. Further, Harbor concluded that Signal had not contributed to the dam's failure and that the DWP was itself a major cause of the occurrence.3 Finally, Harbor contended that its policy did not require it to defend Signal. This latter point, as we have discussed, was resolved against Harbor in Aetna Cas. & Surety Co. v. Certain Underwriters, supra, where an identically worded Harbor policy was involved. Harbor did not, as it could have, participate in the defense under a reservation of rights. (See Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal.App.3d 576, 126 Cal.Rptr. 267.)
We conclude that Harbor had a duty to defend Signal, and the issue then becomes one of determining at what point that duty arose. The alternatives are two: (1) at the time Harbor was put on notice of the claim against Signal exceeded the limits of the primary coverage, or (2) at the time the policy limits of the primary insurer were actually exceeded as a result of Pacific's payment of that amount.
From Signal's standpoint it had a right to expect a defense against the entire claim from one or both insurers. From Harbor's standpoint, although it was of the opinion that the ultimate recovery, if any, would not invade the excess coverage, it could not be certain that its opinion would prove to be correct.
In that context Harbor was in the same position as the insurer in Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168. It was there stated at pages 271-272, 54 Cal.Rptr. at page 109, 419 P.2d at page 173: “Although insurers have often insisted that the duty (to defend) arises only if the insurer is bound to indemnify the insured, this very contention creates a dilemma. No one can determine whether the third party suit does or does not fall within the indemnification coverage of the policy until that suit is resolved; . . . . The carrier's obligation to indemnify inevitably will not be defined until the adjudication of the very action which it should have defended.”
We hold that the notice to Harbor of the possibility that the claim here might invade the excess coverage was sufficient to impose on Harbor the immediate duty to participate in the defense of Signal either directly or by contributing to the cost of the defense provided by Pacific. We do not mean to be understood as saying simply that the size of prayer in the third party's complaint is controlling on the issue of when the duty arises, but where, as here, the amount of actual damage is conceded to be very large and the essential issue is one of arguable liability, a reasonable possibility of invading the excess coverage exists and the duty to defend arises.
As we stated in Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, at p. 874, 110 Cal.Rptr. 511, at p. 522, in discussing the related issue of an insurer's refusal to settle within policy limits a claim which exceeds the policy limits, “In instructing the carrier to consider its own interests equally with those of the assured, the courts have forced the carrier a considerable distance into the field of abstract speculative calculation and required it on occasion to assume hypotheses contrary to fact.” (Compare Dillon v. Hartford Acc. & Indem. Co., 38 Cal.App.3d 335, 113 Cal.Rptr. 396.)
The excess carrier's duty of contribution to the costs of defense which it has wrongfully rejected can rest on a theory of either equitable subrogation, as described in Aetna, supra, or on a theory of quantum meruit for services rendered in defense of the common cause. (Estate of Kemmerrer, 114 Cal.App.2d 810, 814, 251 P.2d 345; 1 Witkin, Summary of Cal. Law (8th ed.) Contracts, s 49, p. 60.)
Under most circumstances we do not think that the value to the excess carrier of the primary insurer's efforts in defending the insured are lessened by the fact that the settlement ultimately negotiated does not exceed the primary policy limits and in effect totally protects the excess carrier. In fact, it seems logical to conclude that the lower the settlement the more competent and, ergo, the more valuable the defense. From this it follows that the fact that here the excess was invaded only to the extent of one tenth of one per cent of the available coverage, should not necessarily diminish Harbor's duty to contribute nor does it diminish the value to Harbor of Pacific's efforts.
In summary, an insurer which breaches its duty to defend should not be permitted to profit therefor at the expense of the insured or another insurer who faithfully and capably bore its obligation to the insured. (Continental Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 17 Cal.Rptr. 12, 366 P.2d 455.) The major theme of California law in the area of the duty of insurers, vis-a-vis their insured or other insurers, is to prevent an insurer from reneging on its obligation where it has everything to gain and nothing to lose by so doing.
When we examine what has happened in the case before us we see the picture of Pacific, with no help from Harbor and in the face of a multi-million dollar exposure on the part of Signal, expending some $95,000 in achieving a settlement which required it to pay out its own entire obligation while limiting Harbor's exposure to a mere $10,000.
To Pacific's credit it did not simply offer up its $25,000 policy and withdraw from the fray. On the other hand, Pacific cannot be said to be simply a volunteer because of its duty to deal with the insured in good faith.
The question remaining is what method of apportionment of the costs will best achieve equity and serve the underlying objective of the law. Harbor would now avail itself of the benefit of a clause in its policy dealing with settlement and apportionment of costs.
Harbor's policy provides in part as follows:
“1. INCURRING OF COSTS. In the event of claim or claims arising which appear likely to exceed the Primary and Underlying Excess Limit(s), no Costs shall be incurred by the Assured without the written consent of the Company.
“2. APPORTIONMENT OF COSTS. Costs incurred by or on behalf of the Assured with the written consent of the Company, and for which the Assured is not covered by the Primary and Underlying Excess Insurers, shall be apportioned as follows:
“(a) Should any claim or claims become adjustable prior to the commencement of trial for not more than the Primary and Underlying Excess Limit(s), then no Costs shall be payable by the Company.
“(b) Should, however, the amount for which the said claim or claims may be so adjustable exceed the Primary and Underlying Excess Limit(s), then the Company, if it consents to the proceedings continuing, shall contribute to the Costs incurred by or on behalf of the Assured in the ratio that its proportion of the ultimate net loss as finally adjusted bears to the whole amount of such ultimate net loss.”
Signal, the insured, incurred no costs on its own. Costs were incurred on Signal's behalf by Pacific but without written consent of Harbor. Harbor refused to consent to sharing in the defense it simply “washed its hands” and wrongfully stood aloof from the matter until the settlement agreement was effected. It cannot now retreat behind its self-imposed limitation on the apportionment of costs.
Apportionment of the costs of defense under these circumstances is an exercise of the court's equitable power. We are of the opinion that no single formula will suffice for every case.
Various factors bear on the issue. The comparative policy limits and the premiums paid for each coverage are certainly fundamental considerations. (Hartford Acc. & Indem. Co. v. Pacific Indem. Co., 249 Cal.App.2d 432, 57 Cal.Rptr. 492; Continental Cas. Co. v. Zurich Ins. Co., supra.) The relative degrees of exposure, which reflect the comparative financial interests to be protected along with the actual ratio of the contributions to the ultimate settlement, are also matters which assist in determining the benefits derived by the competing carriers from the defense efforts.
Application of the Aetna formula to this case would result in Harbor paying approximately 1/3 and Pacific paying 2/3 of the fees. On the other hand, applying the formula urged on us by Pacific, to wit, comparison of policy limits, would result in Harbor paying almost all of the fees.
When we take into account Harbor's potential exposure versus the relatively small sum it contributed to the settlement and compare that to the fact that Pacific contributed its entire policy limit and faced no further exposure, we are of the opinion that an equitable solution is to invert the Aetna formula and require Harbor to bear 2/3 of the fees and Pacific 1/3.
The judgment is reversed and the matter is remanded to the trial court with directions to modify the judgment in accordance with the rule we have here set forth.
1. We are told that the entire case against all companies was settled for $3,000,000.
2. Signal was joined as a party pursuant to Code of Civil Procedure sections 378 and 382.
3. This case was processed prior to the decision in Li v. Yellow Cab Co., 13 Cal.3d 804, 119 Cal.Rptr. 858, 532 P.2d 1226.)
COMPTON, Associate Justice.
ROTH, P. J., and FLEMING, J., concur.