INTERNATIONAL INSURANCE CO v. WEST AMERICAN INSURANCE CO (1989)

International Insurance Company (International) appeals, and West American Insurance Company (West American) cross-appeals, from a judgment allocating coverage and costs between them.   We reverse the judgment.

FACTS

The Underlying Action

A number of homeowners sued Downey Savings & Loan (Downey) and its employee, Michael Fry (Fry), alleging fraud and negligent misrepresentation based on Fry's representations, while processing their home improvement loans, that they were “in very good hands” in using contractor Anthony Gottuso and Professional Development Builders, Inc. to effect the improvements.   In fact, the homeowners alleged, the contractor was known, or should have been known by the defendants, to be slow, to produce work of poor quality, and to fail to pay his subcontractors in a timely manner.   The homeowners alleged the contractor thereafter performed poorly and failed to complete their remodeling projects, causing them personal injury and property damage.

The underlying action was ultimately settled for a total of $150,000.   International defended the action at a cost of $46,900 for Fry and $149,500 for Downey, and paid $112,500 of the settlement.   West American Insurance Co. contributed $11,500 toward the $149,500 cost of defending Downey and $37,500 toward settlement of the action.

The Present Action

International then filed the present action for declaratory relief, seeking full payment of the claims by West American, and West American filed a cross-complaint for declaratory relief alleging that its policy provided no coverage for the claims made by the plaintiffs in the underlying action.

At trial, the attorneys involved in representing the parties to the underlying action testified variously as to the factors they took into account in arriving at the settlement figure, as well as allocation of the settlement amount among the plaintiffs, some emphasizing the potential effect of emotional distress upon the settlement, and others discounting that element.

 Opinions Of International's Expert Witness

According to International's expert witness, West American's Special Multi–Peril and Automobile Policy was the primary policy.   It covered the insured for bodily injury and consequences thereof, for property damage including loss of use, and for personal injury, such as invasion of the right of private occupancy, while International's Directors and Officers Liability and Association Reimbursement Liability Policy covered liability of a corporate officer or director for errors or omissions of the officer or director in that role.   Claims under policies of the latter type generally involve securities, or arise out of mergers and acquisitions and representations made by directors or officers of corporations, and include amounts the employer is obliged to pay as indemnification of the officer or director.   The directors and officers policy does not cover bodily injury, sickness, disease, or property damage, including loss of use;  however, economic losses might be covered under both policies, depending on the nature of the loss.

Emotional distress is generally considered by insurance carriers to be a form of bodily injury.   Both policies would cover loss of wages, but such loss, if a consequence of bodily injury or emotional distress, would be covered by West American's policy.   Neither policy covers fraud.

In analyzing insurance coverage with respect to negligent misrepresentation, one must look not only at the nature of the claim made, but also at the nature of the damages sought.   Where there are allegations of emotional distress, such claims have been defended by general liability carriers;  such a cause of action seeking solely economic damages would be covered under the International policy.

An “occurrence” is defined in West American's policy as “An accident, including continuous or repeated exposure to conditions which result in bodily injury or property damage, neither expected or intended from the standpoint of the insured.”   The expert witness testified that, although there is no reported case holding that negligent misrepresentation is an “occurrence” under this definition, in his experience, a general liability carrier will accept a tender of defense in a case where damages are sought for emotional distress, but will not defend against a corporate plaintiff where there cannot be recovery for emotional distress.

In the opinion of International's expert, the entire $150,000 settlement should have been borne by West American.   His opinion was based on his understanding that the wage losses suffered by the plaintiffs were due primarily to emotional distress, and that their other claims were based on property damage, loss of use of property, and invasion of the right of private occupancy.   The expert did not consider punitive damages, as he was of the opinion that carriers generally ignore this item when settling claims.

This expert opined that West American should bear the cost of defending Downey, and that the carriers should share the cost of Fry's defense, as he was both an insured officer under the International policy, and the functional equivalent of an executive officer under the West American policy.

 Opinions Of West American's Expert Witness

West American also offered the testimony of an expert witness.   He concluded both insurers had a duty to both defend and indemnify Downey.   The policies covered different types of losses, and the amount of indemnity and cost of defense attributable to each would be allocated in accordance with the type of loss involved in the underlying action, if that could be ascertained.

International was obligated to pay Downey to the extent of Downey's obligation to indemnify its directors, officers, and employees.   The witness did not know of any duty on Downey's part to indemnify for negligent misrepresentations.   Assuming such a duty, losses due to diminution in property value, as, for instance, if a prospective purchaser offered less money for property because Gottuso had worked on it, or losses due to forced sale to avoid foreclosure, money spent to repair work that was improperly done, and wage loss due to time off to do or supervise the work could be covered under the International policy.

West American's policy could also cover losses due to forced sale to avoid foreclosure, and sums spent to repair work that was improperly done, as well as loss of use of property, and emotional distress;  West American's policy would not cover lost wages due to time off to supervise contractors completing the work, money so spent, or money spent to complete the work.

West American's expert suggested apportionment of defense costs in accordance with policy limits, because of a lack of information as to the components of the underlying settlement.

 The Trial Court's Ruling

The trial court determined that International's policy covered only economic damages, and expressly excluded coverage of claims for bodily injury, sickness or disease, and injury to or destruction of any tangible property including loss of its use;  West American's policy covered bodily injury and property damage, including loss of use.   However, West American had no duty to indemnify Downey or Fry for the bodily injury and property damage, including loss of use, sought by the plaintiffs in the underlying action, and to which settlement proceeds were attributable, because the negligent representations allegedly made on Downey's behalf did not constitute an “occurrence” under West American's policy.

Of the $150,000 paid in settlement of the underlying action, the court attributed 25 percent to economic damages covered exclusively by International's policy, and 75 percent to bodily injury and property damage covered exclusively by the West American policy, had there been an “occurrence” under the policy.

The court found both insurers had a duty to defend Downey;  West American breached this duty by failing to provide or contribute to Downey's defense from August 1979 to October 1983.   West American had no duty to defend Fry, as he was not an executive officer of Downey, and therefore not a named insured under West American's policy.

The court determined that the costs incurred in defending Downey should be shared equally by the insurers, each of which would contribute $74,750.   Inasmuch as International had paid $138,000 as costs, it was entitled to recover from West American that amount less $74,750, or $63,250.   Inasmuch as West American had contributed $37,500 to the settlement, but had no liability, it was entitled to recover $37,500 from International.   The court determined that neither party was the prevailing party, and ordered each to bear its own costs and attorney fees.

CONTENTIONS

International contends:  (1) West American had a duty to indemnify Downey for all bodily injury and property damages sought by plaintiffs in the underlying action, to which settlement proceeds were attributable, because (a) West American admitted it had such a duty,¹ and (b) Fry's negligent misrepresentations did constitute an “occurrence” as defined in West American's policy;  (2) if West American had such a duty, the indemnification and cost of defense of Downey should be allocated between the insurers in accordance with the amount of covered damage under each policy, as determined by the trial court, i.e., 25 percent to International, and 75 percent to West American;  (3) International is entitled to recover interest on the money owed it by West American from the date of settlement of the underlying action;  and (4) International is the prevailing party, and thus entitled to costs pursuant to Code of Civil Procedure section 1032.

Responding to International's contentions, West American claims International has waived the points necessary to sustain its position on appeal.   This claim is based on the notion that a point not presented in a party's opening brief is deemed to have been abandoned or waived.   Thus, West American urges that inasmuch as International does not contend on appeal that its coverage is inapplicable to Fry and Downey, it has conceded both are covered by its policy.   Similarly, West American urges that International has conceded Fry is not an insured under the West American policy, and West American is entitled to subrogation against International, as the insurer of Fry.

West American also contends it had no duty to indemnify Downey, and that International's arguments with respect to allocation of costs and interest are meritless.

On cross-appeal, West American contends it was entitled to full reimbursement of defense costs from International, pursuant to principles of equitable subrogation, or at least to proration of defense costs.

DISCUSSION

West American Had A Duty To Indemnify

 As heretofore stated, the policy issued by West American defines “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured․”  The policy defines “bodily injury” as “bodily injury, sickness or disease sustained by any person which occurs during the policy period․”  “Property damage” is defined as “(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom;  and (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.”

On this appeal, West American argues the claims made by the plaintiffs in the underlying action did not constitute an occurrence under West American's policy because they did not involve property damage or bodily injury.   West American explains that the property damage claimed in the underlying action was sustained as a result of using a contractor who tore the plaintiffs' houses apart, left the work undone for protracted periods of time, and completed the work in a defective manner.   Conceding that these damages “flowed from” the plaintiffs' reliance upon the negligent or intentional misrepresentations of Fry, West American points out that Fry did not directly cause physical injury to any property of the plaintiffs.   West American's argument is, essentially, that negligent misrepresentations cannot cause physical injury or property damage, and are therefore not covered under general liability insurance policies.

West American cites Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 142 Cal.Rptr. 681, as supportive of its position.   In that case, the insured sought declaratory relief arising out of the refusal of its insurer to defend two third party lawsuits.   In one suit, the purchaser of a used automobile alleged the insured defendant misrepresented that the odometer reading was correct at the time of the purchase, when in fact the odometer had been manipulated to show far less miles than the car had been driven.   The defendant also allegedly represented that the vehicle had no major mechanical defects, when it had a blown head gasket at the time of the sale.   In the second case, the complaint alleged the defendant falsely represented to the plaintiff that a car leased by the latter was a new demonstration model, when in fact the vehicle had been substantially damaged in an accident.   The court stated:  “The third party complaints set forth no facts which constitute an allegation of personal injury or property damage.   While the damages claimed to have been suffered by the plaintiffs relate to the automobiles sold and leased, they are predicated on the misrepresentations made by appellant concerning the automobiles.   There are no allegations suggesting that appellant's representations caused injury or damage to the automobiles.   To the contrary, the damage was to the plaintiffs' pecuniary interests—the out-of-pocket loss caused by the fact that plaintiffs did not receive full value for the money paid for the purchase and lease of the automobiles.   Such loss of anticipated value does not constitute an ‘injury to or destruction of tangible personal property’ as defined in the policy.”   (76 Cal.App.3d at p. 279, 142 Cal.Rptr. 681.)

In the present case, West American recognizes that the plaintiffs in the underlying action did suffer property damage, and that this damage “flowed from” Fry's negligent misrepresentations.²  In Tijsseling v. General Acc. Etc. Assur. Corp. (1976) 55 Cal.App.3d 623, 127 Cal.Rptr. 681, the insurer agreed under the comprehensive general liability part of its policy to pay all sums which Tijsseling should become “ ‘․ legally obligated to pay as damages because of ․ property damage to which this insurance applies, caused by an occurrence, ․’  The policy defined an ‘occurrence’ as ‘an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured;  ․’ ”  (Id. at p. 625, 127 Cal.Rptr. 681.)   Tijsseling brought an action for declaratory relief and breach of contract against several insurers, seeking coverage for sums he was required to pay to persons who purchased real property from him, and who obtained judgments against him based on negligent misrepresentation.   While the question in Tijsseling was whether the occurrence was within the policy period, it is interesting to note an assumption on the part of the parties and/or the court that a negligent misrepresentation could constitute an “occurrence.”  (See also McCollum v. Insurance Co. of North America (1982) 132 Ariz. 129, 644 P.2d 283, assuming negligent misrepresentation constituted an occurrence but ruling there was no coverage because the only claim made against the insured was for loss of anticipated land profits, an economic loss and not one involving injury to or destruction of property;  Safeco Insurance Company v. Munroe (1974) 165 Mont. 185, 527 P.2d 64.)

 In the present case, the experts on both sides concluded that West American's policy provided coverage for at least some of the claims made in the underlying case.   In our view, the fact that a negligent act is verbal, rather than physical, is of no consequence.³  West American cites no authority, and we find none, precluding coverage under a general liability policy based on negligent misrepresentation.   We reject West American's claim, based on cases unlike the one before us, that negligent misrepresentation cannot result in physical injury or property damage, as that is the case here, where actual physical damage to the claimants' properties “flowed from” Fry's statements.

The trial court erred in concluding there was no occurrence within the coverage of the West American policy.

The Trial Court Properly Apportioned Liability And Costs Of Defense

 We note at the outset of this discussion that neither party sets forth the evidence before the trial court in such a manner as to justify a challenge to the factual basis of the trial court's allocation of liability between them, i.e., 75 percent to West American and 25 percent to International, or the court's determination that the parties should contribute equally to the costs of defending Downey.

Based on the trial court's determination that Fry was not an insured under the West American policy, but was in fact insured under the International policy, West American contends the principles of equitable subrogation require that International bear the entire loss, including costs.  (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 428–429, 296 P.2d 801.)   As International points out in its cross-respondent's brief, the uncontradicted testimony of its witness, David Parker, established that as part of the settlement agreement, Downey and Fry released each other from claims of indemnity.

Citing CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 222 Cal.Rptr. 276, West American next contends that the total sum of the settlement plus costs of defense should be apportioned between the parties in accordance with the respective amounts of coverage provided by their policies.   Citing both CNA, supra, and Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511, 235 Cal.Rptr. 185, International contends both liability and costs of defense should be apportioned 75 percent to West American and 25 percent to International.

 As we stated above, neither party has made what amounts to a factual challenge to the trial court's allocation of either liability or costs of defense.   It is well settled that the obligation to defend differs from the obligation to indemnify.  (CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at p. 605, 222 Cal.Rptr. 276, and cases there cited.)   In CNA the court stated, at page 619, 222 Cal.Rptr. 276:  “The courts have expressly declined to formulate any definite rules for allocating defense costs among carriers, because of the ‘varying equitable considerations which may arise, and which affect the insured and the ․ carriers, and which depend on the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers.  [Citation.]’  [Citation.]”  The court went on, at page 620, 222 Cal.Rptr. 276:  “It is an accepted principle of California law that ‘[w]here two insurers cover the same risk, defense costs must also be shared between them pro rata in proportion to the respective coverage afforded by them to the insured.  [Citation.]’  [Citations.]  The method of allocation employed by the trial court was, on the whole, fair and reasonable.   We decline to reverse the court for using a procedure adopted in every California case on point․  [¶] ․ We agree that in given cases, the true scope of an insured's ‘coverage’ might not be confined to the liability limits of a given policy;  it may also include the period of time covered by the policy and the interrelation between the terms of the policy and the wrongs alleged against the insured by a claimant.   In this case, however, the trial court did not abuse its discretion in assessing damages according to the formula followed by an overwhelming weight of authority.”

In CNA, three of the insurers had policy limits of $300,000, while a fourth insurer's policy limit was only $100,000.   In the present case, International's policy limit was $5,000,000 per loss;  West American's policy limit was $300,000 per occurrence.

In Phoenix Ins. Co. v. United States Fire Ins. Co., supra, the court rejected an argument with respect to liability which was based on the rationale of CNA, finding in the superior court case files “evidence of substantial weight and credibility upon which to allocate the indemnification between the carriers.”  (189 Cal.App.3d 1511, 1529, 235 Cal.Rptr. 185.)   The Phoenix court observed that the testimony of the participants in the settlement negotiations “would have cast a clearer light” on the matter in question.   (Ibid.)

Here, the trial court had before it the participants in the settlement negotiations, and was in a peculiar position to evaluate their respective contributions to the defense of the underlying case, as well as the components of the settlement.   In view of the disparate policy limits involved, and the differences in coverage with respect to the types of damage suffered by the claimants, we find that (1) the trial court properly allocated the costs of defense between the parties and, (2) there having been an “occurrence” within the coverage of the West American policy, the allocation of 25 percent of the amount of the settlement to damages covered by International's policy and 75 percent to damages covered by West American's policy is within the sound discretion of the trial court and shall be so awarded.

International Is Entitled To An Award of Prejudgment Interest

 Civil Code section 3287 provides, in part:  “(a) Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day․”  Citing Oil Base, Inc. v. Transport Indem. Co. (1957) 148 Cal.App.2d 490, 306 P.2d 924, International contends the damages due it from West American were certain as of the date of the funding of the settlement in the underlying action in August 1983.  “Damages are deemed certain or capable of being made certain within the provisions of subdivision (a) of section 3287 where there is essentially no dispute between the parties concerning the basis of computation of damages if any are recoverable but where their dispute centers on the issue of liability giving rise to damage.  [Citation.]”  (Esgro Central, Inc. v. General Ins. Co. (1971) 20 Cal.App.3d 1054, 1060, 98 Cal.Rptr. 153.)   In Esgro, the court considered the applicability of section 3287 to causes of action based on both fire insurance and business interruption policies.   Two of the plaintiff's stores were damaged in the Watts riot in August 1965.   One was burned and looted;  the other was broken into.   The insurer defended against some of the losses claimed under the fire insurance policy, claiming the losses resulted from looting, rather than the fire.   The insurer also claimed the cash value of fixtures destroyed in the fire was less than claimed by plaintiffs, and that the policy did not cover merchandise entrusted to plaintiffs for repair.   With respect to the business interruption policy, the insurer claimed the property could have been restored in less time, and challenged the basis of plaintiffs' projection of anticipated income, as well as certain claimed expenses.   The insurer also contended that a small portion of the claim resulted from remote or consequential losses in business.   During the course of trial, plaintiffs were permitted to amend their complaint to pray for greater damages, to conform to proof of greater loss than they had originally claimed.

The Esgro court held the cause of action founded on the fire insurance policy satisfied the requirements of section 3287, because the “essential dispute between the parties on that cause of action involved the issue of coverage by respondent's policy and not computation of the amount of loss if the loss was in fact covered.”  (Esgro Central, Inc. v. General Ins. Co., supra, 20 Cal.App.3d 1054, 1061, 98 Cal.Rptr. 153.)   With respect to the judgment entered on the policy of business insurance, the court observed that the “sole issue ․ was the extent of [plaintiffs'] damage for losses admittedly covered.”  (Id. at p. 1063, 98 Cal.Rptr. 153.)   This required a “judicial determination to be made from conflicting evidence.   It was not ascertainable from data furnished” by plaintiffs to the insurer.  (Ibid.)  The court concluded that the trial court did not err in denying plaintiffs' claim for prejudgment interest on this cause of action.

In Oil Base, Inc. v. Transport Indem. Co., supra, 148 Cal.App.2d 490, 306 P.2d 924, defendant Hardware, one of three insurers who had issued policies indemnifying the insured against loss from the liability imposed by law arising out of the use, maintenance or operation of certain motor vehicles, refused to contribute $100,000 to the $360,000 settlement of a claim against the insured, the other two insurers having paid $260,000.   The insured recovered a judgment in the amount of $100,000 against Hardware, and the issue was whether Hardware must pay prejudgment interest on that amount.   Hardware contended the amount was not “liquidated and ascertainable” as of the date of settlement of the underlying claim “because a controversy existed between it and [the insured] as to whether its policy attached to the risk, and if it attached, the extent of Hardware's liability thereunder.”  (Id. at p. 492, 306 P.2d 924.)   The court stated:  “The fallacy of this contention seems apparent from the very statement of it.   Hardware's liability was created by its contract and, under its contract, it was obligated to pay the $100,000 that was paid by [the plaintiff].  The fact that it misconceived and put an erroneous construction upon this contract in no way affected its liability to pay the $100,000 at the time the [underlying] claim was settled, and its obligation to reimburse [the plaintiff] attached the moment [the plaintiff] made the payment which Hardware was obligated under its policy to make, and, the amount being certain, interest commenced to run from that date.  (Civ.Code, § 3287.)”  (Ibid.)

In the present case, each of the insurers was obligated by its contract to pay its share of the settlement at the time it was made.   The fact that they disagreed with respect to the coverage afforded by their respective policies did not affect this obligation, or mean that the amount of the contractual obligation of each was not ascertainable at that time.   International is entitled to an award of prejudgment interest from the date of the settlement on amounts it paid the claimants on West American's behalf.

International Is Entitled To Its Costs In The Trial Court

“Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.”  (Code Civ.Proc., § 1032, subd. (b).)  “ ‘Prevailing party’ includes the party with a net monetary recovery․”  (Code Civ.Proc., § 1032, subd. (a)(4).)   International was the prevailing party in the trial court, and thus entitled to its costs.

DECISION

The judgment is reversed.   The matter is remanded to the trial court, which is directed to determine appropriate awards of interest and costs, and enter a new judgment in accordance with the views expressed herein.   All parties shall bear their own costs on appeal.

FOOTNOTES

1.   Paragraph 4 of West American's Stipulated Issues and Facts reads as follows:  “The WEST AMERICAN Policy obligates it to indemnify Downey Savings and its executive officers and directors for sums which they became legally obligated to pay as damage because of bodily injury or property damage arising from claims made against Downey Savings or its executive officers or directors in their respective capacities of executive officers or directors.”   This paragraph merely recites policy provisions.

2.   West American claims that no part of the settlement herein can be attributed to emotional distress, which is considered a form of bodily injury, because the trial court sustained a demurrer to allegations of intentional infliction of emotional distress prior to the settlement.   Neither the demurrer nor the court's ruling thereon is contained in the present record.   In any event, as the court pointed out in Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276, 54 Cal.Rptr. 104, 419 P.2d 168:  “Defendant cannot construct a formal fortress of the third party's pleadings and retreat behind its walls.   The pleadings are malleable, changeable and amendable.”

3.   Even assuming intent, in the sense that Fry intended to make the statements attributed to him, “[t]he fact that an act which causes an injury is intentional does not take the consequence of that act outside the coverage of a policy which excludes damages unless caused by accident for if the consequence that is the damage or injury is not intentional and is unexpected it is accidental in character.”  (Meyer v. Pacific Employers Ins. Co. (1965) 233 Cal.App.2d 321, 327, 43 Cal.Rptr. 542, citing Ritchie v. Anchor Casualty Co. (1955) 135 Cal.App.2d 245, 252–254, 286 P.2d 1000;  7A Appleman, Insurance Law and Practice (Berdal ed.), § 4492.02, p. 33.)

DANIELSON, Associate Justice.

KLEIN, P.J., and CROSKEY, J., concur.