BUSS v. TRANSAMERICA INSURANCE COMPANY (1996)

This case presents the question of whether, and under what circumstances, a liability insurer, which has provided a defense to its insured under a reservation of rights, may recover from that insured the attorney's fees and costs expended to defend the insured from claims for which there was no coverage under the policy.   In answering this question, we necessarily recognize that a distinction must be made between two different types of noncovered claims:  (1) those claims for which a potential for coverage existed but were ultimately determined not to be covered and (2) those claims for which there was never any potential for coverage under the terms of the policy but were nonetheless required to be defended because they were joined with other claims for which a potential for coverage did exist.   We hold that in the former case an insurer may not recover its defense costs (incurred prior to the determination of noncoverage) absent an express policy term so providing or an agreement with the insured supported by a new consideration;  however, in the latter situation, the insurer may recover such costs as it can prove, by a preponderance of the evidence, are fairly and reasonably allocable solely to the noncovered claims.

Because in this case the insurer seeks only to recover fees and costs expended in the defense of admittedly noncovered claims (which had been joined with a potentially covered claim) and has demonstrated that issues of material fact exist as to the fair and reasonable allocation of such defense costs, the trial court properly denied the insured's motion for summary judgment.   We therefore deny the insured's petition for a writ of mandate.

FACTUAL AND PROCEDURAL BACKGROUND 1

On March 10, 1989, the petitioners Jerry H. Buss and California Sports Incorporated (collectively, “Buss”) were sued by H & H Sports, Incorporated (“H & H Sports”), a corporation which had, since approximately December 1981, acted as Buss's exclusive agent in obtaining advertising for the Forum Sporting Arena and the Prime Ticket Network.   Buss, the master tenant of the Forum, owned a professional basketball team (Los Angeles Lakers) and a professional hockey team (Los Angeles Kings) both of which used the Forum as their home arena.   In addition, Buss promoted other sporting and entertainment events at that facility.

H & H Sports and Buss entered into certain contractual agreements regarding the performance and duration of such exclusive relationship.   The agreements relevant to this case were entered into in 1984 and 1986.   However, in the summer and fall of 1988, Buss acted to terminate H & H Sports' exclusive advertising rights.   This action on the part of Buss led to the filing of the underlying lawsuit on March 10, 1989.

In that action, H & H Sports asserted 14 claims.²  In its final amended form (Third Amended Complaint filed on or about August 10, 1990), the H & H Sports' complaint consisted of 27 counts which were based on the following principal allegations:  (1) breach of a 1984 written contract between Buss and H & H Sports providing for a complex mechanism for commission payments;  (2) breach of a 1986 contract extension, again relating to the payment of commissions;  (3) Buss's failure to honor his promises to provide H & H Sports with an ownership interest in the fledgling Prime Ticket Network;  (4) Buss's conversion of $200,000 of H & H Sports' money, and his failure to pay interest on a $200,000 loan from H & H Sports;  (5) conspiracy to defraud H & H Sports of commissions on the change of name from the “Forum” to the “Great Western Forum”;  and, finally, (6) termination of the contract between H & H Sports and Buss.   H & H Sports sought $70,000,000 in damages.

In addition, H & H Sports included a claim for defamation.   In count 23 it was generally alleged that Buss, as set forth in paragraphs 29, 38 and 40 of the third amended complaint,³ made statements about H & H Sports which were false and slanderous per se in that they tended directly to injure H & H Sports in respect to its business by imputing to it something with reference to its business which had a natural tendency to lessen its profits.   H & H Sports also alleged that each of the persons to whom such defamatory statements were communicated understood such statements to mean that H & H Sports had overcharged its customers and lacked integrity.

Buss tendered defense of this action to its liability insurers.   Except for the real party in interest here, Transamerica Insurance Company (“Transamerica”), each of Buss's insurers denied coverage and refused a defense.   Transamerica had issued two separate policies to Buss which covered the periods 1988–1989 and 1989–1990, respectively.   The 1988–1989 policy provided coverage of $1 million per occurrence ($2 million aggregate), and the 1989–1990 policy provided coverage of $1 million per occurrence and in the aggregate.   Each of the Transamerica policies also provided coverage for “personal injury” and “advertising injury” liability.   Specifically, the policies covered advertising injuries arising out of “libel, slander, defamation, violation of right of privacy․”  Under the personal injury clause, the policies covered “[w]rongful entry or eviction” and any publication or utterance of “a libel or slander or other defamatory or disparaging material․”

 Because a defamation count had been alleged by H & H Sports, Transamerica conceded that a potential for coverage existed as to that one claim.⁴  Transamerica therefore agreed to provide a defense to the entire action, subject to a reservation of its right to dispute coverage for the defamation claim on a number of grounds.   Included in its reservation was the statement, “With respect to defense costs incurred or to be incurred in the future, Transamerica [ ] reserves [its] full rights to be reimbursed and/or an allocation of attorney's fees and expenses in this action if it is determined that there is no coverage under this policy.”   Because it asserted a reservation with respect to coverage as to the defamation claim, Transamerica agreed that Buss was entitled to representation by independent (Cumis ) counsel, the fees for whom Transamerica would pay as provided in Civil Code section 2860.   Transamerica has produced evidence that, during the conduct of the litigation, Transamerica repeatedly requested that Buss's counsel keep accurate time records and include substantial detail in itemizing the work performed.   Transamerica's counsel testified (in a deposition) in this matter that he specifically requested that Buss's counsel keep a careful record of the time allocable to the defamation claim.⁵

On or about May 28, 1991, Buss and Transamerica entered into a specific agreement regarding Transamerica's claimed right to seek reimbursement of defense costs.   As drafted on the letterhead of Buss's counsel, that agreement provided, “․ [i]f a court, arbitrator or other legally binding tribunal orders that defense costs be shared pro rata by the Buss entities and Transamerica, the Buss entities shall reimburse Transamerica for the appropriate pro rata share of the fees and costs paid to that date.” ⁶

After a substantial amount of discovery had been completed, Buss negotiated a settlement of the H & H Sports lawsuit for $8.5 million.   Buss demanded that Transamerica contribute to this settlement but Transamerica refused to do so, claiming that there was no substantial evidence that Buss had in fact slandered or libeled H & H Sports in any way.   Buss, therefore, funded the entire settlement on December 3, 1991.⁷  Buss then filed this action against Transamerica and its other insurers for breach of contract and bad faith, alleging that they were liable to pay some portion of the settlement as to the ‘covered’ claim of defamation and had unreasonably refused to do so.   Transamerica filed a cross-complaint for reimbursement of defense costs expended with respect to the noncovered claims.

On February 27, 1995, the trial court granted summary judgment in Transamerica's favor on Buss's complaint.   The trial court ruled that the evidence presented on the claim(s) as to which a potential for coverage existed was not sufficient to provide a reasonable basis for Transamerica to participate in the settlement.   In its Statement of Decision, the court concluded that Buss had been faced “with multiple claims that went far beyond the ‘covered claims' in the policy ․ [and] the known circumstances provided no reasonable basis for Transamerica to contribute to the settlement of an otherwise bad faith breach-of-contract case.”

Buss then moved for summary judgment on Transamerica's cross-complaint.   In opposing that motion, Transamerica produced evidence that it had an expert examine (1) the billing records of Buss's counsel and (2) the pleadings, discovery and deposition transcripts in the H & H Sports action.   The expert submitted a declaration in which he expressed the opinion that of the total $1,066,000 in attorney's fees and costs which Transamerica had expended in defense of the entire H & H Sports action, only $21,000 to $55,000—depending on the method of allocation—was chargeable to the defense of the defamation claim.   The balance, according to the expert's opinion, was spent in defending the noncovered claims.   Buss, in response, submitted the declarations of counsel which essentially asserted that the discovery and other pre-trial preparation of the H & H Sports action did not proceed on a count by count basis, but rather was a seamless work in progress and that it was not possible to isolate work done with respect to the separate causes of action which had been alleged.   In addition, Buss argued that Transamerica's demand for an allocation of defense costs was not timely, but rather a specific notice to this effect should have been given at the time that Buss's tender of the defense of the H & H Sports' action was made.

The trial court denied Buss's motion.   In doing so it rejected Buss's principal argument that there could be no allocation as a matter of law.⁸  This ruling implicitly recognized the obvious.⁹  If Buss's legal argument failed, then an allocation had to be attempted and there clearly was a serious and material factual dispute as to how and in what manner that allocation should be made.¹⁰  This dispute would obviously preclude summary judgment.

Buss brought this petition for mandamus relief, claiming that the legal issues raised by its motion had to be resolved before there could be a trial on Transamerica's cross-complaint;  indeed, without the prior resolution of the uncertain rules as to Transamerica's claim for reimbursement and/or allocation, the conduct of the trial could be a speculative waste of time.   We agreed with Buss on this last point and therefore, on July 11, 1995, we issued an alternative writ and set the matter for hearing.

CONTENTIONS OF THE PARTIES

Buss contends that Transamerica had an indivisible duty to defend the entire action and cannot avoid payment of all of the defense costs in the absence of “undeniable evidence” of the allocability of specific fees or expenses to noncovered claims.   Buss further contends that the close interdependence of the facts and allegations in the H & H Sports action preclude, as a matter of law, any reasonable or fair allocation of defense costs.

Transamerica, on the other hand, disputes each of these arguments and contends that where an insurer has defended the entire action in good faith, including noncovered claims, and has properly reserved its right to recover defense costs for noncovered claims, it should be entitled to reimbursement of the defense costs expended on those uncovered claims which can be reasonably and fairly allocated.   Transamerica argues that while it had the burden of proof on the issue, that burden is no greater than a preponderance of the evidence.

DISCUSSION

1. Standard of Review

 “Summary judgment is granted when a moving party establishes the right to the entry of judgment as a matter of law.  [Citation.]  We review the trial judge's decision not to grant the summary judgment de novo.  [Citations.]”  (Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579, 37 Cal.Rptr.2d 653.)   A moving party demonstrates a right to entry of summary judgment by producing evidence which establishes that there is no issue of fact to be tried.  (Mann v. Cracchiolo (1985) 38 Cal.3d 18, 35, 210 Cal.Rptr. 762, 694 P.2d 1134;  Johnson v. Berkofsky–Barret Productions, Inc. (1989) 211 Cal.App.3d 1067, 1071, 260 Cal.Rptr. 67.)   The trial court must decide if a triable issue of fact exists.   If none does, and the sole remaining issue is one of law, it is the duty of the trial court to determine the issue of law.  (Taylor v. Fields (1986) 178 Cal.App.3d 653, 659, 224 Cal.Rptr. 186.)   The questions raised by Buss's petition are pure issues of law relating to the as yet unsettled rules to be applied when a liability insurer seeks to recover fees and costs incurred in the defense of noncovered claims.

2. General Principles Regarding An Insurer's Obligation To Provide A Defense

The general principles regarding a liability insurer's duty to provide a defense are now well settled.  “ ‘[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity.  [Citation.] ․ “[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy” [Citation;  italics in original.]   Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify;  an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.   [Citations.]’  [Citation.]”  (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

“The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded [citation], or until it has been shown there is no potential for coverage [ ]․  Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to:  the full protection of a defense on its behalf.  [Citation.]  [¶] The insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.   As a consequence, California courts have been consistently solicitous of insureds' expectations on this score.  [Citations.]”  (Id., at pp. 295–296, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

 The duty to defend is determined in the first instance by comparing the allegations of the underlying complaint with the terms of the policy.   It may also be shown by facts which are extrinsic to that complaint but which demonstrate that there is a possibility of coverage.  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at pp. 298–300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)   If such extrinsic facts do not eliminate the possibility of coverage, “the duty to defend is then established, absent additional evidence bearing on the issue.”  (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1085, 17 Cal.Rptr.2d 210, 846 P.2d 792;  italics in original.)

 In Montrose, the Supreme Court described the nature of an insurer's burden when it seeks to eliminate its duty to provide a defense.  “To prevail, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential.   In other words, the insured need only show that the underlying claim may fall within policy coverage;  the insurer must prove it cannot.   Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales.   Any seeming disparity in the respective burdens merely reflects the substantive law.”  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153;  italics in original except for final italicized phrase.)

 A liability insurer must provide a defense to the third party's action once the duty attaches, and such duty extends to the entire action if any claim encompassed within it may potentially be covered.   (Horace Mann Ins. Co. v. Barbara B., supra, 4 Cal.4th at pp. 1081, 1084, 17 Cal.Rptr.2d 210, 846 P.2d 792.)   This obligation continues until the insurer can confine the third party claims to a recovery that the policy does not cover.  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 298, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

3. If a Potential For Coverage Exists An Insurer Has No Right To Recoup Defense Costs Incurred Prior To A Determination of Noncoverage

 The insurer's defense obligation arises from the contract of insurance which makes an unconditional promise to defend.¹¹  This is what the insured purchases with premium payments.   The insurer cannot avoid this burden by attempting to shift the cost of providing such defense back to the insured following a determination of noncoverage.   To put it another way, a liability insurer owes a duty to defend any claim where a potential for coverage is present;  that it may ultimately be determined there is in fact no coverage for a claim cannot retroactively alter the insurer's burden.  “[A] declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the ․ insurer of the duty to defend.   It only relieves the insurer of the obligation to continue to defend after the declaration.”  (Hartford Accident & Indemnity Co. v. Superior Court (1994) 23 Cal.App.4th 1774, 1781, 29 Cal.Rptr.2d 32;  accord, Haskel Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 977–978, 39 Cal.Rptr.2d 520.)

 It would seem to follow that an insurer's unilateral reservation of the right to recoup defense costs “if coverage is ultimately found not to exist” could not, in the absence of specific language in the policy itself so providing (or an express agreement with the insured supported by new consideration), serve to justify a claim for recovery of such costs incurred prior to a determination of noncoverage.   To hold otherwise would permit the insurer, by means of a reservation of rights letter, to unilaterally rewrite the policy so as to condition a previously unconditional commitment.   Transamerica's reliance on cases which have purported to recognize such recoupment rights is misplaced.

 Several federal trial court cases (Omaha Indem. Ins. Co. v. Cardon Oil Co. (N.D.Cal.1988) 687 F.Supp. 502, 505;  St. Paul Mercury Ins. v. Medical Lab. Network (C.D.Cal.1988) 690 F.Supp. 901, 904;  Walbrook Ins. Co., Ltd. v. Goshgarian & Goshgarian (C.D.Cal.1989) 726 F.Supp. 777, 782–784) have adopted a theory of equitable restitution, reasoning that an insured would be unjustly enriched by receiving a defense on a claim ultimately determined to be outside policy coverage.   The problem with this theory is that it ignores the basic principles of California insurance law applicable where a potential for coverage exists;  an insurer is obligated to provide a defense even if it might later be determined that the claim was not covered.   Given that the insurer was so obligated, it cannot be true that the insured receiving the benefit of that defense was ever unjustly enriched.

Moreover, as the court in Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791, noted, an insurer defending under a reservation of rights is primarily defending its own interests and not those of the insured.   Thus, no equitable restitution could be justified.  “Among settled principles of restitution is that a person who, incidental to the performance of his own duty or to the protection of his own things, has conferred a benefit upon another, is not thereby entitled to contribution.   [Citation.]  The insurer who is uncertain whether coverage is provided under a policy undertakes the defense of its insured under a reservation of rights in large part to protect itself from a subsequent claim that it breached its agreement with the insured.  [Citation.]  Although the assumption of the defense by the insurer without doubt also benefits the insured, it is not primarily undertaken for the insured's benefit.”  (Id., at p. 203–204, 231 Cal.Rptr. 791;  italics in original.)

 Another theory apparently recognized by some courts is that the insured, by accepting the defense provided by the insurer under an express reservation, has accepted and agreed to that reservation.  (See e.g., Travelers Ins. Co. v. Lesher, supra, 187 Cal.App.3d at p. 203, 231 Cal.Rptr. 791 [no implied consent where insurer did not expressly reserve the right to recover defense costs];  Insurance Co. of the West v. Haralambos Beverage Co. (1987) 195 Cal.App.3d 1308, 1323, 241 Cal.Rptr. 427 [insurer's claim rejected because evidence did not establish an “agreement ”];  and American Motorists Ins. Co. v. Allied–Sysco Food Services Inc. (1993) 19 Cal.App.4th 1342, 1356, 24 Cal.Rptr.2d 106 [no reimbursement where right to recover expressly conditioned on insured's approval and no such approval given ].)   To the extent that any of these cases recognize, even indirectly, an insurer's unilateral right to reserve the right to recover defense costs after a noncoverage determination, we decline to follow them.   Such a unilateral act cannot provide a legal basis for recognizing any right in the insurer to assert such a claim.   It would amount to a unilateral modification of the insurer's contractual obligation.   As the court put it in Reliance Ins. Co. v. Alan (1990) 222 Cal.App.3d 702, 272 Cal.Rptr. 65, in commenting on the insurer's argument that such a contract had been entered into, “Moreover, it would be essential that the agreement comply with all the elements necessary for the formation of a valid contract.   So, it would be essential that the agreement be supported by sufficient consideration, separate and apart from that which supported the initial insurance contract.”  (Id., at p. 710, fn. 4, 272 Cal.Rptr. 65.)

 We therefore conclude that, in the absence of policy language so providing or an express agreement supported by new consideration, a liability insurer may not recover defense costs expended in resisting a claim against an insured for which there was a potential for coverage.   As long as the defense obligation exists (that is, until the insurer conclusively establishes that there is no potential for coverage), the insured is entitled under the policy to a defense of the entire action.   This is a right which may not be altered by the insurer's unilateral act of defending under a reservation of rights.   (Cf. Val's Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 585, 126 Cal.Rptr. 267.)

However, what about the insurer which, in discharge of its defense obligation, provides a defense to the entire action?   May it recover the defense costs expended on admittedly noncovered claims for which there was never any potential for coverage?   We now turn to that issue.

4. Where a Liability Insurer Provides a Defense to an Entire Action It May Recover Defense Costs Allocable Solely to Noncovered Claims for Which There Never Was a Potential for Coverage

By its cross-complaint, Transamerica seeks to recover a substantial portion of the $1,066,000 it spent defending the H & H Sports action.   As already noted, it is undisputed that only one of the 27 counts alleged against Buss presented any potential for coverage under Transamerica's policy.   Transamerica acknowledged the general principles discussed above and did not question its obligation to provide Buss a defense to the entire H & H Sports action.   It did so and that action is now concluded.   There no longer is any issue about providing a defense to its insured.   Transamerica takes the position that an allocation of its total expenditure can in fact be made between the noncovered claims and the single claim for which a potential for coverage did exist.   In opposing Buss's summary judgment motion, it sought the opportunity to prove its allocation claim.

In resisting that argument, Buss relies on the rule endorsed by the Supreme Court in Horace Mann Ins. Co., v. Barbara B., supra, 4 Cal.4th at p. 1076, 17 Cal.Rptr.2d 210, 846 P.2d 792.  “Once the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim” (4 Cal.4th at p. 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792;  italics added.)   As authority for that statement, the Horace Mann court primarily relied on its prior decision in Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825.

In Hogan, the insured, a manufacturer of wood processing machinery, had been sued for property damages sustained by a purchaser of one of its saws.   The damages were allegedly caused by defects in the saw.   The insurer denied coverage and refused to provide a defense.   The insured paid for its own defense and ultimately settled the case.   In that settlement, the insured assigned its right against the insurer to Hogan, the damaged claimant, who then brought suit against the insurer.   The issue presented was whether or not Hogan could recover the attorney's fees expended by the insured in defending the action.   The court concluded that Hogan was entitled to recover such defense costs since there was coverage under the policy for at least some of the claims which Hogan had asserted against the insured.   Therefore, the insurer had a duty to defend the entire action.   The court rejected the insurer's argument that some allocation should be made between the covered and noncovered claims.

“The cases which have considered apportionment of attorneys' fees upon the wrongful refusal of an insurer to defend an action against its insured generally have held that the insurer is liable for the total amount of the fees despite the fact that some of the damages recovered in the action against the insured were outside the coverage of the policy.  [Citations.]  [¶] In its pragmatic aspect, any precise allocation of expenses in this context would be extremely difficult and, if ever feasible, could be made only if the insurer produces undeniable evidence of the allocability of specific expenses;  the insurer having breached its contract to defend should be charged with a heavy burden of proof of even partial freedom from liability for harm to the insured which ostensibly flowed from the breach.”  [Citation.]  (Hogan v. Midland National Ins. Co., supra, 3 Cal.3d at p. 564, 91 Cal.Rptr. 153, 476 P.2d 825;  italics added.)

 This was a proper result under the facts in Hogan.   However, it is of little help to Buss.   In Hogan, the insurer had refused to provide a defense;  and the wrongfully abandoned insured was required to bear the entire financial burden of that defense.   The imposition of a heavy proof burden on an insurer in such a circumstance is entirely consistent with the proof requirements imposed on an insurer which seeks to terminate its duty to defend.   As we have already discussed, an insurer seeking to terminate its duty to defend a claim where a potential for coverage was found to exist must conclusively establish that such potential is no longer present.  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)   In other words, the insurer must come forward with sufficient evidence to support a motion for summary judgment.   The burden should be no less upon an insurer which has refused to defend.   To do otherwise would place the insurer which has ignored its legal obligations in a better position than the insurer which stepped forward and honored its defense obligations and then sought to terminate them in a lawful manner.

Horace Mann's endorsement of Hogan does nothing to change this analysis.   In Horace Mann, the insurer sought to terminate its defense obligation to the child molestation claims brought against its school teacher insured.   After concluding that a potential for coverage existed with respect to some of the claims included in the complaint, the Supreme Court reversed the summary judgment granted by the trial court in favor of the insurer.  Horace Mann's reference to the “undeniable evidence” requirement described in Hogan was substantially identical to the burden later imposed by the Montrose court on insurers seeking to terminate their defense obligation.   In order to succeed, the insurer must present evidence of “undisputed facts which conclusively eliminate a potential for [insurer] liability.”  (Montrose v. Superior Court, supra, 6 Cal.4th at pp. 298–299, 24 Cal.Rptr.2d 467, 861 P.2d 1153;  italics added.)

Contrary to the argument advanced here by Buss, the undeniable evidence standard is not a burden of proof as we ordinarily think of that term (Evid.Code, § 115); ¹²  rather, it is simply a shorthand way of articulating the well established principle that the courts will not relieve a liability insurer of its broad defense obligation in the absence of evidence sufficient to support a motion for summary judgment.   Put another way, in the absence of a judgment (or evidence sufficient to support a summary judgment) determining that there is no coverage under the relevant policy, an insurer must provide a full defense.

In Haskel, Inc. v. Superior Court, supra, we emphasized that an insurer could not unilaterally limit its defense obligation.   We stated, “․ if [an insurer] owes any defense burden it must be fully borne [citation] with allocation of that burden among other responsible parties to be determined later.”  (33 Cal.App.4th at p. 976, fn. 9, 39 Cal.Rptr.2d 520.)   When a potential for coverage exists, the duty to defend is immediately imposed in order “to afford the insured what it is entitled to:  the full protection of a defense on its behalf.  [Citation.]”  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)   As the Montrose court observed, “The insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.”  (Id., at pp. 295–296, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

These principles, which are strongly supported by sound public policy considerations, provide the real rationale for the Hogan rule.   When an insured is sued upon a claim which is at least potentially covered under a liability policy, the insurer must immediately provide a defense.   If it does not, then one of the fundamental purposes for the insured's purchase of the policy is frustrated.   To protect the insured, the Hogan rule imposes a very heavy burden on an insurer which seeks to either terminate its defense obligation or to avoid the consequences of wrongfully abandoning its insured.   However, where an insurer has provided a defense for both covered and noncovered claims and where those claims (or at least the covered claims) have been resolved and there is no further defense obligation, there is no need or justification for the application of the Hogan rule.   The insured has received what was promised under the policy;  what purpose is served by requiring the insurer to bear the burden of more than was promised? ¹³

Transamerica claims to have spent over $1,000,000 in defense of Buss in a case in which there was admittedly only one claim potentially covered by the policy.¹⁴  It now seeks to have the court make an allocation of the defense costs incurred with respect to claims which, but for the joinder of a single potentially covered claim, would not have been entitled to any defense.   What rationale exists for applying the Hogan rule of undeniable evidence as urged by Buss?   We can think of none.   This is not a case where the insurer refused to defend.   To the contrary, Transamerica admittedly fulfilled every obligation imposed upon it by the policy and applicable law;  and it did so under circumstances where its insured was given prompt and adequate notice that it reserved the right to seek reimbursement of those defense costs which could be allocated to noncovered claims.

After the defense burden has been satisfied and the insured has received the full benefits promised by the policy, there is no valid reason to limit an insurer's claim for reimbursement of defense costs (which are attributable solely to noncovered claims) only to those cases where the evidence is undisputed or so strong and conclusive as to support a summary judgment.   To impose such a burden in all cases would deny the insurer a jury trial on its disputed demand for reimbursement of defense costs incurred with respect to claims against the insured which were never actually or potentially covered under the policy.   Such a rule would effectively recognize an equivalence between the conduct of the insurer which honors its defense obligation and the insurer which wrongfully abandons its insured.   This would be contrary to the strong public policy which has fostered California's expansive view of an insurer's duty to defend.   By failing to treat differently the cost recoupment claim of the insurer which has met its responsibility to provide a full defense to its insured, we would simply create a disincentive to salutary insurer behavior and thereby encourage the very insurer misconduct which a long line of cases have repeatedly condemned.

We therefore conclude that the application of the Hogan rule should be limited to those cases where (1) the insurer has refused to provide a defense in spite of the existence of a potential for coverage or (2) the insurer seeks to have its defense obligation judicially terminated.¹⁵  This case does not present either of those alternative circumstances.

CONCLUSION

 The costs incurred by an insurer in defending potentially covered claims prior to a determination of noncoverage may not be recouped by an insurer in the absence of a policy term so providing or a separate agreement supported by new consideration.   However, the Supreme Court, in both Hogan and Horace Mann, has made it clear that an insurer may recover the costs of defending against noncovered claims which have been joined with claims which are actually or potentially covered.   These cases impose upon an insurer which has either wrongfully failed to provide a defense, or seeks to terminate a defense obligation, the threshold burden of conclusively demonstrating noncoverage and the proper allocation of defense costs to noncovered claims.   Neither case, however, purports to deal with the defense cost recoupment rights of an insurer which has provided a defense.   This case presents that issue.

 We have concluded that there is no reason in law or logic for refusing to permit an insurer, which has defended under a specific reservation of its rights to seek such allocation and recoupment, to have an opportunity to prove, if it can, that a fair and reasonable allocation of the total defense expenditure can be made between actually or potentially covered claims and noncovered claims.   If such an allocation can be established, and the burden of proof (by a preponderance of the evidence) will be on the insurer,¹⁶ then the reasonable expectations of the parties will have been satisfied.   Moreover, such a result will avoid an unfair windfall to the insured who is not entitled to receive the benefit of something not bargained for and it will prevent imposition of an improper and unjustified burden on an insurer which has fulfilled its contract in good faith.

 For all of the foregoing reasons, we conclude that the trial court properly denied Buss's motion for summary judgment.   In the circumstances presented by this case, an insurer should have the opportunity to prove that a fair and reasonable allocation of defense costs can be made and the burden of proof required should be no greater than preponderance of the evidence.  (See Bertero v. National General Corp. (1974) 13 Cal.3d 43, 63.)

DISPOSITION

The alternative writ is discharged.   The peremptory writ is denied.   The matter is remanded to the trial court with directions to conduct further proceedings not inconsistent with the views expressed herein.

FOOTNOTES

1.   There is no dispute as to the relevant facts.   The record presented to us demonstrates that the issues raised by petitioner's writ application are pure questions of law.

2.   The 14 claims asserted against Buss by H & H Sports included:  (1) breach of the 1984 contract, (2) breach of the 1986 contract, (3) fraud and deceit, (4) constructive fraud, (5) intentional interference with economic relations, (6) negligent interference with economic relations, (7) conversion, (8) specific performance, (9) quantum meruit, (10) inducing breach of contract, (11) concealment, (12) breach of the Prime Ticket contract, (13) defamation and (14) bad faith denial of contract existence.

3.   By reference to these earlier incorporated paragraphs of the third amended complaint, H & H Sports, in its cause of action for defamation, apparently sought to provide some specifics as to the actual defamatory statements which it claimed had been made in order to flush out the general allegations of count 23.   We therefore quote paragraphs 29, 38 and 40 in full:“29.  Prime Ticket and Buss [ ], in an effort to destroy H & H Sports and secure to themselves the good will of its advertising clients, contacted and solicited said clients, advised them that H & H Sports did not represent [Prime Ticket], encouraged them to place their business directly with [Prime Ticket] and falsely stated that H & H Sports had overcharged them.   On November 17, 1988, the said defendants denied the existence of the contracts with [Prime Ticket] and terminated H & H Sports without justification.“38. [H & H Sports] believes and thereon alleges that in early 1988, defendant McNall purchased the Kings from [ ] Buss [ ] for about $13 million.   Although Buss and McNall knew of H & H Sports' exclusive advertising rights for the Kings, the said defendants in 1988–1989 failed and refused, without justification, to honor H & H Sports' exclusive rights under the Contract [ ].  In 1989 said defendants, without justification, terminated H & H Sports' advertising rights for the Kings under the 1984 Contract, and thereafter contacted H & H Sports' clients, solicited their business, and encouraged them to deal directly with the said defendants rather than H & H Sports.“40. Thereafter, [ ] Buss [ ] contacted H & H Sports' clients, solicited their business, encouraged them to deal directly with them rather than H & H Sports, and falsely stated that H & H Sports had overcharged them.”

4.   There appears to be no dispute that as to the defamation claim there was a potential for coverage.   Buss argues that this was also true of the wrongful eviction claim set out in the third amended complaint of H & H Sports.   However, as to that claim the trial court concluded that “the known facts did not constitute wrongful eviction as a matter of law. ”  (Emphasis in trial court order.)   A potential for coverage depends upon facts pled in a complaint or known to the insurer;  there can be no potential for coverage, sufficient to establish a duty to defend, “ ‘where the only potential for liability turns on resolution of a legal question.’  [Citation.]”  (McLaughin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1151, 29 Cal.Rptr.2d 559;  see also, A–Mark Financial Corp. v. CIGNA Property & Casualty Companies (1995) 34 Cal.App.4th 1179, 1191–1192, 40 Cal.Rptr.2d 808.)   As to the balance of the claims alleged in H & H Sports' pleading, there never was any potential for coverage under either of Transamerica's policies.

5.   In his deposition, William Chertsk, counsel for Transamerica testified:  “I recall now I had said with the right of reimbursement that we had that right in this case;  that had been an agreement reached through Paul, Hastings firm, [i.e., the firm representing Buss], and that the work that I had seen that had been done on defamation was very small in terms of the overall work that had been done;  and that I had requested of the Paul, Hastings office that they make an allocation themselves among the work that they were doing so that there would not be a difficulty later if our position was correct in being able to be precise with the moneys.”

6.   Unfortunately, that agreement does not assist us in resolving this dispute;  rather it only begs the question as to just what circumstances, if any, will enable Transamerica to obtain reimbursement of defense costs allocable to noncovered claims.

7.   In his deposition, Transamerica's counsel stated that Buss had told him that the reason for negotiating an end to the H & H Sports litigation was that Buss wished to avoid negative publicity and because Buss was unable to obtain financing for other projects with the lawsuit pending.   Nothing was said about a threat of damages resulting from the alleged defamation.   In the petition to this court, Buss argues that the reason for the settlement was the substantial exposure which the action represented and the ever mounting costs of defense.

8.   The trial court did not rule on Buss's timeliness argument except to state that Buss had cited no legal authority to support it.   We would also note that the record reflects that Transamerica clearly expressed, in its August 23, 1989 reservation of rights letter, its firm intention to seek a reimbursement and/or allocation of “attorney's fees” and expenses in the event that it was “determined that there is no coverage under this policy.”

9.   The trial court's order contained no citation to or description of the factual evidence which established that one or more issues of material fact remained to be resolved.  (Code Civ.Proc., § 437c. subd. (g).)  However, we find no error here since Buss's motion had been predicated entirely upon issues of law.   The court simply concluded that the law was contrary to Buss's position.

10.   Although Buss has not yet presented any expert testimony on this issue, but rather sought relief entirely on the legal argument which it contended was dispositive, we assume that it will be prepared to contest the as yet unresolved factual issues upon remand.

11.   The policies in this case, for example, contained the typical defense commitment:  “We will have the right and duty to defend any “suit” seeking [covered] damages.”  (Italics added.)

12.   Evidence Code section 115 provides:  “ ‘Burden of proof’ means the obligation of a party to establish by evidence a requisite degree of belief concerning a fact in the mind of the trier of fact or the court.   The burden of proof may require a party to raise a reasonable doubt concerning the existence or nonexistence of a fact or that he establish the existence or nonexistence of a fact by a preponderance of the evidence, by clear and convincing proof, or by proof beyond a reasonable doubt.  [¶] Except as otherwise provided by law, the burden of proof requires proof by a preponderance of the evidence.”

13.   The New Jersey Supreme Court recently had occasion to apply the rule, generally followed in most jurisdictions, that an insurer can avoid paying the entire defense burden of a case involving covered and noncovered claims only if an allocation can in fact be made between such claims.   In describing the rationale for requiring the insured to bear the burden of those costs which can be allocated to noncovered claims, the court said, “ ‘The duty to defend arises solely under contract.   An insurer contracts to pay the entire cost of defending a claim ․ [within the policy, but] has not contracted to pay defense costs for occurrences which took place outside the policy․’  [Ins. Co. North America v. Forty–Eight Insulations (6th Cir.1980) 633 F.2d 1212, 1224–1225] [¶] We believe that principle obligates the insurer to pay only those defense costs reasonably associated with claims covered under the policy.”  (SL Industries v. American Motorists Co. (1992) 128 N.J. 188, 607 A.2d 1266, 1280;  italics added.)

14.   As to that claim, as we have already noted, the trial court has ruled that the evidence was insufficient to support any liability against Buss.   While that ruling cannot retroactively impact Transamerica's defense burden, it suggests there may be some merit to Transamerica's claim that defense of the defamation court did not account for a significant part of the total defense expenditure.

15.   Buss argues that the decision in California Union Ins. Co. v. Club Acquarius, Inc. (1980) 113 Cal.App.3d 243, 169 Cal.Rptr. 685 suggests that the Hogan rule should not be so limited.   We disagree.   California Union simply quoted the rule (without discussion or analysis) as support for its conclusion that, after a judgment in the bifurcated trial of the underlying action imposed liability on the insured only for claims which clearly were not covered under the policy, the insurer was free to withdraw from the defense of the balance of the case.   This decision represents nothing more than an application of the principles later confirmed in Montrose.   The court's ruling conclusively established that the insured had no liability on any covered claim.   Therefore, no potential for coverage remained and the insurer's defense burden had been concluded.   Moreover, the California Union court was not asked to allocate the defense expenses incurred prior to entry of the interlocutory judgment limiting the insured's exposure to noncovered claims.

16.   Lest there be any confusion on the point, we emphasize that the insurer is required to prove that the defense costs which it seeks to recover were not reasonably related to any actually or potentially covered claims.   Defense costs which were required in any event or would have been incurred in order to defend actually or potentially covered claims, whether or not joined with noncovered claims, cannot be recovered.   An insurer is only entitled to recover those defense expenses which can be fairly and reasonably allocated solely to noncovered claims for which there never was any potential for coverage.

CROSKEY, Associate Justice.

KLEIN, P.J., and ALDRICH, J., concur.