THE INSURANCE COMPANY'S DUTY TO PAY IN FULL FOR SETTLEMENTS
By Jordan Stanzler

Reprinted from the August 8, 2000 issue of Mealey's Litigation Report: Insurance

Each insurance company providing coverage during a period of continuing injury has a separate, independent obligation to provide coverage up to the limits of its policy. When it comes time to settle such a case, the insurance company cannot offer to pay a pro-rata share and insist that the policyholder collect the balance due from some other insurance company.

Sometimes insurance companies just don't get it. That is especially true in cases involving continuous injury. Although the policyholder may have lots of coverage from different insurance companies, it is frequently difficult to get one insurance company to step up and pay the full amount of the settlement. Each insurance company wants some other insurance company to pay.

The policyholder is left in the middle to fend off the plaintiff and fight with its insurance companies. It should not be that way. In case after case, the courts in California have made it increasingly clear that each insurance company has a separate, independent obligation to pay. The burden is not upon the policyholder to chase and corral its insurance companies. The message has not always gotten through. An insurance company my commit bad faith by failing to pay the full amount due. See Shade Foods Inc. v. Innovative Products Sales & Marketing, 78 Cal. App. 4th 847 (2000), discussed below.

I. IN CLAIMS INVOLVING CONTINUOUS INJURY, EACH POLICY IN EFFECT DURING THE PERIOD OF ALLEGED DAMAGE HAS A SEPARATE, INDEPENDENT OBLIGATION TO PROVIDE A COMPLETE DEFENSE, NOT A PRO-RATA PORTION OF THE DEFENSE

The standard comprehensive general liability obligates the insurance company "to pay all damages which the insured shall become legally obligated to pay because of...damage to property...caused by an occurrence." (Part I, Liability).

In Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), the Supreme Court adopted the continuous trigger of coverage to claims involving continuous or progressively deteriorating damage. The court considered coverage under a "standard" commercial general liability policy for claims of contamination from a landfill that was in operation from 1956 to 1972. The court ruled that each policy in effect during this period provided coverage:

Where, as here, successive CGL policy periods are implicated, bodily injury and property damage which is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.

Id. at 689.

The Montrose case involved the duty to defend. Courts interpreting that decision have held that an insurance company must defend the entire case and cannot charge "pro-rata" a share of defense costs to the policyholder.

In Aerojet General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38(1997), the California Supreme Court ruled that each insurance company providing coverage during a period of a continues loss has a duty to defend the entire action. Aerojet had liability policies with various insurance companies during 1956 to 1976; from 1976 to 1984 it had a "fronting policy" with INA under which Aerojet agreed to pay its own defense costs.

The insurance companies argued that they should pay only a "pro-rata" share of defense costs and allocate a share to Aerojet, to reflect the years of no insurance. The court held that a percentage of defense costs could not be "pro-rated" to the policyholder: The court rejected this argument:

The insurers imply that they may allocate defense costs to Aerojet...they are wrong here as well. Whatever duty to defend each may have had was provided for in its own policies, and was not affected by Aerojet's subsequent agreement to pay its own defense costs, and indeed defend itself under INA's ["fronting policy"].

Id. at 71. The court emphasized that:

Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers. Truck Ins. Exchange v. Amoco Corp., supra, 35 Cal.App.4th at pp. 827-828; County of San Bernardino v. Pacific Indemnity Company (1997) 56 Cal.App.4th 666, 690-691 [65 Cal.Rptr.2d 657] [following Truck Ins. Exchange].) Equitable contribution applies only between insurers Truck Ins. Exchange v. Amoco Corp., supra, 35 Cal.App. 4th p. 828; County of San Bernardino v. Pacific Indemnity Company (1997) 56 Cal.App.4th at pp. 690-691 [following Truck Ins. Exchange]), and only in the absence of contract (see Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th at p. 687). It therefore has no place between insurer and insured, which have contacted the one with the other. Neither does it have any place between an insurer and an uninsured or "self-insured" party. (Truck Ins. Exchange v. Amoco Corp., supra, 35 Cal.App.4th at pp. 827-828; County of San Bernardino v. Pacific Indemnity Company (1997) 56 Cal.App.4th at pp. 690-691 [following Truck Ins. Exchange].)

Id. at 72 (emphasis in original; footnote omitted).

The court therefore ruled that the insurance companies were not entitled to allocate defense costs to Aerojet for those years in which Aerojet had agreed to defend itself. Id. at 71 - 72. See County of San Bernadino v. Pacific Indemnity Co., 56 Cal.App. 4th 666, 690 (1992); Haskel, Inc. v. Superior Court, 33 Cal.App. 4th 963, 976 fn. 9 (1995).

II. EACH INSURANCE COMPANY HAS A DUTY TO PAY FOR A SETTLEMENT IN FULL

The Court of Appeal in Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996), specifically rejected attempts by the insurance companies to "pro rate" indemnity obligations. In Armstrong, the court made a distinction between an insurance company's rights vis-a-vis the policyholder and an insurance company's rights vis-a-vis other insurers:

a distinction must be drawn between apportionment among multiple insurers and apportionment between an insurer and its insured...[t]hat apportionment among multiple insurers, however, has no bearing upon the obligations of the insurers to the insured. The insurance policies obligate the insurers to pay on behalf of the policyholder "all sums' that the policyholder becomes legally obligated to pay as damages because of bodily injury during the policy period. We interpret this language to mean that once coverage is triggered, the insurer's obligation to the policyholder is to cover the policyholder's liability "in full" up to the policy limits. The logical consequences of this ruling is that the policyholder is covered (up to the policy limits) for the full extent of its liability and need not pay a pro rata share.

Armstrong, at 56-57. In a later part of the same decision, the court reiterated this point, adding that there is no "pro-rata" allocation between a policyholder and its insurers. The insurers may allocate amongst themselves. But each insurance company has a single, undivided obligation to the policyholder:

As we have explained in Issue Group II, part A, ante, however, apportionment among multiple insurers must be distinguished from apportionment between an insurer and its insured. When multiple policies are triggered on a single claim, the insurers' liability is apportioned pursuant to the 'other insurance' clauses of the policies (Keene Corp. v. Ins. co. of North America, supra, 667 F.2d 1034, 1049) or under the equitable doctrine of contribution (Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal. 3d 359, 369 [165 Cal.Rptr. 799, 612 P.2d 889]; CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 619-620 [222 Cal.Rptr. 276]). That apportionment, however, has no bearing upon the insurers' obligations to the policyholder. (See Dayton Independent School d. v. National Gypsum, supra, 682 F.Supp. at pp. 1410-1411 and fn. 21.) A pro rata allocation among insurers "does not reduce their respective obligations to their insured." (Sandoz, Inc. v. Employer's Liability Assur. Corp. supra, 554 F.Supp. at p. 267.) The insurers' contractual obligation to the policyholder is to cover the full extent of the policyholder's liability (up to the policy limits).

Id. at 105-106.

The Supreme Court cited Armstrong with approval in Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38, 57, fn. 10 (1997). Although Aerojet dealt with defense costs, the Court discussed indemnity as when it gave the following example:

[Coverage] is triggered if specified harm is caused by an included occurrence, so long as at least some such harm results within the policy period. (Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal. 4th at pp. 669-673.) It extends to all specified harm caused by an included occurrence, even if some such harm results beyond the policy period. (See id. at p. 686.) In other words, if specified harm is caused by an included occurrence and results, at least in part, within the policy period, it perdures to all points of time at which some such harm results thereafter. To illustrate by a hypothetical similar to the present case: Insurer has a duty to indemnify Insured for those sums that Insured becomes legally obligated to pay as damages for property damage caused by its discharge of hazardous substances, up to a limit of $1 million. Insured discharges such a substance. It thereby causes property damage to Neighbor's land, in the amount of $) 100,000 (determined by the cost of returning the soil to its original condition), within the policy substance spreads under the surface, in the amount of $100,000 annually, in year two through year thirty. Insured must pay neighbor $3 million in damages under judgment. Insurer must pay Insured the limit of $1 million for indemnification.

17 Cal.4th 38, 56-57.

In the course of this discussion, the Supreme Court explained further that once a policy is "triggered," that policy must "pay in full," up to its limits, by citing Armstrong with approval:

In Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1 [52 Cal.Rptr.2d 690], the Court of Appeal...explained: "[T]he event which triggers an insurance policy's coverage does not define the extent of the coverage. Although a policy is triggered only if [bodily injury or] property damage takes place 'during the policy period,' once a policy is triggered, the policy obligates the insurer to pay 'all sums' which the insured shall become liable to pay as damages for bodily injury or property damage. The insurer is responsible for the full extent of the insured's liability..., not just for the part of the [injury or] damage that occurred during the policy period. (Id. at p. 105.) In light of the foregoing commentators have soundly stated: "Courts reject the argument that [an] insurer should only be responsible for [injury or] damage that took place during its policy period..." (Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, 8:73.10, p.8-19, italics on original.)

Id. at p. 57, n.10. Thus, there is no "pro rata" allocation of insurance proceeds over the years of continuous damage. Under the Supreme Court's example, the insurance company issued one policy for $1,000,000, but there is contamination taking place continuously over thirty years. The insurance company cannot "pro-rate" its obligation and offer 1/30 of its $1,000,000 policy, on the theory that the insurance company only has to pay for a portion of the damage. The insurance company must pay $1,000,000 to the policyholder. (It is true that the insurance company may then seek equitable contribution from other insurance companies which provided insurance during the thirty year period; but this issue is separate and distinct from the insurance company's obligation to pay the policyholder the full amount of the policy.) See also Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 1297 (1998) ("Where there are multiple primary insurance policies covering the same risk each insurance carrier has an independent obligation to indemnity").

III. THE POLICYHOLDER IS ENTITLED TO CHOOSE ONE POLICY TO PAY FOR A CLAIM INVOLVING CONTINUOUS INJURY

Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996) concerned insurance coverage for asbestos claims, which involved continues injuries over many years. The court ruled that for each continuous injury claim, the policyholder could designate one single "policy under which it is to be indemnified":

In phase IV, the trial court qualified its "in full" ruling by concluding that only one policy's limits can apply to each claim, and the policyholder may select the policy under which it is to be indemnified. That decision, too, is supported by Keene: "The principle of indemnity implicit in the policies requires that successive policies cover single asbestos-related injuries. That principle, however, does not require that Keene be entitled to 'stack' applicable policies' limits of liability...Therefore, we hold that only one policy's limits can apply to each injury. Keene may select the policy under which it is to be indemnified." (Keene Corp. v. Ins. Co. of North America, supra, 667 F.2d at pp. 1049-1050; see also Owens-Illinois, Inc. v. Aetna Cas. and Sur. Co. (D.D.C. 1984) 597 S.Supp. 1515, 1524; contra, Cole v. Celotex Corp., supra, 599 So.2d 1058, 1074-1080; J.H. France Refractories v. Allstate, supra, 626 A.2d 502, 510.) The policyholders have not challenged this ruling.

45 Cal. App. 4th at 50, fn. 15.

Armstrong and Aerojet were applied in California Pacific Homes, Inc. v. Scottsdale Insurance Company, 70 Cal. App. 4th 1187 (1999). That case involved insurance coverage for construction defects for continuous or progressively deteriorating property damage taking place from 1989 to 1995. The court ruled that all five policies in effect provided coverage. The issue in that case was whether the policyholder had to pay a "retained limit" of $250,000 in each policy year for five successive years. The policyholder settled a construction defect case for $1,750,000. The insurance companies argued that the policyholder had to pay five "deductibles" - for a total of $1,250,000 - before the insurance companies had to pay anything. The court ruled in favor of the policyholder, holding that the policyholder could choose one policy year to apply to the loss. The policyholder was therefore permitted to "put" the $1,750,000 settlement in on year, and pay one "deductible":

the insured made a demand under a single policy...How these insurers choose to proceed as between themselves is not before us.

Id., at 1195. See also FMC Corp. v. Plaisted & Companies, 61 Cal.App. 4th 1132, 1191 (1998) (if coverage "is triggered in more than one policy period FMC may select the policy period in which the policy limits are to be fixed.")

IV. AN INSURANCE COMPANY MAY COMMIT BAD FAITH BY REFUSING TO PAY A SETTLEMENT IN FULL

In Shade Foods Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847 (2000), the court upheld a jury verdict of bad faith because of an insurance company's refusal to pay the full amount of a settlement. Innovative Products sold almonds to Shade Foods, who in turn processed the almonds with other nots for sale to General Mills, which made "Clusters" cereal. General Foods found pieces of wood in the product delivered by Shade Foods and ultimately had to destroy its entire stock of contaminated cereal. General Mills then made a claim against the two companies for $1,347,932 representing the value of the destroyed cereal. Innovative Products and Shade Foods then requested coverage from Northbrook Insurance Company and Royal Insurance Company.

Royal insured Shade but refused to pay more than 5-10% to settle the claim. Royal's position was that Innovative Products rather than Shade was primarily responsible for the damage; and therefore that the other insurance company should pay the bulk of the settlement.

The court reviewed California case law and concluded that Royal engaged in bad faith when it refused to pay the entire claim:

Royal was bound by an obligation to indemnify Shade for the whole amount of the loss, without taking into account any contribution that Northbrook might be obligated to make.

Id. at 899.

The court concluded that Royal's failure to pay the full amount constituted bad faith:

Royal's position...effectively put Royal's interest in securing an allocation of the indemnity obligation with the other insurer above the insured's interest in securing payment of the third party claim. Royal's implied obligation to conduct itself as if it were alone liable for the claim demanded that it pay the claim within policy limits and assume the burden of forcing the other insurer to contribute its portion of liability through a subrogation action or other means.

Id. at 909.

The court summarized the evidence as follows:

We conclude that the jury could draw a reasonable inference of Royal's bad faith from evidence that it concealed its unwillingness to contribute significantly to payment of General Mills claim, with knowledge of the injury to Shade's business that would result from failure to pay the claim, and ultimately placed Shade in a position in which it was compelled to pay the full amount of the claim from its own funds and assume the burden of bringing suit against its insurers for reimbursement.

Id. at 907.

Insurance companies not only have a duty to settle, but a duty to pay for settlement in full. Insurance companies cannot legitimately refuse to pay the full amount of the settlement or put the policyholder in the position of collecting insurance from other insurance companies. That course of conduct may constitute bad faith.