Most of the cases from the annual top ten “Best in Show” are from state high courts and federal courts of appeal. But sometimes I include a trial court decision because there is something very unique about it. Or it sends a strong message or offers a very important lesson. This is why I included the California district court’s decision in Seneca Specialty Ins. Co. v. DB Ins. Co., No. 18-1163 (C.D. Calif. Sept. 9, 2019).
I read a lot of coverage decisions. And I can’t recall seeing one where one insurer sues another insurer for bad faith. Sure there are situations where an excess insurer sues a primary insurer for bad faith failure to settle. And there are lots of insurer vs. insurer suits for contribution, when one insurer believes that another insurer owes coverage and skated. But to include bad faith counts is unusual. However, that’s what one insurer did in Seneca Specialty. There must have been some bad blood between these guys.
This decision demonstrates an important lesson for insurers – be careful what you wish for. I included DB Ins. in Coverage Opinions when it came out. Lots of reader feedback left no doubt that it struck a chord with insurers. Based on that, the decision’s uniqueness and the lesson that it teaches, it was selected for inclusion here.
The facts that gave rise to this clash amongst insurers are as follows: CW Piedmont, LLC owned and operated an apartment building in Palmdale, California. On May 1, 2017, 38 current and former tenants sued Piedmont alleging that the building was kept in an uninhabitable condition.
DB Insurance Co. was Piedmont’s liability insurer from May 6, 2014 through May 6, 2017 (three consecutive one-year policies). Seneca Insurance insured Piedmont from May 6, 2017 through May 6, 2018.
Seneca defended Piedmont, but noted, rightly so, that its policy only applied to damages sustained by tenants after the Seneca policy became effective. However, DB refused to defend Piedmont, stating that, to the extent the tenants alleged “bodily injury” or “property damage,” their claims weren’t caused by an “occurrence.” No doubt Seneca could have said the same but it didn’t.
Both Seneca and Piedmont tried to get DB to participate in Piedmont’s defense. No go. The action was eventually settled at mediation for $218,050. DB participated in the mediation via telephone and paid nothing. Seneca obtained an assignment of any and all claims Piedmont might have against DB regarding the action.
Seneca filed suit against DB, asserting the following claims against DB, both on its own behalf and on behalf of Piedmont: “(1) equitable contribution for the defense and indemnity of the Current Tenants; (2) breach of contract; (3) equitable subrogation for defense and indemnity of the Departed Tenants; (4) alternatively, equitable contribution for defense and indemnity of the Departed Tenants; (5) bad faith refusal to defend and indemnify claims by the Current Tenants; and (6) bad faith refusal to defend and indemnify claims by the Departed Tenants.”
The contribution and subrogation claims are what you would expect to see in a case like this, when one insurer pays a claim and another says n-o. But Secena raised the stakes and included claims for bad faith. Insurer vs. insurer is the Cain and Abel of coverage cases.
DB moved for summary judgment. On the bad faith claims – which are the only ones I’ll address here -- DB argued that, even if its initial coverage position was erroneous, it was not in bad faith, as it was based on a genuine dispute regarding coverage.
On one hand, the court agreed with DB, noting that, “under California law, a bad faith claim can be dismissed on summary judgment if the defendant can show that there was a genuine dispute as to coverage[.] Stated differently, [t]he mistaken [or erroneous] withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability under California law, does not expose the insurer to bad faith liability.”
However, the court was not willing to make a decision by simply concluding that there was no genuine dispute as to coverage.
Recall that DB refused to defend Piedmont on the basis that, to the extent the tenants alleged “bodily injury” or “property damage,” their claims weren’t caused by an “occurrence.”
The court was none too pleased with DB’s decision, based solely on the complaint, that there was no “occurrence.” The court had these harsh words for DB:
“Regardless of the reasonableness of DB’s coverage decision, DB can’t escape bad faith liability on this basis. Why? Because DB didn’t undertake a reasonable investigation into whether the claims truly stemmed from nonaccidental conduct. And where a reasonable investigation would have disclosed facts showing the claim was covered, . . . [t]he insurer cannot claim a genuine dispute regarding coverage. . . . Just so here. Based on the vague and broad allegations in the Piedmont Action, including allegations that Piedmont negligently failed to remedy various habitability issues, DB couldn’t reasonably conclude no ‘occurrence’ existed without further investigation. Indeed, under California law, the negligent failure to repair can constitute an ‘occurrence’ when an unexpected or unforeseeable consequence results. . . . But here, DB didn’t even bother asking Piedmont whether the tenants’ damages were unexpected or unintended, and thus potentially an ‘occurrence’ under the DB policies. Rather, based solely on the allegations in the Piedmont Action, DB cursorily concluded no ‘occurrence’ existed without any further investigation into the salient facts. And for that reason, the Court can’t find DB’s decision to deny coverage for lack of an ‘occurrence’ was based on a genuine dispute.”
So Seneca got what it wanted. DB may have acted in bad faith. And now Seneca may have to investigate the facts surrounding “no occurrence” complaints when addressing its duty to defend. This includes asking its insureds if damages were unexpected or unintended. I wonder what the answer is going to be. Insurers – be careful what you wish for.
