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INSURANCE NOTES

An Excess Insurer's Duty To Defend: In Suspended Animation Or Not?

11.01.2005
In Eaton Hydraulics, Inc. v. Continental Casualty Co., the California Court of Appeal reversed the trial court order sustaining the insurers' demurrer to the Complaint and directed that the trial court overrule the demurrer and allow the policyholder's lawsuit to proceed against its insurers for breach of the duty to defend and indemnify an underlying environmental lawsuit. The ruling was based, at least in part, on its apparent holding that the insured has the option not to sue, and thus its causes of action do not accrue, until four years after the underlying action against the insured is terminated by a final judgment The Court reached its decision in favor of the policyholder despite facts demonstrating that the policyholder had already filed an earlier lawsuit in 1996 against primary insurers and "Doe" excess insurers for breach of the duty to defend and indemnify against the very same environmental lawsuit and at the same time "acknowledged" that the duty to defend on the part of an excess insurer does not even accrue until the primary insurer's policy has exhausted.

The facts of the Eaton case were as follows:

From 1991 to 1997, the EPA issued various administrative notices and orders against Eaton, the policyholder, under CERCLA relating to soil and groundwater contamination at various sites in Glendale, California.

In 1996, Eaton sued its primary insurers for refusing to defend and indemnify the insured with respect to the various EPA's administrative enforcement notices and orders ("Coverage Action I"). In Coverage Action I, policyholder Eaton designated its excess insurers as "Doe Defendants." Eaton alleged that the excess insurers would be liable for the amount in excess of the limits of primary insurance available and would provide a duty to defend if there were no applicable primary insurance or the primary insurance had exhausted. Those Doe Defendants were never specifically identified or served.

While Eaton ultimately obtained summary judgment that the primary insurers had a duty to defend, the judgment was ultimately reversed in December, 1998 on the basis of the Foster-Gardner holding that the EPA administrative proceedings were not a "suit" triggering a duty to defend. Coverage Action I was then dismissed, but without prejudice to any claim for defense costs with respect to any "suits" as defined under California law or any claim for indemnity with respect to the administrative proceedings or any other claim or suit.

In 1999, the administrative claims resulted in a lawsuit against Eaton and others by the United States and the State of California (the "Environmental Lawsuit"). A global settlement was reached, resulting in an August 2, 2000 judgment based upon a consent decree.

In 2001, Eaton filed a second coverage action against its four primary insurers - the same ones previously sued in Coverage Action I -- and four umbrella insurers, including several CNA companies ("Coverage Action II"). In Coverage Action II, Eaton sued for declaratory relief and breach of contract based upon breaches of the duty to defend and indemnify against the Environmental Lawsuit. The First Amended Complaint alleged that all of the insurers, including the umbrella insurers, had refused to defend and indemnify Eaton for the prior environmental claims and the Environmental Lawsuit. Eaton also alleged a bad faith cause of action against the CNA defendants on the grounds that they had denied receiving tenders of coverage despite prior correspondence in 1992 and 1993 acknowledging prior tenders of the claims.

The CNA Defendants demurred to the First Amended Complaint in Coverage Action II were barred by the four year statute of limitations applicable to claims based upon contract. Code of Civil Procedure, section 337. The trial court agreed that, based upon the verified complaint in Coverage Action I, the policyholder had been put on notice of the accrual of a cause of action against the umbrella insurers by at least April 11, 1996. Thus, the trial court dismissed the complaint as to the CNA Defendants. Eaton appealed.

On appeal, the Court of Appeal took issue with the trial court's conclusion that the verified Complaint in Coverage Action I established that the CNA Defendants had breached its insurance contract by refusing to defend as of the date of the filing of that action because the complaint did not specifically identify those excess umbrella insurers by name.

In addition, the Court of Appeal noted as an independent ground for reversal that the statute of limitations could not have commenced to run against an excess umbrella insurer unless and until the primary insurers on the risk had exhausted because the excess umbrella insurer's duty to defend is not triggered by a primary insurer's mere refusal to defend.

Sandwiched in between those two rationales for reversal, however, the Court of Appeal spent a good deal of time addressing equitable tolling of the statute of limitations on the duty to defend. While the Court could have reversed on either of the two grounds discussed above, the Court of Appeal went on to state that any claims against the excess umbrella insurers would have been "equitably tolled from the time the cause of action accrues - upon CNA's refusal to defend - until the underlying lawsuit is terminated by a final judgment." (Id., emphasis added.)

The Court relied upon Lambert v. Commonwealth Land Title Ins. Co. (1991) 53 Cal. 3d 1072, 1077. Lambert involved a title insurance policy and the duty to defend. The Supreme Court resolved an apparent conflict in the case law regarding the accrual of a cause of action under section 339(1) of the Code of Civil Procedure. The Court applied the equitable tolling doctrine to the cause of action on the basis that the primary carrier's duty to defend was a continuing obligation during that entire period the lawsuit was pending, relying upon the decision in Oil Base, Inc. v. Continental Cas. Co. (1969) 271 Cal.App.2d 378, 389 that refused to apply statute of limitations to a primary liability carrier's denial of defense because the duty was continuing until the conclusion of the underlying litigation. Again, however, the decision in Oil Base involved a general liability insurance policy that provided a first dollar duty to defend and did not involve an excess or umbrella policy. The apparent conflicting messages within the Eaton Hydraulics case are problematic, especially since the Court was ruling on demurrer, where all pleaded facts are taken as true, and some of the holdings do not appear to be necessary to the Court's ultimate ruling. Does the statute of limitations accrue and commence to run upon the denial of a duty to defend by the excess carrier even when that denial is based upon the failure of the insured to have exhausted all primary insurance with a defense obligation? Does the cause of action against the excess insurer accrue only after the obligation of a defense arises upon exhaustion of primary limits? Hopefully, these types of questions will be more fully explored by other Courts of Appeal.

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