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Musick Peeler PUBLICATIONS INNOVATIVE EXPERIENCED ACCESSIBLE
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INSURANCE NOTES

Prejudice Not Required When Relying On Breach Of The Voluntary Payments Provision Of Policy In Contribution Action

12.27.2005
In Truck Ins. Exch. v. Unigard Ins. Co. (2000) 79 Cal.App.4th 966, the Court of Appeal examined whether an insurer seeking contribution was required to meet the contractual conditions precedent in the other carrier's policy-the notice provision, the cooperation clause, and the no voluntary payments provision-in order to establish its right to contribution. Focusing particularly on the no voluntary payments provision, the court determined that the insurer seeking contribution was required to satisfy the conditions precedent to coverage in order to invoke equity. Carriers seeking contribution often attempt to invoke the "notice prejudice" rule to avoid application of the conditions precedent. However, this position confuses a policy defense against payment of post-tender fees and costs based on late notice, with the bar of pre-tender fees and costs (including all fees and costs when the matter was not tendered to the insurer prior to resolution).

Courts are clear that the notice-prejudice rule does not apply prior to the time the matter is tendered to an insurer: "Only previous voluntary payments by the insured are barred from indemnification. [ . . . ] The prejudice requirement . . . applies only to the insurer's attempt to assert lack of notice as a policy defense against payment even of losses and costs incurred after belated notice."" Jamestown Builders, Inc. v. General Star Indem. Co. (1999) 77 Cal.App.4th 341, 350 (italics in original; bold added).

In ruling that insurers seeking contribution are required to tender their contribution rights to their co-insurers, the Truck court specifically held that the nonparticipating insurer is not required to prove prejudice in relying on the no voluntary payments provision of the policy. Truck Ins. Exch. v. Unigard Ins. Co., supra, 79 Cal.App.4th at 982, n. 20. Moreover, it was immaterial that the carrier seeking contribution was not a party to the second carrier's policy and, therefore, not contractually bound by the voluntary payments provision. The court reasoned that the voluntary payments provision of the policy is based on the equitable rule that the insurer is vested with the complete control and direction of the defense, and is thus not liable for any voluntary payments, expenses, or other obligations assumed without the carrier's consent. Since the cause of action for contribution is itself based upon equity, to deny a carrier control (or shared control) of the defense of the underlying action and then saddle it with expenses about which it knew nothing, was the antithesis of both equity and contribution. Id., at 981.

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