Golden Eagle Insurance Corporation ("Golden Eagle") issued a commercial general liability policy to Emerald Bay Community Association ("Emerald Bay") with a policy limit of $2 million per occurrence. In addition, Emerald Bay had a $1 million primary director's and officer's liability policy as well as a $10 million excess/umbrella policy, both issued by Federal Insurance Company ("Federal"). Emerald Bay was sued in an underlying action and tendered the defense to both Golden Eagle and Federal. Federal agreed to provide a defense subject to a reservation of rights. Golden Eagle did not immediately respond to the tender despite several requests from both Emerald Bay and Federal.
Nearly one year after the initial tender was made, Golden Eagle sent a check to the law firm representing Emerald Bay in the underlying action for payment of certain defense costs. Golden Eagle also initially agreed to provide a defense subject to a reservation of rights but after receipt of the second amended complaint in the underlying action, Golden Eagle concluded that there was no coverage under the policy, withdrew from any defense, and denied indemnity.
Federal continued to defend Emerald Bay in the underlying action, and pursuant to an agreement with Emerald Bay, agreed to "advance" the defense costs incurred in the underlying action as well as $2 million to settle the underlying action. In exchange, Emerald Bay agreed to pursue litigation against Golden Eagle and seek coverage under the policy in order to repay Federal from "funds actually paid to [Emerald Bay] by [Golden Eagle] . . . ."
Emerald Bay sued Golden Eagle alleging that Golden Eagle failed to promptly investigate and respond to its request that Golden Eagle provide a defense in the underlying action and wrongfully denied coverage for the underlying action. Golden Eagle filed a motion for nonsuit claiming that Emerald Bay had suffered no recoverable damages because all of its defense costs were paid by Golden Eagle or Federal and the settlement was paid by Federal. The trial granted the motion for nonsuit concluding:
"As a matter of law, [Emerald Bay] has no supportable damages in this dispute. Its interest was and is entirely subsumed by the carrier Federal.  As a matter of law, [Emerald Bay] has no legal interest to pursue save and except by way of assignment from Federal of its claims....  ...  I don't believe that [Emerald Bay] is properly in a position today to pursue the claims that it did not plead by way of ... the original complaint or by way of amendment...."
Judgment was entered in favor of Golden Eagle and Emerald Bay filed an appeal.
On appeal, Emerald Bay claimed that the trial court erred in entering judgment in favor of Golden Eagle on the breach of contract and bad faith claims because (1) Emerald Bay's agreement with Federal entitled Emerald Bay to recover against Golden Eagle in its own right; (2) since Golden Eagle knew about the agreement between Emerald Bay and Federal, the court erred in relying on Emerald Bay's failure to adequately allege the assignment of Federal's rights in its Complaint; and (3) Emerald Bay was entitled to recover for bad faith against Golden Eagle even though no portion of the defense and indemnity costs were paid by Emerald Bay. The Court of Appeal rejected all three arguments.
Emerald Bay claimed that it was entitled to sue Golden Eagle in its own right because it had entered into an agreement with Federal that Federal's defense and indemnification payments were an "advance" and Emerald Bay was required to pursue Golden Eagle and repay Federal. However, the Court of Appeal rejected this argument concluding that it ignored California law as well as the stipulated facts. The Court of Appeal recognized established California law which provides that "The fact that one insurer may owe a duty to provide a defense will not excuse a second insurer's failure to honor its separate and independent contractual obligation to defend." Id. at *5 (citing Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27, 37-38.) However, the Court went on to say that a cause of action for breach of the duty to defend is still "an action at law for breach of contract, [and, thus,] the plaintiff must show it has suffered damage." Id. at *6. Also where two or more insurers are on the same risk and the insured is fully protected by one or more, but not all, of the insurers and obtains a full recovery, the insured has no further rights against those insurers that did not contribute to its recovery. Id. at *6-*7. Applying these principles, the court concluded that Emerald Bay could not show it suffered any contract damages because Emerald Bay stipulated prior to trial that (1) the Federal policies provided coverage for the underlying action; (2) all defense costs in the underlying action were paid by either Golden Eagle or Federal; and (3) the settlement in the underlying action was paid for by Federal. Id. The Court further concluded that "[t]he mere fact plaintiff and Federal agreed between themselves to characterize Federal's payments as a loan does not alter the legal effect of what occurred." Id. at *7.
The court then addressed Emerald Bay's argument that it could enforce Federal's rights in this action. Although the court acknowledged that Emerald Bay failed to allege the assignment in its pleadings, it suggested that the trial court would have abused its discretion if it denied recovery solely on this ground because there was no evidence that Golden Eagle suffered prejudice as a result of Emerald Bay's failure to specifically plead the assignment since Golden Eagle was aware of the agreement between Emerald Bay and Federal. Id. at *8. The court then implied, however, that any such error was harmless because even if the assignment had been alleged, Emerald Bay would still have been precluded from bringing a breach of contract action on behalf of Federal because Federal was not a party to the contract with Golden Eagle. Id. Federal's only right of recovery against Golden Eagle was for contribution, a cause of action separate and distinct from breach of contract and which was not asserted in the Complaint. Id.
Finally, and most significantly, the Court determined that Emerald Bay could not maintain a bad faith cause of action against Golden Eagle. The Court reasoned "where one insurer fully protects the insured by providing a defense and full coverage for a claim, a second insurer's refusal to defend generally cannot support a tort action for breach of the covenant of good faith and fair dealing because the latter's conduct will not enhance the insured's cost of defending itself or its exposure to liability." Id. at *9. Since the stipulated facts established that Federal provided a complete defense and paid the entire settlement amount, the Court concluded that Emerald Bay was "fully protected from both the expense of litigation and the exposure to liability in that lawsuit." Id. Therefore, Emerald Bay was precluded from maintaining a bad faith claim against Golden Eagle.
The Court did caution, however, that this general rule may not apply if the insurer who is defending the insured has a policy which is far below the amount claimed by the plaintiff in the underlying action (which was not the case in Emerald Bay). Id. at *10. Specifically, the Court cited Wint v. Fidelity & Casualty Co. (1973) 9 Cal.3d 257, 263, wherein the California Supreme Court rejected an insurer's argument that even if it was under a duty to defend its insured, its failure to do so was "of no consequence," because another insurer provided a defense. Id. In Wint, the insurer who provided the defense had a policy limit of $10,000. The insurer who refused to provide a defense had a $100,000 limit. A consent judgment was entered into in the underlying action for $80,000. In concluding that the insurer who failed to provide a defense was liable for the settlement payments as a result of its wrongful refusal to defend the underlying action, the Court reasoned that "a defense by an insurer whose policy has a limit far below the amount claimed cannot be equated to the defense of an insurer who stands to lose 10 times as much as the insurer who defends. This court has, in fact, held that where more than one insurer owes a duty to defend, a defense by one constitutes no excuse of the failure of any other insurer to perform." Wint, 9 Cal.3d at 263 (citing Continental, 57 Cal.2d at 37(emphasis added).
The analysis by the Wint court suggests that its holding may not be construed as narrowly as the Emerald Bay court suggests. Accordingly, it will be interesting to see whether this decision is appealed to the California Supreme Court. But, for now, it appears that an insured has no claim for breach of contract or bad faith against its insurer for the failure to defend an underlying action if (1) the insured is receiving a complete defense from another carrier; and (2) the defending carrier has a policy with limits sufficient to fully protect the insured from exposure to liability in that underlying action.