Barratt American, Inc. v. Transcontinental Insurance

Opinion

A residential developer, Barratt American, Inc. (Barratt), sued its insurer, Transcontinental Insurance Company (Transcontinental),

Both parties appeal. Transcontinental contends: (1) the claimed defense costs are not recoverable as a matter of law; (2) insufficient evidence supports the judgment as to the existence and amount of the defense costs; (3) the court erroneously instructed the jury on defense cost issues; and (4) the court erred in failing to reduce the judgment amount to reflect Transcontinental’s share of the defense costs. Barratt contends: (1) the court erred in granting a directed verdict determining as a matter of law that Barratt did not tender the defense until June 1997; and (2) the court erred in failing to award prejudgment interest.

We reject Trans continental ’ s contention the claimed defense costs are not recoverable as a matter of law. In a construction defect lawsuit involving a residential development where only a portion of the homeowners join the lawsuit, the developer is not barred as a matter of law from recovering from its liability insurer the costs to repair the homes owned by the nonplaintiffs if the costs are reasonable and necessary to defend the lawsuit that was filed. But we agree the factual record is insufficient to support the conclusion it was reasonable and necessary for Barratt to spend $580,714.50 in repairing nonplaintiff homes to defend the underlying litigation. We therefore reverse this portion of the judgment. To provide guidance in the event of a retrial, we briefly discuss Transcontinental’s asserted instructional errors. In the unpublished portion of the opinion we additionally conclude that the trial court properly granted a directed verdict finding that Barratt first tendered the defense of the underlying lawsuit to Transcontinental in June 1997.

Factual Summary

Barratt developed a tract of homes known as the Cortina project, consisting of 208 homes based on four floor plans, using numerous subcontractors. With respect to this project, Barratt was covered by its own primary and excess liability insurance policies, and was also a named additional insured on many of the insurance policies issued to its subcontractors. Barratt’s roofing subcontractor, Bernard Roofing, obtained a policy from Transcontinental that named Barratt as an additional insured with respect to liability arising out of Bernard Roofing’s work.

Shortly thereafter, Barratt representatives met with Barratt’s attorneys and made a decision that Barratt would voluntarily offer to repair defects in the residences of the homeowners who had not yet joined the lawsuit. Barratt employee, Bruce Mezan, directed this repair effort by contacting every nonplaintiff Cortina homeowner, “to ask them . . . if we could come in their home and take a look around and see if there are any issues that we could help them with.” Barratt paid for hundreds of these repairs, including such items as locks, showers, windows, carpet, handrails, doors, drainage systems, cabinets, and garage doors. By June 1997, Barratt had incurred $514,685.33 in costs to repair items in the nonplaintiff homes.

On June 30, 1997, one year after the initial tender to Gerling, Barratt (in its capacity as an additional insured) tendered the defense of the Cortina action to Transcontinental. At the time, Gerling was continuing to provide a defense, but was overdue in paying Barratt’s attorney fee bills. Transcontinental acknowledged the tender letter, but did not expressly respond to the tender by agreeing it had a duty to defend.

In June 1998, Transcontinental’s claims representative orally acknowledged that Transcontinental may have “some limited” duty to defend. At this time, the parties and the numerous insurers were attempting to reach a global settlement of the Cortina action. In early July 1998, Transcontinental participated in a mediation with Barratt and several other insurers. Transcontinental and Barratt were far apart on the amount of indemnity owed for the roofing defects, and Transcontinental’s claims representative refused to offer any money on the defense obligation, claiming Transcontinental was responsible to pay for the defense only as it related to the roofing claims.

Two weeks later, on July 17, 1998, Barratt filed the lawsuit that is the subject of this appeal. Barratt sued Transcontinental for declaratory relief, breach of the duty to defend, and bad faith. Barratt alleged that although Transcontinental acknowledged it had a duty to defend Barratt in the lawsuit, Transcontinental “failed and refused to pay any portion of the substantial defense costs that it incurred defending the Lawsuit,” and was wrongfully

With respect to this latter purpose, the attorneys testified that by investigating the problems identified at nonplaintiff homes, Barratt could potentially achieve several defense objectives, including: identifying early in the litigation which plaintiff claims were legitimate and which were spurious or exaggerated; devising effective and economical repair solutions for the legitimate claims; and obtaining evidence of the satisfactory performance of alternative repair methods to rebut plaintiffs’ later claims. These attorney witnesses explained that the nature of civil litigation and discovery rules made it difficult to achieve these objectives if they were limited to inspecting plaintiff homes. They cited several reasons for this conclusion: (1) it is difficult to learn the precise nature of the alleged defects early in litigation because construction defect complaints usually assert vague allegations with no useful details; (2) a developer cannot inspect the plaintiffs’ homes until the parties obtain a case management order, which may not be entered for a substantial period after the lawsuit is filed and which often limits the time and manner of home inspections, particularly to perform essential destructive testing; (3) formal discovery rules require that a plaintiff representative accompany a defense inspector and this hampers a defendant’s ability to perform an effective inspection of the alleged defects; and (4) formal discovery rules do not give developers an opportunity to test their repair methodology to determine whether a less expensive repair would be effective. The attorney witnesses testified that by actually conducting the less expensive repairs on homes of nonparties, a defendant would have the ability to obtain information to effectively refute the plaintiffs’ arguments that these types of repairs would not work.

Barratt also relied on the testimony of project manager Mezan, who identified a chart (exhibit No. 257) that listed each vendor who participated in the repair work of the nonplaintiff homes, a general description of the work, and the total cost of the work with respect to each category. Mezan testified that all of the vendors listed on exhibit No. 257 performed work that was part of the effort to gather information in defense of the lawsuit and that he consulted with Barratt’s attorneys during this repair process. At trial, Barratt sought to recover from Transcontinental the total amount listed on the chart (the $1.1 million).

Barratt also sought to establish that the repair effort constituted a necessary and reasonable defense cost through the testimony of John Landry, an architect who was Barratt’s lead construction expert in the underlying

In response, Transcontinental argued that Barratt’s evidence was not credible because Barratt never asked Transcontinental or any of its other insurers to reimburse it for this repair effort, demonstrating that Barratt did not consider the repairs to be a defense cost in the Cortina lawsuit until after it completed the repairs. Transcontinental additionally called an expert witness who opined the repair costs were not necessary to Barratt’s defense and were not reasonable defense costs.

At the conclusion of the trial, the court granted a directed verdict in Transcontinental ’ s favor with respect to the date of tender, finding the undisputed evidence showed that Barratt tendered the defense of the Cortina action to Transcontinental on June 30, 1997. The court thus ruled Barratt was entitled, at most, to recover the total repair costs incurred after the June 1997 tender date ($580,714.50).

The court then provided the jury with a verdict form that contained four special interrogatories. In response to the first three interrogatories, the jury found Barratt established by a preponderance of the evidence that: (1) “the expenses incurred in connection with the houses not involved in the Cortina lawsuit were ‘defense costs . . (2) Barratt did not obtain consent from Transcontinental to incur these expenses; and (3) Barratt was excused from obtaining consent to incur these costs because Transcontinental breached its duty to defend. In response to the fourth interrogatory, the jury found Transcontinental failed to establish its waiver defense by clear and convincing evidence.

Based on these responses and after denying Transcontinental’s four postverdict motions, the court entered judgment in Barratt’s favor for $580,714.50 (the total amount of costs incurred by Barratt to repair the nonplaintiff homes between the time of the June 1997 tender to the settlement date) minus $19,649.84 for an amount awarded on Transcontinental’s cross-complaint. The court also found in Barratt’s favor on its declaratory

Transcontinental’s Appeal

In resolving Transcontinental ’ s appellate contentions, we first summarize the legal principles governing an insured’s recovery of defense costs from an insurer that breached its duty to defend the insured. We then address Transcontinental’ s contentions that Barratt is not entitled to recover the repair costs as a matter of law, and alternatively that the jury’s findings were not supported by the evidence. Finally, we discuss Transcontinental’s additional arguments regarding the jury instructions.

It

has long been held that when an insurer breaches a duty to defend, the damages the insured is entitled to recover may include the reasonable costs of defending the underlying action. (See Arenson v. National Auto. & Cas. Ins. Co. (1957) 48 Cal.2d 528 , 537 [ 310 P.2d 961 ].) In Aerojet-General Corp. v. Transport Indemnity Co., supra, 17 Cal.4th 38 (Aerojet-General), the California Supreme Court applied this general principle in an action concerning insurance coverage for liability based on hazardous waste disposal. In that case, the insured discharged hazardous substances, causing property damage to its own and adjacent property. (Id. at p. 46.) The insured was sued by numerous entities, including the State of California and the United States, and thereafter spent approximately $26 million in “site investigation expenses” to investigate the extent of the contamination and the viability of cleanup options, and to monitor the spread of waste from the site. (Id. at pp. 47, 52.) In a lawsuit in which the insured was seeking to recover indemnity and defense costs from the insurer, the trial court instructed the jury that the insured’s investigation costs did not include recoverable defense costs “ ‘even if [the insured’s] lawyers used information developed during the investigation to assist them in negotiating with the governments to limit [the insured’s] obligations to clean up and to remediate.’ ” (Id. at p. 51.)

The California Supreme Court held this instruction was erroneous because it precluded the jury from finding “reasonable and necessary” investigative costs incurred to minimize or avoid liability were recoverable as defense costs. (Aerojet-General, supra, 17 Cal.4th at pp. 60-68.) The court made clear, however, that these costs were not recoverable unless they satisfied the “reasonable and necessary” test, and were incurred after tender and before

In Foster-Gardner, the California Supreme Court interpreted a standard liability insurance provision similar to the one before us, providing that the insurer “ ‘shall have the right and duty to defend any suit against the insured seeking damages [for] . . . bodily injury or property damage . . . .’ ” to mean that a defense duty is not triggered until a third party files a complaint against the insured in a court proceeding. (Foster-Gardner, supra, 18 Cal.4th at pp. 863, 878-888, italics added.) Although the court recognized that “early intervention in a dispute outside the civil action context may reduce any indemnity for which the insurer is ultimately held liable,” it concluded that this principle did not affect the interpretation of the relevant insurance contract language. (Id. at p. 883.) The court reasoned that although an insurance company may voluntarily agree to pay costs before a suit is filed to reduce its ultimate exposure, the policy language does not require it to do so and instead “this is a judgment call left solely to the insurer . . . .” (Ibid.) Three years later, the California Supreme Court applied this reasoning to conclude that an insurer’s duty to indemnify for “ ‘all sums that the insured becomes legally obligated to pay as damages’ ” is limited to money ordered by a court and therefore is not triggered until after a lawsuit is filed and resolved. (Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945 , 960 [ 103 Cal.Rptr.2d 672 , 16 P.3d 94 ] (Powerine).)

The parties agree that, under Foster-Gardner and Powerine, the costs incurred in repairing the nonplaintiff Cortina homes were not recoverable under Transcontinental’s indemnity obligation, even if the defects requiring the repairs were caused by the negligence -of Transcontinental ’ s insureds (Barratt or Bernard Roofing). Because those homeowners never filed suit against Barratt, no duty to indemnify on Transcontinental’s part was triggered. (See Powerine, supra, 24 Cal.4th 945 .) Similarly, Transcontinental had no duty to pay the repair amounts as a cost to defend the nonplaintiff construction defect claims because those costs were incurred voluntarily without a complaint being filed against Barratt by the affected homeowners. (Foster-Gardner, supra, 18 Cal.4th at p. 886.)

But these principles do not mean the costs voluntarily incurred by Barratt cannot constitute recoverable investigation expenses to defend the Cortina lawsuit. To the contrary, in reaching its conclusion, Foster-Gardner expressly reaffirmed Aerojet-General’s holding that an insurer has a duty to

As applied here, these principles mean that the costs incurred by Barratt are potentially recoverable even though they may serve more than one objective. If Barratt’s expenditures qualify as defense costs in the Cortina action, they do not lose that status merely because the costs are not independently recoverable based on the nonplaintiff property damage claims. Under Aerojet-General and Foster-Gardner, the critical issue is whether the costs were reasonably and necessarily incurred in defense of an existing lawsuit. If the investigation costs satisfy this test, they are recoverable even if the payments of these costs benefited a third party who did not file suit against the insured.

We reject Transcontinental’s additional argument that Aerojet-General limits the recovery of defense costs to costs spent to investigate the particular location that is the subject of the pending litigation. As explained above, Aerojet-General was merely a specific application of well-established law that reasonable and necessary costs of defending a lawsuit are recoverable if the insurer breaches its duty to defend. There is nothing in this law that limits the type of defense costs to costs spent on investigating or repairing the particular site that is the subject of the lawsuit. If a jury concludes on a proper record that an investigation is a reasonable and necessary effort to gather evidence and information to defend a lawsuit, it does not matter that this investigation took place at a location different from the pending litigation.

We conclude that recovery of Barratt’s costs for repairs to nonplaintiff homes was not barred as a matter of law under the Aerojet-General or Foster-Gardner decisions.

B. Insufficient Evidence Supports Finding That Repairs Were Reasonable and Necessary

Transcontinental alternatively contends the judgment must be reversed because insufficient evidence supports the jury’s conclusions that the repairs to the nonplaintiff homes constituted a necessary and reasonable effort to

In examining this contention, we review the evidence most favorably to Barratt, giving the evidence “the benefit of every reasonable inference and resolving all conflicts in its favor. . . . Substantial evidence is evidence of ponderable legal significance, reasonable, credible, and of solid value. . . . However, ‘[substantial evidence ... is not synonymous with “any” evidence.’ . . . Instead, the evidence must be ‘ “substantial” proof of the essentials which the law requires.’ . . .” (Oregel v. American Isuzu Motors, Inc. (2001) 90 Cal.App.4th 1094 , 1100 [ 109 Cal.Rptr.2d 583 ], citations omitted.)

An insured may recover from its liability insurer investigative expenses if the costs were reasonable and necessary costs to defend the lawsuit. (Aerojet-General, supra, 17 Cal.4th at p. 58.) Barratt’s evidence on this issue consisted of its attorneys, employees, and an expert defense coordinator testifying that in construction defect litigation it can be helpful and useful to obtain repair information from third party homes. These witnesses opined that this information is particularly valuable because it can be obtained through a process unhindered by civil discovery rules and the defendant can actually test alternative forms of repairs. Barratt’s witnesses testified this repair information would have been helpful to refute damage estimates proffered by the Cortina plaintiff homeowners.

Although this evidence may have supported a general conclusion that it can be a reasonable trial strategy in construction defect litigation to use repair information from other homes in a residential development to bolster defense theories, this general conclusion does not support a reasonable inference that in this case it was reasonable and necessary to engage in this strategy by repairing every claimed defect in every Cortina nonplaintiff home and to spend $580,714.50 in doing so. The testimony of Barratt’s attorneys and litigation coordinator (all of whom were testifying as percipient witnesses rather than experts) that it was possible that these unspecified repairs to the nonplaintiff homes could be useful to explain the nature of the plaintiffs’ claimed construction defects and/or to help show the viability of a defense repair strategy was too theoretical to establish that a reasonable insured would have incurred all of these expenses in defending against the Cortina lawsuit in this case.

In reaching this conclusion, we emphasize two aspects of proof that were missing in this case.

First, there was no evidence that the problems found and corrective repairs made to the nonplaintiff homes were similar to the problems that were the

Second, it is not enough to produce evidence that repairs to nonplaintiff homes would be “helpful” or “useful” in litigation involving other homes in the residential development. It may always be said that a defendant would obtain some benefit from additional investigation that has some relationship to the subject of a lawsuit, but this fact is not enough to logically support the requisite finding that the investigation was reasonable and necessary for purposes of defending the existing suit. Instead, a developer seeking reimbursement for repair costs to homes not the subject of a lawsuit must present evidence that a reasonable insured would have engaged in a similar defense strategy, which necessarily involves a consideration of whether the benefits of the strategy are worth the cost. Without this weighing analysis, the fact that it may be helpful or useful to a defense to learn additional information does not—in and of itself—lead to an inference that a reasonable insured would have found the costs were reasonable and necessary to defend the lawsuit. Moreover, the fact that Barratt attorneys and employees may have actually believed this was a good defense strategy or that they were subjectively motivated to do the repairs by a desire to obtain more information in the Cortina lawsuit does not support an inference that a reasonable insured would also reach this conclusion. “What matters here is whether the . . . investigation would be conducted against liability by a reasonable insured under the same circumstances.” (Aerojet-General, supra, 17 Cal.4th at p. 62.)

If we were to conclude the evidence here was sufficient to show the expenses constituted a defense cost, an insured developer could be sued by a single homeowner, present its construction defect attorneys’ opinions that it

We conclude the evidence was insufficient to show the $580,714.50 in expenses to repair nonplaintiff homes qualified as recoverable defense expenses in the Cortina litigation.

Barratt raises a number of arguments in an attempt to show that Transcontinental’s sufficiency of the evidence challenge is without merit. We find these arguments unpersuasive.

First, Barratt contends it was Transcontinental’s burden to show the costs were unreasonable and unnecessary, and the jury could have found that Transcontinental ’ s expert evidence on this issue was not credible. In Aerojet-General, the court explained the burden of proof for recovery of defense investigation costs as follows: “In the general case, it is the insured that must carry the burden of proof on the existence, amount, and reasonableness and necessity of the site investigation expenses as defense costs, and it must do so by the preponderance of the evidence. . . . [1f] By contrast, in the exceptional case, wherein the insurer has breached its duty to defend, it is the insured that must carry the burden of proof on the existence and amount of the site investigation expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary.” (Aerojet-General, supra, 17 Cal.4th at p. 64.)

Barratt argues that because it presented evidence that Transcontinental breached its duty to defend by failing to immediately accept the tender and the parties stipulated as to the amount that was spent on the repairs to the nonplaintiff homes, Barratt proved the existence and amount of the investigation expenses, and therefore the burden of proof shifted to Transcontinental to prove the costs were unreasonable and unnecessary.

These arguments are unavailing. Transcontinental ’ s trial strategy did not eliminate Barratt’s need to meet its burden of proof. In particular, Transcontinental’s failure to call its defense expert to discuss each objectionable repair invoice does not mean Barratt was relieved of its duty to prove the relationship between the various repairs and its defense in the underlying litigation. Similarly, while it may have been helpful if the jury had been asked to specifically identify the portion of the repair costs that reflected reasonable and necessary costs, the record does not show the absence of this question on the verdict form eliminated Barratt’s burden on this issue, or that Transcontinental’s failure to insist on the question establishes Transcontinental’s waiver of the issue. Likewise, Transcontinental’s postverdict motion reflects Transcontinental ’ s efforts to remedy a failure of proof at trial, and does not establish the intentional relinquishment of a defense or the right to challenge Barratt’s failure of proof on appeal.

We additionally reject Barratt’s argument that Transcontinental waived the sufficiency of the evidence issue by failing to fully recite in its appellate briefs all of the evidence supporting Barratt’s position. While it certainly would have been helpful if Transcontinental had provided a more detailed description of the evidence supporting the verdict, Transcontinental ’ s summary of the relevant evidence was sufficient for this court to evaluate its appellate challenges.

On the record before us we conclude there was not sufficient evidence supporting the finding that all of Barratt’s repairs to the nonplaintiff homes constituted recoverable defense costs in the Cortina action. Accordingly, we reverse the judgment. We decline, however, to enter judgment in Transcontinental’s favor. Because the record establishes Transcontinental is legally obligated to pay defense costs and at least some of the repair costs may qualify as recoverable defense costs upon a proper evidentiary record, Barratt should not be denied the opportunity to prove whether some or all of the repair costs constitute recoverable defense costs.

In a

ddition to challenging the sufficiency of the evidence, Transcontinental asserts several jury instruction errors. While these contentions are technically moot because we are reversing the judgment on the ground of