Scottsdale Insurance v. Essex Insurance

Opinion

This is an action for declaratory relief and equitable contribution between insurance carriers for a common insured. After a bench trial the court determined that plaintiff Scottsdale Insurance Company (Scottsdale) properly paid $225,000 to settle prelitigation claims made against the mutual insured, James Conrad Construction, Inc., arising from the construction of a house purchased by Robert Opera and his wife, Sandra Opera. The trial court required defendant Essex Insurance Company (Essex) to reimburse Scottsdale in the amount of $148,026.32. Essex appeals, arguing the trial court misapplied the law of equitable contribution and erroneously found the claim covered by its policy and gave Scottsdale an excessive judgment.

Background

A. The House

James Conrad, a licensed architect and general contractor, built a large single-family home in Laguna Beach. Conrad’s financial partner in the project was Robert Boris. Title to the property to be developed was held in Boris’s name. The application for the building permit identified Boris as the owner and Conrad as the builder. Boris was not involved with the physical construction of the home. The final inspection was completed in April 1991. The Operas purchased the house in October 1991. The limited warranty provided for the house was signed by Conrad and Boris.

The court found that an allocation based on each carrier’s time on the risk was proper.

Discussion

A. Joint Venture Coverage

Essex notes that both its and Scottsdale’s policy did not apply to injury or damage arising from any joint venture not designated in the policy as a named insured. Essex argues the only reasonable conclusion based on the evidence is that the Operas’ damages arose from a joint venture; it was, therefore, not obligated to cover such damage and the trial court erred in requiring it make an equitable contribution to Scottsdale’s settlement. Scottsdale replies Conrad and Boris were not engaged in a joint venture. It argues in any event that the joint venture exclusion is inapplicable since whatever the business relationship between Conrad and Boris, it did not materially alter Essex’s risk.

1. Equitable Contribution

“In the context of insurance law, the doctrine of equitable contribution may be simply stated. ‘[W]here two or more insurers independently

“One of the firm principles undergirding the doctrine of equitable contribution is that two or more insurers share an obligation to the common insured. Every California case of which we are aware has enforced an insurer’s contribution claim only where the other insurer was also obligated to pay on the claim. (See, e.g., Fireman’s Fund Ins. Co. v. Maryland Casualty Co. [(1998)] 65 Cal.App.4th [1279], 1288-1302 [ 77 Cal.Rptr.2d 296 ] [and cases cited thereat]; American Continental Ins. Co. v. American Casualty Co. (1999) 73 Cal.App.4th 508 , 513 [ 86 Cal.Rptr.2d 560 ] (American Continental (California)); Fire Ins. Exch. v. American States Ins. Co. (1995) 39 Cal.App.4th 653 , 657, 664 [ 46 Cal.Rptr.2d 135 ]; Continental Casualty Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27 , 32 [ 17 Cal.Rptr. 12 , 366 P.2d 455 ].) On the other hand, where there is no common obligation that is legally due from multiple insurers, then no basis for contribution exists. (See Old Republic Ins. Co. v. Superior Court (1998) 66 Cal.App.4th 128 , 154 [ 77 Cal.Rptr.2d 642 ], disapproved on another ground in Vandenberg v. Superior Court (1999) 21 Cal.4th 815 , 841, fn. 13 [ 88 Cal.Rptr.2d 366 , 982 P.2d 229 ] [loss paid by plaintiff insurer not covered under policy of defendant insurer]; Great American West, Inc. v. Safeco Ins. (1991) 226 Cal.App.3d 1145 , 1152-1153 [ 277 Cal.Rptr. 349 ] [loss payment was made to insured by plaintiff insurer more than four years after the expiration of the one-year time limit in defendant insurer’s policy; thus, any claim under defendant’s policy was unenforceable]; United Pacific Ins. Co. v. Hanover Ins. Co. (1990) 217 Cal.App.3d 925 , 939 [ 266 Cal.Rptr. 231 ] [even though paid by plaintiff insurer, the loss was not covered under any of the policies issued by the multiple insurers involved].)” (American Continental Ins. Co. v. American Casualty Co., supra, 86 Cal.App.4th at pp. 937-938.)

2. Joint Venture

“There are three basic elements of a joint venture: the members must have joint control over the venture (even though they may delegate it), they must share the profits of the undertaking, and the members must each have an ownership interest in the enterprise.” (Orosco v. Sun-Diamond Corp. (1997) 51 Cal.App.4th 1659 , 1666 [ 60 Cal.Rptr.2d 179 ].) A joint venture may be formed by parol agreement or may be assumed as a reasonable deduction from the acts and declarations of the parties. (Ibid.)

Scottsdale argues the trial court’s finding that the building of the Opera house was not a joint venture of Conrad and Boris is not supported by substantial evidence. We agree. However, we conclude the trial court’s alternative finding correct that if Conrad and Boris were involved in a joint venture, it did not materially alter Essex’s risk and provided no basis for rejecting coverage.

A challenge in an appellate court to the sufficiency of the evidence is reviewed under the substantial evidence rule. (See Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624 , 632 [ 80 Cal.Rptr.2d 378 ]; Alderson v. Alderson (1986) 180 Cal.App.3d 450 , 465 [ 225 Cal.Rptr. 610 ].) “ ‘Where findings of fact are challenged on a civil appeal, we are bound by the “elementary . . . principle of law, that ... the power of an appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted,” to support the findings below. [Citation.] We must therefore view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor in accordance with the standard of review so long adhered to by this court.’ [Citation.]” (Thompson v. Tracor Flight Systems, Inc. (2001) 86 Cal.App.4th 1156 , 1166 [ 104 Cal.Rptr.2d 95 ].)

The evidence about Conrad’s relationship with Boris in the building of the Opera house is not in conflict. Conrad testified that he and Boris together owned the property on which the house was built. Conrad stated, however, he might not have been on the title. The grant deed for the property was from Boris to the Operas. Conrad testified that he and Boris agreed to develop the property, sell it and share in any profit or loss. Conrad applied for the building permits. Conrad was the contractor on the project and Boris was not involved in the physical construction of the house. Boris signed the notice of completion. Both Conrad and Boris signed the limited warranty provided to the Operas. In his testimony Conrad described their relationship as a joint venture.

Scottsdale and Essex agree that two of the three elements of a joint venture were present in the construction of the house. The men agreed to share in any profit or loss and each had an ownership interest in the enterprise. They disagree as to the third element, i.e, the requirement they have joint control over the venture.

The basis for Scottsdale’s claim that joint control did not exist over the venture was testimony from Conrad that at no time did Boris have the ability or right to control any aspect of Conrad’s construction business.

We also conclude, however, that the trial court was correct in its alternate finding that any joint venture did not materially alter Essex’s risk and, therefore, the fact a joint venture existed was not a basis for Essex to deny coverage. (See Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712 , 725 [ 260 Cal.Rptr. 797 ].)

The purpose of the joint venture exclusion is to protect the insurer from hidden risks it did not consider in calculating an appropriate premium. (Maryland Casualty Co. v. Reeder, supra, 221 Cal.App.3d at p. 979.) As the trial court noted, Essex agreed to insure Conrad’s contracting business. The Operas’ claim arose from defects in the construction of their house. The evidence supports the trial court’s finding that Boris was not involved in the design or construction aspects of the venture. Thus, whether Conrad and Boris were involved in a joint venture did not materially alter Essex’s risk. Conrad would be individually liable for damages arising from the claimed defects. (See Austin P. Keller Const. v. Commercial Union (Minn. 1986) 379 N.W.2d 533 , 535-536 [ 57 A.L.R.4th 1147 ].)

B. Special Condition Endorsement

Essex argues the trial court erred when it refused to enforce the special condition endorsement contained in its policy.

1. Background

The special condition endorsement stated: “It is hereby understood and agreed that conditions for coverage under this policy are:

“1) Certificates of insurance with limits of liability equal to or greater than those provided by this policy will be obtained from all subcontractors prior to commencement of any work performed for the insured.

“2) Insured will obtain hold harmless agreements from subcontractors indemnifying against all losses from the work performed for the insured by any and all subcontractors.

Essex asserts its promise to Conrad was conditional but not illusory. It states that if Conrad satisfies the condition of the special condition endorsement, i.e, requires his subcontractors to obtain insurance naming him an insured, then Essex is required to participate with those insurers in defending and/or indemnify him. So interpreted, Essex’s policy of insurance is not illusory.

b. Escape Clause

Essex argues the trial court erred in finding that the subject special condition endorsement was analogous to disfavored escape clauses. We agree.

An escape clause acts to eliminate coverage in the presence of other insurance. (CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th 1839 , 1845 [ 29 Cal.Rptr.2d 120 ].) In this case the subject special condition endorsement was a condition precedent to coverage, not an escape clause. In effect, Scottsdale’s claim that the endorsement is “analogous” to an escape clause is merely a restatement under another heading of its other arguments that the endorsement was unreasonable and violates public policy.

c. Ambiguity

Essex argues the trial court erred in finding the special condition endorsement ambiguous and unenforceable. We agree.

Whatever else one might say about the subject special endorsement, what it requires of the insured and the effect of a failure to satisfy its requirement is clear. The endorsement requires that the insured obtain certificates of insurance from all subcontractors, that the insured obtain hold harmless agreements from subcontractors against all loss for the work performed, and that the insured be named as additional insured on all subcontractors’ liability policies. The endorsement plainly states that meeting those requirements is a condition of coverage.

d. Other Insurance Provision

Essex argues the trial court erred in finding that the special condition endorsement was in conflict with the other insurance clause of the policy.

e. Impossibility of Compliance

Scottsdale argues the special condition endorsement is void since it is impossible to perform. Scottsdale contends it is unfair to require that Conrad obtain certificates of insurance, hold harmless agreements and additional insured endorsements from all of his 25 subcontractors in order to be covered by Essex. He states he had no direct control over actions of his subcontractors and their insurance carriers. Scottsdale states: “Enforcing this provision would, therefore, hold Conrad hostage to the failures and omissions of third parties.”

As Essex notes, the Scottsdale policy itself contains an endorsement similar to the special condition endorsement. Scottsdale required Conrad to obtain certificates of insurance from his independent contractors. While the consequences of failing to meet that requirement were not as onerous as under the Essex policy, Scottsdale apparently considered it reasonable and not impossible for Conrad to obtain certificates of insurance from his subcontractors.

As we have noted, endorsements requiring general contractors to warrant that all subcontractors used will maintain insurance at specific levels, and to be named an additional insured on the subcontractors’ policies, is not unusual. The special condition endorsement was not impossible of performance.

f. Spirit of the Condition

Scottsdale argues the special condition endorsement should not be enforced since under the circumstances of this case to do so would violate the

g. Prejudice

Scottsdale argues even if the special condition endorsement was not otherwise defective, it is meaningless in the present context since there is no evidence Conrad’s failure to comply resulted in prejudice to Essex.

Scottsdale, citing Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303 , 305-306 [ 32 Cal.Rptr. 827 , 384 P.2d 155 ], argues that it is not enough for Essex to prove Conrad’s failure to comply with the special endorsement condition but also must prove it was substantially prejudiced by such failure. Scottsdale contends there is no such evidence.

As Essex notes, however, the rule Scottsdale asserts is the “notice-prejudice” rule applicable to the notice and cooperation conditions of insurance policies. (See Truck Ins. Exchange v. Unigard Ins. Co. (2000) 79 Cal.App.4th 966 , 977 [ 94 Cal.Rptr.2d 516 ]; Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal.App.4th 341 , 349 [ 91 Cal.Rptr.2d 514 ]; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2001) 3:168 to 3:170, pp. 3-44 to 3-45, 3:176, p. 3-47, 6:32, p. 6A-3, 7:409, p. 7A-110, 7:419 to 7:425, pp. 7A-112 to 7A-113; 2 Cal. Insurance Law and Practice (1997) § 12.06[2] [a], p. 12-21.) Scottsdale cites no case and we find none requiring a showing of prejudice outside the notice-cooperation clause context.

In any event we agree with Essex that it was prejudiced by Conrad’s failure to comply with the condition that he require his subcontractors to be insured and that he be named an additional insured in their polices. Had he done so Conrad’s vicarious liability for negligence by the subcontractors would be covered both by the Essex policy and the subcontractors’ policies.

The judgment is reversed. Appellant is to recover costs on appeal.

Kremer, P. J., and O’Rourke, J., concurred.