By Dominic Nesbitt
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Twenty years ago in
Buss v. Superior Court, 16 Cal. 4th 35, 58-59 (1997), the California Supreme Court held that
in a “mixed action” – where some claims against the
insured are potentially covered and others are not – the insurer
has to defend the action
in its entirety. The
Buss decision laid to rest any argument that an insurer may allocate defense
expenses when conducting an insured’s defense.
Nevertheless, some insurers will argue that the
Buss rule, requiring a complete defense, does not dictate the scope of contractual
damages they must pay for breaching the duty to defend. Instead, they
contend that a breaching insurer is obligated to pay as damages only those
fees and costs associated with the defense of covered claims. If confronted
with a breaching insurer making an argument along these lines, insureds
should consider the following points and authorities when fashioning their response.
-
Buss Dictates The Scope of Damages Owed
The theory behind damages in contract law is that the injured party should
receive, as nearly as possible, the equivalent of the benefits of the
contract he or she would have received had performance been rendered as
promised.
See Archdale v. American Int’l Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 469 (2007). It necessarily follows that a breaching
insurer must pay as damages the equivalent of what it would have paid
had it discharged its duty to defend,
i.e., the entire cost of defending the underlying “mixed action.”
Simply put: if
Buss requires a defending insurer to pay to defend both covered and non-covered
claims, then a breaching insurer must do the same.
- A Breaching Insurer Has No Right Of Reimbursement
The California Supreme Court held in
Buss that at the conclusion of the underlying lawsuit, a defending insurer may
seek reimbursement from its insured of any costs related solely to the
defense of claims not even potentially covered by its policy. However,
the Court made clear that to exercise such a right of reimbursement, an
insurer must have reserved that right. A breaching insurer, of course,
will not have reserved any rights, let alone a right of reimbursement.
It follows, therefore, that a breaching insurer is precluded as a matter
of law from pursuing any reimbursemen claim or otherwise allocating between
covered and non-covered fees and costs.
- An Insurer Should Not Benefit From Its Breach
It would be utterly nonsensical if a defending insurer –
which has failed to reserve reimbursement rights – would have to bear the entire cost of its insured’s defense,
while a breaching insurer –
which has also failed to reserve reimbursement rights – was permitted to allocate between the costs of defending covered
and non-covered claims. This makes no sense from either a legal or public
policy standpoint. On the contrary, such an outcome would give insurers
an economic incentive to breach their duty to defend.
See Comunale v. Traders and General Ins. Co., 50 Cal. 2d 654, 660 (1958) (an insurer “should not be permitted
to profit by its own wrong.”).
- Post-Buss Authorities
Numerous authorities since
Buss have held that a breaching insurer must pay as damages what it failed to provide,
i.e., the cost of a complete defense.
See State v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1549 (1998) (“Buss does not support Pacific Indemnity’s theory that the State should
contribute to attorney’s fees. To the contrary, it unequivocally
holds that the insurer’s duty is to defend the action in its entirety.”);
Cassady v. Morgan, Lewis & Bockius LLP, 145 Cal. App. 4th 220, 236 (2006) (“When an insurer
refuses to defend an action in which a potential for coverage exists, the insured
may recover defense costs, including attorney’s fees allocable to
the defense of noncovered claims, unless the insurer can prove they were
unreasonable or unnecessary.”);
Electronics For Imaging, Inc. v. Atlantic Mut. Ins. Co., 06 3947 (N.D. Cal. May 14, 2007) (“As defendant did not provide
plaintiff with a defense, defendant is liable for plaintiff’s costs
and fees incurred in defending the underlying action, including those
fees and costs incurred in defending claims that are not even potentially
covered.”);
Thane International, Inc. v. Hartford Fire Ins. Co., 06 1244 (C.D. Cal. February 19, 2009) (“‘[The insurer’s]
argument that its duty to defend should be apportioned with its insured
. . . is contrary to California law.’”);
KM Strategic Management LLC v. American Cas. Co. of Reading PA, 15 1869 (C.D. Cal. July 25, 2016) (breaching insurer required to pay
as damages all fees and costs incurred by the insureds including “any
fees and costs related to the defense of claims for which there was not
even a potential for coverage.”).
Leading commentators on insurance law are in full agreement that a breaching
insurer owes as damages the entirety of the reasonable defense costs incurred
by the insured without any right of allocation.
See Hon. H. Walter Croskey,
et al., California Practice Guide: Insurance Litigation § 12:652 (The Rutter
Group 2016) (“By refusing to provide a defense, the insurer becomes
liable for defense costs incurred by the insured allocable to claims
not even potentially covered under the policy.”) (italics in original); 1_7 New Appleman on Insurance
Law Library Edition § 7.06, n. 365 (“Based on [the
Buss] rationale, in California, at least, the policyholder’s recovery
where the insurer does not defend should include reasonable and necessary
fees and expenses to defend against claims within the underlying suit
that are not potentially covered.”).
Twenty years
post-Buss, there are some breaching insurers still arguing they do not owe as damages
the fees and costs their insureds incurred to defend non- covered claims.
This argument is both anachronistic and legally unsound in light of
Buss, as well as being directly contradicted by the myriad legal authorities
cited above.