Daily Development for
By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
prandolph@cctr.umkc.edu
INSURANCE; LIABILITY; NON-FILED CLAIMS: Liability insurer may be liable to
cover costs of housing developer
subjected to a construction defects lawsuit when the developer undertakes a
program of inspecting and repairing homes of non-plaintiff home buyers.
Barratt
American, Inc., Plaintiff and Appellant, v. Transcontinental Insurance Company, No. D036401 (
Builder faced a huge lawsuit for construction defects in its new homes.
During the period of disagreement about coverage, Builder, without
consulting Transcontinental (since Transcontinental was denying coverage)
undertook a program whereby it inspected all of the homes of purchasers who
were not suing the builder, and repairing defects as it discovered them. In the end, builder spent over $500,000 in
this program.
Later, it was determined that Transcontinental in fact had a duty to insure
builder on the litigation in question, and Builder demanded also that
Transcontinental pay the money that it had expended in addressing construction
defects on non-plaintiff owners' properties.
Transcontinental refused, and this issue became part of the overall
insurance dispute and the subject of this appeal.
The court here held that Transcontinental did indeed have an obligation to
compensate builder for some expenses related to its non-plaintiff repair
program because they arguably were related to investigation and mitigation of
damages in the litigated claims. It
further held that the fact that Builder might enjoy an incidental benefit of
avoiding litigation on other matters or of buying good will would not preclude
the determination that the insurer was liable. Insurer "must undertake
reasonable and necessary efforts to avoid or at least minimize liability[,]
Citing the California Supreme Court decision in Aerojet-General
Corp. v. Transport Indemnity Co.,17 Cal.4th 38 (1997), the court noted that
"investigation and mitigation expenses" constitute defense costs that
the insurer must incur in fulfilling its duty to defend under certain
circumstances. (In Aerojet,
the expenses were in the nature of investigating an alleged
hazardous substances conditions on a site which might or might not have
been the basis for the liability claims that were the basis of the pending
lawsuit.)
"First, the site investigation must be conducted within the temporal
limits of the insurer's duty to defend, i.e., between tender of the defense and
conclusion of the action. Second, the site investigation must amount to a
reasonable and necessary effort to avoid or at least minimize liability. Third
and final, the site investigation expenses must be reasonable and necessary for
that purpose." [W]hether the insured's investigation and investigation
expenses are reasonable and necessary "must be assessed under an objective
standard," and the subjective motivations of the insured and/or its
attorneys are not relevant in the analysis."
The insurer argued that the investigative costs involved in Aerojet at least involved the same site as the site that
was the basis for the pending lawsuit, and that Aerojet
as authority was limited to that investigation at the site of the problem
claimed in the lawsuit. The court
rejected this argument. It viewed Aerojet as "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."
Developer's claim, basically was that the
investigation of the other homes might have led to some information that would
be useful in identifying whether the alleged conditions in the pending lawsuits
were indeed defects for which it was responsible. Further, assuming that the Developer was held
responsible for the alleged defects in the pending lawsuit, the Developer
argued that its experience in remediating the
problems in the non-plaintiff homes would be relevant in evaluating the money
claims of the plaintiffs in the pending litigation.
Notwithstanding this broad holding in favor of the general principles
underlying the Developer's claim, the court rejected the Developer's attempts
to obtain procedural advantage in proving that the monies that it spent were
indeed related to the pending litigation.
It held that Developer continued to bear the burden of proof that its
expenditures indeed directly related to investigation and mitigation of alleged
liability in the lawsuit. For instance,
the investigation and remedying of defects that had no relationship to the
defects for which the insurer might be liable would not be recoverable. The insurer's liability was limited primarily
to roof problems.
Developers witnesses opined that information
obtained from non plaintiffs 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. But the court indicated that more substantial
and specific evidence was required to link the repair and remediation actions
specifically to claims in the pending lawsuit.
"[I]t 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 a inference that a reasonable insured would have found the
costs were reasonable and necessary to defend the lawsuit."
The court consequently remanded the case to the trial court for further
inquiry as to whether the principle that the Developer could recover the costs
of its inspection and remediation program as "investigation and
mitigation" costs in the pending lawsuit actually resulted in any provable
economic recovery in this case.
Comment: The UMKC insurance expert,
Jeff Thomas, indicated to the editor that this case really makes common sense
in the insurance context.
Anything that would logically be an appropriate expenditure to limit the
recovery against the insured ought to be a recoverable cost of defense where
the insurer refuses to defend. In fact,
Thomas commented, this rule is a "win-win" rule for the insurer,
since it supports the insured's actually expending monies that might ultimately
lead to a lower insurance payoff even when the insurer is contesting
coverage.
To the editor, however, this is a novel idea, and obviously subject to some
manipulation by developers seeking to avoid further lawsuits by other
plaintiffs. It doesn't appear to be a
rule limited to the special circumstances of
Readers are urged to respond, comment, and
argue with the daily development or the editor's comments about it.
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