Opinion
A homeowner entered into a contract for the construction of an additional building on his property. He later filed suit against the contractor, alleging defects in the construction. The contractor did not notify his liability insurer of the suit. A default was entered. Through an investigator, the insurer learned about the suit after the entry of default and unsuccessfully moved to set the default aside. A default judgment followed.
The homeowner then brought this action against the insurer, seeking payment on the default judgment. The insurer defended on the grounds that the insurance policy did not cover a default judgment entered without timely notice of the suit, and the insured had failed to give notice in time for the insurer to protect its and the insured’s interests.
The insurer moved for summary judgment based on the policy provisions. The homeowner argued that the insurer had to
We conclude that where a default judgment results from a lack of notice by the insured, (1) the insurer is liable on the judgment unless it suffered actual, substantial prejudice, and (2) the mere inability to investigate the claim thoroughly or to present a defense in the underlying suit does not satisfy the prejudice requirement. Accordingly, we reverse.
I
BACKGROUND
We accept as true the following facts and reasonable inferences supported by the parties’ undisputed evidence on the motion for summary judgment.
(See
Raghavan v. Boeing Co.
(2005)
In 1999, plaintiff Gary Belz entered into a written agreement with Alan Namay, a general contractor, for the construction of a freestanding “healthplex” at Belz’s home. The healthplex included a racquetball court, a rock-climbing wall, a bedroom, and a parking structure. Construction commenced in October 1999 and continued until October 2000.
Defendant Clarendon America Insurance Company (Clarendon) issued a commercial general liability policy to Namay, effective for one year, commencing July 20, 2000.
During or after the construction, Belz saw water leaks in the healthplex, primarily on the racquetball court. Leaks also occurred in other areas. A dispute arose between Belz and Namay over alleged construction defects and the damage to the healthplex.
On December 3, 2001, Belz advised Namay’s insurance broker by letter that Belz was making a claim under the Clarendon policy. After learning of the claim, Clarendon contacted its claims handling service, which retained Crawford Claims Management Services (Crawford) to conduct an investigation. Crawford, in turn, assigned the matter to David Warner.
Between January 2002 and September 2002, Warner investigated the claim. He met with Belz and obtained a recorded statement. He toured the healthplex and took photographs. For his part, Belz gave Warner several items, including a report prepared by a leak specialist, a repair estimate from a construction company, and the contact information for the subcontractors who had worked on the project.
Meanwhile, Warner was trying to get in touch with Namay (the insured) by letter, telephone, and visiting Namay’s home unannounced. Those efforts were to no avail. Warner never heard from Namay.
By letter dated July 1, 2002, Warner wrote to Belz, stating: “. . . I have been unable to make contact with our insured, as he has not responded to my letters, etc. [Clarendon] regrets any inconvenience this may have caused you as we attempt to investigate this claim. Until we speak with our insured, [Clarendon is] not willing to make a decision on what responsibility [its] insured may have for your water intrusion problems, [f] . . . [W]e are continuing our efforts to try and contact our insured so that we may complete the necessary investigation.”
On September 19, 2002, Belz called Warner and asked about the status of the
On December 4, 2002, Belz filed a lawsuit against Namay, alleging negligence and breach of contract arising out of the construction of the healthplex (Belz v. Namay (Super. Ct. L.A. County, 2003, No. BC286397)). On December 12, 2002, the summons and complaint were personally served on Namay. He did not notify Clarendon of the suit. A responsive pleading was not filed. On January 14, 2003, Belz filed a request for entry of default, which was entered the same day. Namay did not inform Clarendon of the request or default.
In late 2003, a claims adjuster for Clarendon, Michael Barnard, assumed responsibility for Belz’s claim. He hired a different company, West Coast Casualty (West Coast), to investigate the claim because Crawford had already taken its “best shot” and come up with nothing.
On February 13, 2004, West Coast’s investigator spoke by telephone with Belz and was told about the suit against Namay. The investigator also contacted Belz’s attorney and received copies of the documents relating to the suit. West Coast reported its findings in a letter to Barnard.
On February 17, 2004, Clarendon, through Barnard, learned that Belz had sued Namay and that Namay’s default had been entered. By letter of the same date, Barnard retained the law firm of Pierce & Weiss to “have the default set aside.” Barnard also instructed the firm to “analyz[e] our defense position,” develop “defense strategies,” file cross-complaints against “all parties” involved in the construction project, and let him know if “early settlement is recommended.”
Pierce & Weiss asked Belz to set aside the default voluntarily, but he refused. Thereafter, the firm filed a motion to vacate the default based on Namay’s “mistake, inadvertence, surprise, or excusable neglect.” (Code Civ. Proc., § 473, subd. (b).) Belz filed opposition. He also filed a request for entry of a default judgment against Namay. Pierce & Weiss filed opposition to the request. On April 28, 2004, the superior court denied the motion to vacate the default and entered a default judgment against Namay in the amount of $191,395.90.
On May 7, 2004, Pierce & Weiss filed a motion for reconsideration and a supporting declaration from Namay, who stated he had not contacted Clarendon or the Pierce firm about the Belz suit because he had given the summons and complaint to an attorney handling a bankruptcy case for him. Namay believed that the bankruptcy attorney would handle the matter. An accompanying declaration from the bankruptcy attorney recited that he had not been retained to defend the Belz suit, so he did not notify Clarendon or the firm about it; he listed the suit as a potential liability on Namay’s bankruptcy petition. (Although Namay was served with process on December 12, 2002, he did not retain the bankruptcy attorney until April 1, 2003, long after a response to the complaint was due.) Belz filed opposition to the motion for reconsideration. On July 1, 2004, the superior court denied the motion.
Namay filed an appeal from the default judgment. It was dismissed as untimely by order of this court dated May 31, 2005 (Belz v. Namay, B177303).
On May 6, 2004, shortly after communicating with Namay for the first time, Clarendon sent him a letter denying coverage. Clarendon informed Namay that there was no potential coverage under the policy because
On June 30, 2005, Belz filed this action against Clarendon, seeking to recover the amount of the default judgment. Belz premised his claim on the Insurance Code, which requires that liability policies contain a “provision that whenever judgment is secured against the insured ... in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.” (Ins. Code, § 11580, subd. (b)(2); see
Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone
(2003)
On July 8, 2005, Clarendon filed a general denial, alleging defenses based on provisions of the policy. (See Code Civ. Proc., § 431.30, subd. (d).)
On February 22, 2006, Clarendon filed a motion for summary judgment, arguing that there was no potential coverage based on the following language in section IV, paragraph 6.d. of the policy: “The Company shall not be liable for any cost, payment, expense (including legal expense) or obligation assumed or incurred by an insured without the Company’s express consent. The Company further shall have no liability for any default judgment entered against any insured, nor for any judgment, or settlement or determination of liability rendered or entered before notice to the Company giving the Company a reasonable time in which to protect its and its insured’s interests. . . .” (Italics added.)
In his opposition papers, Belz contended that the motion should be denied because Clarendon had not shown that Namay’s conduct had caused any prejudice. Belz also filed objections to some of Clarendon’s supporting declarations.
In reply, Clarendon asserted that a showing of prejudice was not necessary and, alternatively, Namay’s conduct had resulted in prejudice by precluding it from thoroughly investigating Belz’s claim and from presenting a defense in the underlying suit.
On May 25, 2006, the trial court heard argument and granted the motion, concluding that Namay had breached section IV, paragraph 6.d. of the policy and that Clarendon did not have to establish prejudice. An order to that effect and a judgment were entered on June 20, 2006.
Belz responded with a motion requesting that the trial court rule upon his evidentiary objections and specify the evidence upon which the court relied in granting summary judgment. Clarendon filed opposition. By amended order filed on August 3, 2006, the trial court sustained Belz’s objections in their entirety and cited the evidence supporting the granting of summary judgment. Belz filed an appeal.
II
DISCUSSION
A motion for summary judgment must be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).)
“ ' “A defendant seeking summary judgment has met the burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action cannot be established [or that there is a complete defense to that cause of action], ... In reviewing the propriety of a summary judgment, the appellate court independently reviews the record that was before the trial court. . . . We must determine whether the facts as shown by the parties give rise to a triable issue of material fact. We accept as undisputed facts only those portions of the moving party’s evidence that are not contradicted by the opposing party’s evidence.’ ”
(Raghavan
v.
Boeing Co., supra,
The rules of construction applicable to contracts govern the interpretation of insurance policies. We interpret the words of the policy in their ordinary sense, according to the plain meaning a layperson would give them. (See
Davis v. Farmers Ins. Group
(2005)
Here, the focus is on the policy language stating that Clarendon “shall have no liability for any default judgment entered against any insured, nor for any judgment... or determination of liability rendered or entered before notice to the Company giving the Company a reasonable time in which to protect its and its insured’s interests.” (Italics added.) The question on appeal rests on whether this portion of the Clarendon policy is a notice provision, a cooperation clause, or a no-voluntary-payment provision. We conclude, unlike the trial court, that the pertinent language is a notice provision and that Clarendon must show prejudice from the lack of notice.
A notice provision requires the insured to inform the insurer promptly of any claims, suits, or occurrences, and obligates the insured to forward immediately to the insurer a copy of any demands, notices, summonses, or legal papers received in connection with a claim or suit. (See
Truck Ins. Exchange v. Unigard Ins. Co.
(2000)
“These three provisions play an important role in defining the insured-insurer relationship. With respect to notice provisions, one Court of Appeal has explained: ‘ “[A]n ‘occurrence’ policy provides coverage for any acts or omissions that arise during the policy period even though the claim is made after the policy has expired.” ... [][].. . [j[] Occurrence policies were developed to provide coverage for damage caused by collision, fire, war, and other identifiable events. . . . Because the occurrence of these events was relatively easy to ascertain, the insurer was able to “conduct a prompt investigation of the incident
“Similarly, cooperation clauses serve an important purpose. ‘[A] condition of a policy requiring the cooperation and assistance of the assured in opposing a claim or an action lodged against him by an injured person is material to the risk and of the utmost importance in a practical sense. Without such cooperation and assistance the insurer is severely handicapped and may in some instances be absolutely precluded from advancing any defense.’ . . . ‘[Sjuch provisions “enable the [insurer] to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to facts, material to [its] rights, to enable [it] to decide upon [its] obligations, and to protect [itself] against false claims.” ’ . . . Where an insured violates a cooperation clause, the insurer’s performance is excused if its ability to provide a defense has been substantially prejudiced. . . .
“Finally, we come to the provision prohibiting an insured from making voluntary payments without the insurer’s consent. Typically, a breach of that provision occurs, if at all, before the insured has tendered the defense to the insurer. ‘The duty to defend is “a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded . . . , or until it has been shown that there is no potential for coverage Phrased somewhat differently, ‘ “[t]he duty to defend arises when the insured tenders defense of the third party lawsuit to the insurer.” ’ . . . The ‘temporal limits of the insurer’s duty to defend [fall] between tender of the defense and conclusion of the action.’ . . .
“The same temporal limits are relevant where an insured has made a voluntary payment in defending an action or resolving a claim. As our Supreme Court has noted: ‘The provisions . . . requiring [the insurer’s] prior
consent to the expenditure of defense costs and permitting [the insurer] to assume the defense of any claim are common in [all] liability insurance policies. Their purpose “is to prevent collusion as well as to invest the insurer with the complete control and direction of the defense or compromise of suits or claims. . . ’
(Gribaldo, Jacobs, Jones & Associates
v.
Agrippina Versicherunges A.G.
(1970)
“More recently, in
Jamestown Builders, Inc.
v.
General Star Indemnity Co.
(1999)
“The Court of Appeal went on to explain that, unlike a notice provision or a cooperation clause, a no-voluntary-payment provision
Most cases applying a no-voluntary-payment provision have involved
pre-tender
payments by the insured. (See
Truck Ins. Exchange v. Unigard Ins. Co., supra,
79 Cal.App.4th at pp. 976-977.) In one case, however, the court dispensed with a showing of prejudice for
posttender
payments, reasoning that the prohibition on voluntary payments is based on an insurer’s
lack of consent,
which can also occur
after
acceptance of tender and while the insurer is providing a defense. (See
Low v. Golden Eagle Ins. Co.
(2003)
A no-voluntary-payment provision encourages an insurer to act promptly in accepting a tender of defense and thereby gain control over the resolution of the claim. “That means insureds cannot unilaterally settle a claim before the establishment of the claim against them .... In short, the provision protects against coverage by fait accompli.”
(Jamestown Builders, Inc. v. General Star Indemnity Co., supra,
“There may be exceptions to the prohibition on voluntary payments, as where the insured is unaware of the identity of the insurer, the payment is necessary for reasons beyond the insured’s control, or the insured faces a situation requiring an immediate response to protect its legal interests.”
(Truck Ins. Exchange v. Unigard Ins. Co., supra,
Clarendon equates an insurer’s payment of a judgment with an insured’s unilateral expenditures to defend and settle a suit. We reject that comparison. The underlying suit by Belz involved a
default
judgment
against
Namay, not a
voluntary
payment
by
him. The courts have applied a no-voluntary-payment provision to
affirmative
acts by the insured, namely, the making of unapproved expenditures in response to a claim or suit, including the payment of a settlement, attorney fees, litigation costs, repair expenses, and remediation costs. (See, e.g.,
Low v. Golden Eagle Ins. Co., supra,
110 Cal.App
In the context of insurance defense, a default judgment may be—as in the underlying suit—the result of several failures by the insured: a
lack of timely notice
to the insurer,
& failure to cooperate
with the insurer, and—especially important here—a
lack of voluntary payments
such as defense costs or a
settlement. Indeed, if this case truly presented a no-voluntary-payment situation, the posture of the litigation would probably be quite different. Most likely,
Namay
would now be suing Clarendon, seeking reimbursement for defending and settling the underlying suit at his own expense, and Belz would be out of the picture. (See, e.g.,
Low v. Golden Eagle Ins. Co., supra,
It follows that Namay’s default was the result of a lack of notice or failure to cooperate and was not attributable to the payment of a settlement or defense costs. The courts have repeatedly recognized that, in circumstances like those here, the insurer must show actual, substantial prejudice to prevail on a policy defense. In
Campbell
v.
Allstate Ins. Co.
(1963)
The plaintiffs sued Allstate on the default judgment. The trial court found in favor of Allstate on the ground that Hammer’s failure to cooperate raised a presumption of prejudice. The Supreme Court reversed, explaining: “An insurer may assert defenses based upon a breach by the insured of a condition of the policy such as a cooperation clause, but the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby. . . . Similarly, it has been held that prejudice must be shown with respect to breach of a notice clause.” (Campbell, supra, 60 Cal.2d at pp. 305-306, citations omitted.) “The burden of proving that a breach of a cooperation clause resulted in prejudice is on the insurer.” (Id. at p. 306.) “Although it may be difficult for an insurer to prove prejudice in some situations, it ordinarily would be at least as difficult for the injured person to prove a lack of prejudice, which involves proof of a negative. . . . [W]e are of the view that a judicially created presumption of prejudice, whether conclusive or rebuttable, is unwarranted . . . .” (Id. at p. 307, citation omitted.)
In examining the record in
Campbell
for prejudice, the court noted that, according
In
Billington v. Interinsurance Exchange
(1969)
The Supreme Court reversed, stating: “The primary question presented is whether a determination that an insurer was substantially prejudiced by its insured’s breach of a cooperation clause may be based upon the conclusion that there might have been advanced a valid defense which the finder of fact could reasonably have accepted. In our view, a holding of substantial prejudice cannot be supported upon this tenuous foundation.”
(Billington, supra,
“If an insurer could meet its burden of establishing substantial prejudice from the breach of a cooperation clause by a mere showing that a jury could reasonably and properly have accepted a defense, the holding of Campbell would be effectively vitiated since we can conceive of few cases in which an insurer would be unable to maintain that a finding could reasonably have been made in a [third party] defendant’s favor. . . .
“We hold, therefore, that an insurer, in order to establish it was prejudiced by the failure of the insured to cooperate in his defense, must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in the insured’s favor.”
(Billington, supra,
In
Northwestern Title Security Co. v. Flack
(1970)
The Court of Appeal affirmed, pointing out that a late-notice defense “is not carried by a showing of [a]
possibility
of prejudice to the insurer. Rather,
actual
prejudice must be shown.”
In
Clemmer v. Hartford Insurance Co.
(1978)
Thus, “[i]n order to demonstrate actual, substantial prejudice from lack of timely notice, an insurer must show it lost something that would have changed the handling of the underlying claim. ... To establish actual prejudice, the insurer must show a substantial likelihood that, with timely notice, and notwithstanding [any] denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.”
(Shell Oil Co.
v.
Winterthur Swiss Ins. Co.
(1993)
We give no weight to Clarendon’s reliance on dicta in two older
cases—Valladao v. Fireman’s Fund Indem. Co.
(1939)
Further, Clarendon argues that the language at issue is a no-voluntary-payment provision because of its location in the policy. Turning to the policy, the first three paragraphs of section IV (pars. 6.a.-c.) contain several provisions relating to notice and cooperation, including the insured’s obligation to notify the insurer promptly of a suit and to cooperate in the investigation, settlement, and defense of a suit.
The language at the heart of the appeal—disclaiming liability for a default judgment entered without timely notice to the insurer—is contained in the fourth and final paragraph of section IV (par. 6.d.). (See, ante, at p. 624 [quoting paragraph].) More specifically, the pertinent language appears in the second sentence of that paragraph. Clarendon places equal importance on the first, or preceding, sentence: “The Company shall not be liable for any cost, payment, expense (including legal expense) or obligation assumed or incurred by an insured without the Company’s express consent.” As Clarendon sees it, the proximity of these sentences means they should be interpreted to cover the same subject: voluntary payments by the insured, which do not require a showing of prejudice.
We agree with Clarendon that the first sentence is a traditional no-voluntary-payment provision. But the placement of the two sentences in the same paragraph, albeit next to one another, does not mean we should ignore the plain meaning rule in construing the applicable language of the second sentence. As explained above, that language is a notice provision, not a prohibition on voluntary payments.
Last, Belz raises a procedural issue, arguing that Clarendon is “bound by the default judgment” against Namay because it did not
intervene
in the underlying suit but instead filed a motion to set aside the default. We disagree. Given that a judgment against an insured may be satisfied through a direct action against a liability insurer (see Ins. Code, § 11580, subd. (b)(2)), the insurer may choose to intervene where, for example, the insured is an individual in jail or a corporation that has had its corporate status revoked. (See
Reliance Ins. Co. v. Superior Court
(2000)
In sum, because Namay breached a notice provision, and Clarendon did not make a showing that it suffered actual, substantial prejudice, the trial court erred in granting summary judgment. We express no view as to exactly what Clarendon must show to satisfy the prejudice requirement. Nor have we limited the
HI
DISPOSITION
The judgment is reversed. Appellant is entitled to costs on appeal.
Rothschild, J., and Jackson, J., * concurred.
Respondent’s petition for review by the Supreme Court was denied March 12, 2008, SI60483. Moreno, J., did not participate therein.
Notes
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.