Allocation is a concept with triple meanings in Insurance Coverage circles. The term refers to an Insurance Company doing any one of three things: Allocating expenses it incurred in defending noncovered claims under a liability Policy, for which it seeks reimbursement from its Insured; allocating indemnity payments it incurred in settling noncovered claims, and again for which it seeks reimbursement from its Insured; and third and finally, allocation of Coverage to a particular risk based on various factors such as time on the risk, etc., when the Carrier has issued Liability Policies over the course of several years.
In Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 (Cal. 2d DCA August 3, 2012), Download Axis Surplus Insurance Co. v. Reinoso (Cal. 2d DCA No. B228332, Opinion Filed August 3, 2012) PUBLIC ACCESS, the first two kinds of allocation were involved. Axis Surplus provided Edgar and Linda Reinoso with a defense and Axis also settled claims against the Reinosos, which Axis claimed were not covered and for which Axis sued the Reinosos for reimbursement.
Before passing to Axis's reimbursement case, some factual background is in order. Mr. and Mrs. Reinoso owned and managed rental properties in California. Tenants at a particular apartment complex owned and managed by the Reinosos sued the Reinosos based on alleged diminished habitability; cockroach infestation; inoperable cooling systems; water leaks; inoperable heat systems; and mold. The Tenants alleged not less than nine (9) causes of action against Mr. and Mrs. Reinoso. Estimates provided to Axis of likely Damages outcomes ranged from $3.5 Million to $30 Million. Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 *1 (Cal. 2d DCA August 3, 2012).
The Reinosos tendered their defense in the Tenant Action to Axis Surplus, which had issued two Commercial General Liability Policies to the Reinosos. Axis defended the Reinosos under a Reservation of Rights apparently including a right to claim reimbursement to get its money back for defending noncovered causes of action. See Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 *2 (Cal. 2d DCA August 3, 2012).
Axis incurred defense costs of approximately $257,500.00 for which it sued the Reinosos for reimbursement when the Tenant Action concluded. See Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 *2 (Cal. 2d DCA August 3, 2012). Parenthetically, Axis also sought reimbursement of its settlement payment, which will be the subject of the next post here.
The Trial Court held, and the California Appellate Court affirmed the holding, that Axis could not legally recover its defense expenses for defending noncovered claims in the Tenant Action. The Trial Court applied the Intentional Damages Exclusion ("excluding from coverage injuries that were 'expected or intended from the standpoint of the insured'") to Mrs. Reinoso, finding that she "knew" of the conditions at the apartments which were alleged in the Tenant Action. As noted, the Appellate Court affirmed, holding that "[t]here is substantial evidence to support the trial court's rejection of [Mrs. Reinoso's] claim that she was ignorant of the conditions". See Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 *4, *6 (Cal. 2d DCA August 3, 2012). Since there was no potential for Coverage, the Trial Court held that Axis Surplus had not met its burden to obtain reimbursement for costs it incurred in the defense of claims that were not even potentially covered. See Axis Surplus Insurance Co. v. Reinoso, 2012 WL 3143907 *4 (Cal. 2d DCA August 3, 2012).
Without directly discussing the effect on Axis Surplus's claim for reimbursement of defense expenses of holding that the intentional damages Exclusion applied to the record facts, the Appellate Court affirmed the Trial Court's denial of reimbursement of defense expenses to Axis Surplus in this case.
Discussion of all three allocation issues continues in the next post on Insurance Claims and Issues Blog.
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