Crown Energy Services, Inc. v. Zurich American Insurance Company

Background

Crown Energy Services, Inc., doing business as Able Engineering Services, and Crown Building Maintenance Co., doing business as Able Building Maintenance, sued Zurich American Insurance Company, Zurich Services Corp., and Does 1–50. The plaintiffs alleged breach of contract and breach of the implied covenant of good faith and fair dealing. The motions addressed two commercial general liability policies Zurich issued to Able for coverage periods beginning in 2013 and 2014.

The policies used a $500,000 per-incident self-insured retention. Under that arrangement, Able was responsible for defense costs and covered damages up to the retention before Zurich’s coverage applied. The policies also allowed clients that Able was contractually required to insure to qualify as additional insureds. The dispute concerned whether the retention applied when a claim was brought against one of those additional insureds rather than against Able itself.

The underlying litigation involved fifty-five bodily-injury claims asserted against Able’s clients, including claims arising from alleged slip-and-fall accidents connected to Able’s janitorial work. Zurich acknowledged the additional-insured status of at least one client but declined to accept the defense and indemnity tender because Able had not satisfied the $500,000 retention. The opinion states that Able did not incur and pay $500,000 or more in defense fees, costs, and indemnity in any of the underlying matters.

Motions and Parties’ Arguments

Able moved for partial summary judgment on its breach-of-contract claim concerning the commercial general liability policies. Zurich filed a cross-motion for summary judgment on that claim and also moved for summary judgment on Able’s claim for breach of the implied covenant of good faith and fair dealing.

Able argued that the policy distinguished between the named insured and additional insureds and that the retention provisions addressed only the named insured. It relied particularly on provisions using “you” and “your,” which referred to the named insured, and on language stating that payments by additional insureds could not satisfy the retention. According to Able, Zurich therefore owed first-dollar defense and indemnity to the additional insureds and had breached the policy by refusing to provide that coverage.

Zurich argued that satisfying the retention was a condition precedent to its liability under the policy as a whole. It relied on the policy’s statements that the retention endorsement controlled in the event of a conflict with other policy provisions and that Zurich had no obligation to pay damages or defense costs unless Able satisfied the retention. Zurich also cited California and Indiana decisions involving similar retention provisions and communications showing that Able understood it was accepting greater risk in exchange for lower premiums.

For the bad-faith claim, Zurich argued that an insurer cannot be liable for breach of the implied covenant when policy benefits are not owed under the contract. It also argued that a genuine dispute over policy interpretation, without evidence of unreasonable conduct, could not establish bad faith.

Court’s Analysis

The court applied California contract-interpretation law. It treated interpretation of the insurance policies as a legal question suitable for summary judgment because the parties’ dispute concerned the meaning of the policy language rather than a material factual dispute.

The court found the retention language materially similar to the provision enforced in Forecast Homes, Inc. v. Steadfast Insurance Co. That language made the named insured’s payment of the retention a condition precedent to the insurer’s liability, prohibited additional insureds from satisfying the retention, and stated that the endorsement controlled if it conflicted with other policy language. The court concluded that the same structure required Able to satisfy the retention before Zurich owed defense or indemnity under the policy.

The court also found Walsh Construction Co. v. Zurich American Insurance Co. persuasive. That decision held that a similar retention applied to coverage for both the named insured and additional insureds. The court rejected Able’s argument that the retention definition’s use of “you,” rather than “you or any insured,” limited the retention to Able’s direct liability. It reasoned that Able’s contractual obligations to defend and indemnify its clients meant that amounts Able became legally obligated to pay on behalf of additional insureds fell within the retention’s broad wording.

The court further relied on the policy’s overall structure and the parties’ negotiations. Able had moved from a policy with a $10,000 deductible to a high-retention program intended to reduce premiums. Communications involving Able’s broker, Marsh Risk & Insurance Services, showed that Able and its clients anticipated concerns about the effect of the $500,000 retention on additional-insured coverage. The court concluded that this evidence supported Zurich’s interpretation, even assuming the policy language were ambiguous.

Ruling

The court granted Zurich’s cross-motion for summary judgment on Able’s breach-of-contract claim concerning the commercial general liability policies and denied Able’s motion for partial summary judgment on the same claim. The court held that the $500,000 retention applied to claims involving Able’s additional insureds and that Able had not satisfied the retention in the underlying matters.

The court also granted Zurich’s motion for summary judgment on Able’s claim for breach of the implied covenant of good faith and fair dealing. Because the court found that Zurich did not owe coverage under the contract before Able satisfied the retention, the bad-faith claim lacked an underlying contractual basis. The court separately stated that the claim would fail because Able had not shown that Zurich’s conduct went beyond an honest mistake, bad judgment, negligence, or a genuine dispute about policy coverage.

The order states that it disposed of Docket Nos. 59 and 67. It does not state that every claim in the action was resolved by this order.