When a claimant advances a damage claim based on one causation theory, but the defense investigation reveals a different cause of the damage, what evidence can be used in an indemnity or insurance trial regarding causation? In a recent case, National Union Fire Ins. Co. of Pittsburg v. Tokio Marine & Nichdio Fire Ins. Co., (2015) 233 Cal.App.4th 1348, a California Court of Appeal provided important guidance concerning the evidence that may be used to prove one party’s obligation to indemnify another following settlement of a third-party claim. The National Union decision is applicable in a wide range of cases in which an insured seeks to enforce coverage obligations of an insurer, as well as in cases where, for example, a developer seeks indemnity from a subcontractor.

National Union involved a fight between two insurance companies concerning a severe injury claim arising from a tire failure involving Yokohama tires sold and installed by Costco: Tokio Marine, the insurer for Yokohama, and National Union, the insurer for Costco. Yokohama agreed to manufacture tires for distribution and sale by Costco and to indemnify Costco for defects in design, materials and workmanship. Yokohama also agreed to maintain products liability insurance coverage naming Costco as an additional insured. After entering the agreement with Costco, Yokohama secured that coverage from Tokio Marine.

A customer purchased Yokohama tires at a Costco store in 1997. In 2001, the left rear tire failed and the customer sustained quadriplegic injuries. The customer sued Yokohama and Costco (among others), alleging products liability claims against Yokohama and Costco, and negligence claims against Costco. Costco tendered defense to Yokohama and Tokio Marine; they rejected Costco’s tender. The plaintiff customer identified a single expert on his product defect claim, who opined regarding three contributing causes. On the first day of trial, Costco and Yokohama each separately settled with the plaintiff for a total of $6.6 million, with $1.1 million paid by Yokohama and Tokio Marine, and $5.6 million paid by Costco and National Union.

Following the settlement, National Union filed an action against Yokohama and Tokio Marine to recover the cost of defense and the settlement paid on behalf of Costco. To prevail on its claim, National Union needed to prove that the accident was caused by Yokohama’s defective tire and not Costco’s negligence in installing and maintaining the tire. To meet its burden, National Union retained an expert who identified eight discrete defects in the tire made by Yokohama, all of which caused the tire to fail. Before the start of the trial, however, Tokio Marine moved successfully to limit the evidence that National Union could present to prove its case. Specifically, Tokio Marine moved that National Union’s evidence of tire defects should be limited to the opinions offered by the plaintiff customer’s expert in the underlying personal injury action. Tokio Marine argued that National Union settled with the plaintiff customer in the underlying action based upon the testimony of the plaintiff’s expert only, and that the additional theories asserted by National Union’s retained expert in the subrogation action were not relevant. In effect, Tokio Marine argued that all evidence regarding National Union’s claim became frozen

and could not be changed as of the time that National Union settled the products liability action. The trial court agreed with Tokio Marine and excluded the testimony of National Union’s retained expert, stating: “[W]e know exactly pretty much what was going to be tried [in the personal injury action], and so in my opinion, I think that’s where we put an end to things. That’s the be all and end all of what the knowledge was. . . . It stops right then and there. I don’t believe that [National Union’s expert] can come up with new theories that weren’t raised by [plaintiff’s expert] at the time of the settlement.”

The trial court’s ruling substantially limited National Union’s ability to present evidence that the accident was caused by a product defect and not Costco’s negligence. In its opening statement, National Union conceded that its expert could not opine, based solely on the opinions of the plaintiff customer’s expert in the underlying action, that the tire contained a defect in design or manufacture that caused the tire failure. Based upon this concession, the trial court granted Yokohama’s motion for a nonsuit on National Union’s express indemnity claim, granted summary adjudication in favor of Tokio Marine on National Union’s refusal to defend claim, granted summary adjudication in favor of Yokohama on National Union’s contractual indemnity claim, and awarded Yokohama over $800,000 in attorneys’ fees as prevailing party on the contractual indemnity claim.

National Union appealed on the grounds, inter alia, that the trial court’s exclusion of the testimony of its tire expert was prejudicial error. As framed by the Court of Appeal, the question presented was “whether an indemnitee which settles a third party claim can present evidence acquired post-settlement, or instead is limited to the underlying plaintiff’s evidence of liability.” In reversing the decision of the trial court, the National Union court found no support for Tokio Marine’s assertion that “an indemnitee which settles the underlying plaintiff’s personal injury claim is limited to offering the evidence which the plaintiff was prepared to present in prosecution of the third party claim.” Rather, National Union should have been permitted to present the opinions of the plaintiff’s expert as well as other evidence developed by National Union as subrogee to Costco’s indemnity claims, including the newly-developed expert testimony regarding design and manufacturing defects in Yokohama’s tires. The Court of Appeal recognized that if the trial court’s ruling were correct, “a business sued for both products liability and negligence would be required to marshal evidence of its own liability to the injured plaintiff or risk impairing its indemnity rights vis-à-vis the product manufacturer. This would not only place an unfair burden on the litigant, but could very well undermine the public policy in favor of settlement.”

The National Union decision is significant in that the Court of Appeal expressly rejected Tokio Marine’s argument that National Union needed to “fight to the death” with the plaintiff customer in the products liability suit as a precondition for National Union to introduce evidence gathered in the subsequent indemnity action. Although National Union arose in the context of two insurance companies fighting over indemnity, the case is useful and applicable to a wide variety of disputes involving indemnity obligations.

For example, National Union may be applicable when a developer is sued for construction defects and seeks indemnity from a subcontractor. In this type of litigation, the developer is sued on the basis that there is property damage and the developer is responsible to

repair or replace the damaged property. In response, the developer will look to the subcontractors whose work is involved in the claim to pay both its defense costs and any cost to repair or replace the damaged property. The holding in National Union confirms that a developer should be permitted to present evidence to establish that the subcontractor’s work caused property damage, regardless of whether the developer chose to settle the underlying action. The developer should be permitted to use both evidence developed by the plaintiff in the underlying construction defect action as well as evidence specifically gathered by the developer in support of its indemnity claim, including evidence prepared by its own experts to show that the subcontractor’s work caused damage to the property.

National Union also will be useful in coverage disputes between policyholders and their insurers. In such disputes, there are often questions about the nature of the claims being asserted, and the analysis involves examining a wide variety of documents. Insurers often argue that only a limited range of evidence is relevant to determine if the third-party claim is covered or potentially covered. In contrast, policyholders often will seek to use a wide variety of evidence gathered from numerous sources to support their contention that the third-party claims are covered, or potentially covered, by the relevant insurance policy. National Union confirms that policyholders should be permitted to use evidence gathered by the policyholder itself, as well as evidence gathered by the third-party claimant, to support its position that there is insurance coverage.

Similarly, National Union confirms that an insurer may not deny coverage simply on the basis that the third-party claimant has not clearly pled its allegations. In this regard, National Union follows prior cases, such as Montrose Chem. Corp. of Calif. v. Superior Court, (1993) 6 Cal.4th 287: If a third-party claimant fails to clearly plead its allegations and, as a result, the insurer incorrectly interprets the allegations, the insurer is required to consider evidence gathered by the policyholder showing the extent of the claim alleged. An insurer cannot ignore evidence showing the potential for coverage simply because the policyholder, rather than the third-party claimant, provided that evidence to the insurer.

National Union is a reminder that evidence about third-party claims is often fluid, and the obligations flowing from third-party claims should not be examined on the basis of a single snap shot taken at any one particular moment in time. Rather, there must be a continuous process of examining and reexamining the facts supporting specific allegations, what those allegations mean and, as important, what indemnity obligations may be triggered because of new facts developed and/or changing allegations.