A California appellate court held on Tuesday in Navigators Specialty Ins. Co. v. Moorefield Constr., Inc., 2016 WL 7439032, __ Cal.Rptr.3d __ (Dec. 27, 2016), that a general liability insurer must cover amounts paid as attorneys’ fees in an underlying settlement even where no duty to indemnify was owed under the policies. The coverage was required under the policies’ Supplementary Payments provision – an often overlooked and underutilized section of the CGL policy that can be of significant value to policyholders.

The case concerned a claim for coverage by Moorefield Construction, a general contractor, who had been sued due to defects in the construction of a Best Buy store. Navigators, Moorfield’s general liability insurer, accepted defense of the suit under a reservation of rights. Evidence adduced in the defect litigation showed that the defects were not caused by an accident. The defect litigation settled for $1.3 million, to which Navigators contributed its $1 million policy limits. Navigators then filed suit seeking a declaration that it owed no coverage to Moorefield. Following a bench trial, the trial court found that because the defects were not the result of an accident, they were not the result of an “occurrence” under the policies. The trial court also found that Navigators had no duty to make payments under the policies’ Supplementary Payments coverage provision because Moorefield’s liability arose from a non-covered claim. The judgment required Moorefield to reimburse Navigators for the full $1 million paid as part of the settlement.

The appellate court reversed the Supplementary Payments ruling, finding that the Supplementary Payments provision should include attorney fees when they are or would be taxable as costs against the insured. As the appellate court explained, that would include prevailing party attorneys’ fees under a contract. Moorefield’s construction contract had such a provision. The court noted that Supplementary Payments are tied to an insurer’s duty to defend, not the insurer’s duty to indemnify. Thus, there need only be a duty to defend for coverage to be due under the Supplementary Payments provision. Here, Navigators had a duty to defend Moorefield at the time of the settlement because there was a potential that the construction defect was covered. Thus, Navigators had a duty to compensate Moorefield under the Supplementary Payments provision of the policies. That duty was not extinguished by the determination that Navigators had no duty to indemnify.

The trial court also erred in placing the burden of allocating the $1 million payment to damage versus taxable attorneys’ fees. The insurer, not the policyholder, bears that burden. The trial court’s error was prejudicial because the evidence showed that most of the $1 million paid by Navigators was for amounts constituting supplementary payments since the cost of repairing the defects was only $377,404. Thus, the insurer was responsible for the balance of $622,596.

Navigators Specialty is a reminder of the significant policy benefits that may exist even in the absence of a duty to indemnify. Policyholders therefore should remember to review their policies carefully for all potentially applicable coverages. Experienced coverage counsel can assist with this and your other coverage needs.