For months the legal press has been teeming with articles about Buss v. Superior Court, reacting to the decision=s long-awaited pronouncement on several previously unsettled questions concerning an insurer=s right to reimbursement for the cost of defending against noncovered claims. Completely overlooked in the commentary so far has been the opinion=s unusual and questionable treatment of the so-called Ain for one, in for all@ ruleCthe rule thatA[o]nce the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered. . . .@ While this rule has long been a staple of claims involving general liability (CGL) policies, until Buss there was little basis for assuming the rule applied elsewhere.
Now that=s changed. In barely two sentences, and with no pretense of the contract-based analysis that has been the centerpiece of recent Supreme Court insurance jurisprudence (including Buss itself), the Supreme Court has required non-CGL carriers to rethink their defense obligations.
H&H Sports sued Mr. Buss in a complex commercial lawsuit with 27 causes of action that included a claim for defamation. This was the only claim potentially covered by Mr. Buss= CGL policies, issued by Transamerica. Transamerica provided a complete defense, reserving a right to reimbursement for the cost of defending noncovered claims. Defense costs exceeded $1 million; Transamerica claimed no more than $56,000 was attributable to the defamation claim. Mr. Buss settled with H&H by paying $8.5 million. Transamerica refused to participate in the settlement, and demanded reimbursement of defense costs. In Mr. Buss= litigation against Transamerica, the parties filed cross-motions for summary judgment. The principal issues were whether Transamerica had a duty to defend; whether it had a right to reimbursement; and if it had that right, the procedure for obtaining reimbursementCwho had the burden of proof, and what the burden was. The trial court granted Transamerica=s motion and denied Mr. Buss=; the Court of Appeal and Supreme Court affirmed.
All but one of the many amicus briefsCas well as those in the companion case, Imcera v. Liberty Mutual Insurance Co. (review dismissed)Cfocused on the reimbursement issue. Everyone assumed the Ain for one, in for all@ rule applied; the question was whether the rule permitted reimbursement. In holding that it did, the Court discussed the basis for the rule. Surprisingly, this was the first time it had ever done so. Although the Ain for one, in for all@ rule had been embedded in California decisional law for many years, no prior opinion explained the basis of the rule, much less evaluated the rule in light of policy language creating the duty to defend. In its most recent statement of the rule, the Supreme Court merely cited the seminal case of Hogan v. Midland National Ins. Co., which itself contained no analysis of the question. Neither did any of the five decisions Hogan cited.
Authority from elsewhere suggested that the duty to defend is grounded in the insurance contract. As one court observed, A[t]he nature of the insurer's duty to defend is purely contractual. There is no common law duty as to which the courts are free to devise rules. The obligation on the court is merely to interpret the language of the insurance contract.@ But in Buss, the Court concluded that policy language is not the basis of the rule. To the contrary, the Court held:
AWe cannot justify the insurer's duty to defend the entire >mixed= action contractually, as an obligation arising out of the policy, and have never even attempted to do so. To purport to make such a justification would be to hold what we cannotCthat the duty to defend exists, as it were, in the air, without regard to whether or not the claims are at least potentially covered.@
One might have thought that this language presaged an end to the Ain for one, in for all@ rule, but it didn=t. Rather,
Awe can, and do, justify the insurer's duty to defend the entire >mixed= action prophylactically, as an obligation imposed by law in support of the policy. To defend meaningfully, the insurer must defend immediately. Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 295. To defend immediately, it must defend entirely. It cannot parse the claims, dividing those that are at least potentially covered from those that are not. To do so would be time consuming. It might also be futile: The >plasticity of modern pleading= [citation] allows the transformation of claims that are at least potentially covered into claims that are not, and vice versa.@
This is the entire discussion of the subject. The Court cites no authority for its conclusion beyond Montrose. It provides no analysis beyond this unvarnished exercise of ipse dixit.
But so what? Hasn=t the Ain for one, in for all@ rule been well settled for years? Isn=t this what every insurer and insured expects, irrespective of the principal issue in Buss concerning who pays for the defense of noncovered claims? In a word, Ano.@ To the contrary, for decades non-CGL insurers have been drafting policies that explicitly disclaim the Ain for one, in for all@ rule. The language of title insurance policies in particular has evolved to a point where its intent is unmistakable:
A[T]he Company, at its own cost and without unreasonable delay, shall provide for the defense of such insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy. The Company shall have the right to select counsel of its choice (subject to the right of such insured to object for reasonable cause) to represent the insured as to those stated causes of action and shall not be liable for and will not pay the fees of any other counsel. The Company will not pay any fees, costs or expenses incurred by an insured in the defense of those causes of action which allege matters not insured against by this policy.@
Justice Kennard recognized the significance of this language in her dissent, where she took the majority to task for ignoring the fact that CGL policies require the defense of Aany suit@ in which a claim for covered damages is made, in contrast with language like that of title insurance policies. She observed that A[b]y stating their defense obligation in terms of defending particular causes of action, rather than entire suits, title insurers have done what insurers issuing standard CGL policies have not doneClimited their contractual defense obligation to the defense of potentially covered claims.@
Justice Kennard=s point is well taken. It is significant that, despite the fact that Mr. Buss= policy obligated his carrier to defend A>any suit against [the insured] seeking damages on account of such injury,=@ and despite the Supreme Court=s close focus in recent years on policy language, in Buss the Court seems to have gone very far out of its way to avoid using the As@ word. In the body of the majority opinion (Sections I and II), the Court uses the words Aclaim@ or Aclaims@ 53 times and uses the word Aaction@ 30 times, but the word Asuit@ never appears outside of two descriptive quotations from Mr. Buss= policies.
Why did the Court, having meticulously explained that an insured can have no expectation that the insurer will pay for the defense of noncovered claims, then turn around and holdCwith virtually no authority or analysis, and after years of pointedly holding that policy obligations are defined by policy languageCthat the insurer is nevertheless subject to the Ain for one, in for all@ rule? The unusual facts of Buss suggest the likely explanation. The Court evidently rebelled at the prospect of requiring an insurer to pay more than $1 million to defend a case on behalf of an extraordinarily wealthy insured who could probably buy the insurance company if he wanted to, where the only covered claim was indisputably a tiny part of the case. At the same time, the Court was not prepared to overthrow the long-settled Ain for one, in for all@ rule. Giving Transamerica a right to reimbursement required eliminating its contractual obligation to defend noncovered claims. Having done so, the Court had to find another basis for the Ain for one, in for all@ rule. The only noncontractual basis for imposing the rule would be some legal policy. But even here, the Court=s approach was strikingly myopic. The logical source for a legal policy would be the statutory authority for defense obligations under indemnity agreements, Civil Code Section 2778(4). But the Court ignored that statute, presumably because it imposes a lesser obligation than the Ain for one, in for all@ ruleCit only requires a defense Ain respect to the matters embraced by the indemnity,@ and then only Aunless a contrary intention appears.@ Left with no statute, decision, or legal principle supporting its desired conclusion, the Court did what it said it couldn=t do: It found the Ain for one, in for all@ rule, in the Court=s words, Ain the air.@ It simply created the rule out of nothing.
The question remains: How broadly does this new rule apply? Does it undercut the carefully-drafted language of title insurance and other non-CGL policies? There is a big world out thereCthe Insurance Code lists 20 different kinds of insurance. Should this unsupported and unreasoned new rule apply everywhere?
One could argue that the rationale of the opinion, such as it is, extends to any kind of insurance that includes any kind of defense obligation, regardless of policy language. The Court construed CGL policies, despite their broad Aany suit@ language, to require a defense only for covered and potentially covered claims. That interpretation seems to create an equivalence with the title policy defense clause, which expressly imposes the same limitation. If the Ain for one, in for all@ rule applies to a CGL policy despite the absence of any contractual obligation to defend noncovered claims, shouldn=t it apply just as well to a title insurance policy, or to any other policy regardless of limiting language?
No, for a number of reasons.
First and most obviously, nothing in the opinion suggests that the Court intended to reach beyond CGL or other liability policies, which were the entire focus of the case and which have long been subject to the Ain for one, in for all@ rule. Title policies are not truly liability policies; they are a hybrid. While they have a defense component, they are primarily first-party indemnity policies, whose principal coverage obligation is to compensate the insured for title defects. The defense obligation is not only incidental to this principal obligation, but is actually optional. Unlike a liability carrier, a title insurer can terminate all coverageCspecifically including any defense obligationCby paying the policy limits to the insured. Further, completely independent of whether any litigation is even pending, the insurer Afully perform[s] its obligations@ by establishing the insured's title Ain a reasonably diligent manner by any method.@
Second, Buss= only rationaleCthat A[t]o defend meaningfully, the insurer must defend immediately [and to] defend immediately, it must defend entirely@Cmay well play no role in a particular case. True, a carrier receiving a claim on the 29th day after service of a complaint is in no position to waste time Apars[ing] the claims, dividing those that are at least potentially covered form those that are not.@ The immediacy of the insured=s need is obvious, and the need is not just financial. The insurer in that position must actually Amount@ a defense, because the insured needs Athe resources and expertise of his insurer@ and Aexpect[s] to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own.@ But what if, as often happens, the insured does not recognize the potential for title coverage until the lawsuit has already been under way for a year and has been fully defended by a CGL carrier? The insured no longer needs anyone to mount a defense; it already has that. The insureds= counsel has been fully paid, and the insured=s rights have been fully protectedCthe CGL carrier has already Adefend[ed] meaningfully@ by Adefend[ing] immediately [and] entirely@ without any participation by the title insurer. All the title insurer can bring to the case at this point is financial support. Buss= rationale provides no basis for requiring the title insurer to provide anything beyond the explicit requirements of the title policyCthe cost of litigating any potentially covered title claims.
Third, Athe plasticity of modern pleading@ is rarely as problematic with title claims as it is with general liability claims. Title policies have a feature that no standard liability policy has: an objective and precise measuring stick for determining whether a claim is, in the first instance, covered by the policy= insuring clause. One simply compares the insured's title as described in the policy with the title claim being asserted. If they conflict, the claim is covered; otherwise not. The linguistic gymnastics in which courts regularly engage when determining coverage under liability policies are, by and large, not a feature of title insurance litigation.
Fourth, although Buss suggests that CGL insureds do not expect their insurers to be ultimately responsible for the cost defending noncovered claims, the clear thrust of the opinion is that insureds do expect a complete defense in the first instance. Insureds under CGL policies have long had a sound basis for that expectation. As noted earlier, in California the Ain for one, in for all@ rule in the CGL context dates back more than 40 years to Ritchie v. Anchor Casualty Co., which itself cited decisions substantially older. The Supreme Court approved the rule nearly 30 years ago in Hogan v. Midland National Ins. Co.
But the entire history of the Ain for one, in for all@ is built around CGL and other liability policies. In sharp contrast, for many years title insurers have been drawing ever more explicit boundaries around their defense obligations. Almost a quarter-century ago, the standard CLTA policy was narrowed from to provide that the insurer would Aprovide for the defense of an insured in litigation to the extent that such litigation involve[d] an alleged defect, lien, encumbrance, or other matter insured against by this policy.@ The current language, which is far more restrictive, has been in effect for nearly a decade. Decisional law in the title insurance arena suggests no discomfort or uncertainty among insureds. Not one reported California decisionCand apparently no decision anywhere elseCinvolves even a contention that title insurance is subject to an Ain for one, in for all@ rule. It is reasonable to infer that insureds under title policies have never expected their insurers to defend non-title claims under any circumstances.
Fifth, the central theme of Buss= analysisCits focus on what the insured is paying premiums forChighlights the uniqueness of title insurance:
ATitle insurance is unlike any other insurance. Insurers in other lines cannot control the risk beyond being careful in the selection of insureds. However, title companies do control the risk; they attempt to eliminate it by the work they do in determining the state of the title.@
The costs that title insurance premiums defray primarily involve the title company=s work in examining titleCa retrospective look at the public record, by which the company seeks to eliminate risk by listing all existing title defects as exceptions from coverage. The policy protects the insured against loss from any defects that the title company failed to locate in the public records. In simple terms, a title policy describes an interest in real property as of the date of the policy and insures against losses resulting from differences between the actual record title and title as insured as of that date. Nothing that happens afterwards is covered. The measure of coverage is equally limited: The most the insured can recover (within policy limits) is the loss in value resulting from the difference between record title and title as insured. For this limited coverage, the insured pays a relatively small, one-time premium for a policy that remains in effect for as long as the insured owns the property. Even apart from the policy=s explicit language, its extremely narrow focus and attendant low premium eliminate any suggestion to the insured that the title insurer would ever pay litigation costs for noncovered claims, even with a right to reimbursement. The expectations of CGL insureds that allowed the Court in Buss to express concern about carriers parsing claims while Rome burns should not govern the fundamentally different relationship that arises under a title insurance policy.
Finally, there has to be some practical limit to the Supreme Court=s analysis even as to CGL policies. To pick a somewhat unrealistic example because it highlights the problem, suppose two plaintiffs join in a lawsuit against the insured. One brings a personal injury action against the insured for an injury occurring on property owned by the insured at a time when the insured carried a CGL policy that plainly covered the claim. The other asserts a personal injury claim for an automobile accident with the insured that occurred during an earlier period when the insured carried no liability insurance of any kind. There is no relationship of any kind between the claims, and as to the second claim there is no circumstance under which the insured could ever have its defense paid for by any insurer. (A comparable example in the title insurance context would be title claims against two unrelated properties, only one of which is insured.) Must the CGL insurer pay for the defense of the second plaintiff=s claim? True, the need for an immediate defense is the same as if the claims had some legal relationship, and there are obvious practical problems involved in providing only a partial defense. But defending against the second plaintiff=s claim would go far beyond anything Buss says about the insured=s expectations and the contractual limitations of the policy. It would, in effect, create an entirely new insurance policy Ain the air.@ From an insurance perspective, these are like two distinct lawsuits. It is difficult to believe that even the Buss court would believe that these circumstances trigger the Ain for one, in for all@ rule.
What this analysis suggests is that the Supreme Court=s rationale for the Ain for one, in for all@ rule cannot require application of the rule in every case under every circumstance. But when should it apply? And how will insurers and insureds know what to do?
It is impossible to provide a general rule because of the range of fact situations in which the parties may find themselves. At one end would be the late-raised claim described above. With the insured already well into the litigation and fully defended by another carrier, no conceivable basis exists for requiring the title insurerCor any other late-notified carrierCto step in and bear the entire cost of defense. The situation would not be very different where a financially capable insured has been paying for the defense itself (i.e., there is no other insurance). In both cases, the insured=s need for an immediate, entire defense has already been met. Given the limitations in the title policy and Buss= only articulated basis for the Ain for one, in for all@ rule, there is no basis for asking a title insurer to do more than pay the cost of defending the title-related claim.
On the other hand, when a homeowner has been sued by her neighbor over a complex of claims that center around a disputed easement, even though some of those claimsCsuch as the insured=s claimed intentional destruction of the neighbor=s propertyCmay be indisputably noncovered, the title insurer probably has no choice but to defend the entire case. Apart from the immediacy of the insured=s needs, how can an insurer ever appoint counsel to handle only part of a case? Will the lawyer file an answer as to only selected causes of action? Is opposing counsel supposed to deal with the insured on some claims and with the appointed lawyer on others? There is a practical dimension to the defense of a case that no policy language can avoid.
Title insurers have an advantage in that noncovered claims will often trigger a defense obligation under another policy, most likely one with an undeniable Ain for one, in for all@ obligationCfor example, the homeowner=s policy in the neighbor dispute described above. If another insurer is involved, the issues raised in Buss will ordinarily be addressed between the insurers, who will agree on some method of allocating defense costs without affecting the ongoing progress of the defense. The same result could obtain even without another insurer=s involvement: Once the case is under way and the demands of immediacy have been met, the insurer should be able to ask the insured to begin bearing her share of the defense costs.
Percentage allocation agreements make the most practical sense, assuming there is some reasonable basis for assessing the proportion of the case that will be devoted to noncovered claims. While it necessarily lacks precision, such an arrangement avoids disputes about the characterization of particular costs and the level of detail necessary for defense counsel=s billsCotherwise an area fertile not only for disputes between insurer and insured but also for a conflict of interest for defense counsel. While, as Buss suggests, it may often be Asafer@ for the insurer to simply defend the entire action without seeking some interim allocation agreement, title insurance claims are often so distinct from other claims that if both sides address the matter in good faith it should be possible to create a realistic allocation.
Although Buss resolved some thorny issues that have been plaguing insurers and insureds for many years, it may have created a whole new round of problems in areas that the case did not even involve. The issues discussed here regarding title insurance will arise with other kinds of policies that do not involve conventional Aany suit@ defense language, and it may be many more years before the dust settles.
Mr. Green is Counsel to the California Land Title Association. Mr. Meadow is with the firm or Greines, Martin, Stein & Richland.