Kmart v. XL Ins.

Filed 2/3/10 Kmart v. XL Ins. CA2/1

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

APPEAL from a judgment of the Superior Court of Los Angeles County. Robert L. Hess, Judge. Affirmed in part; reversed in part with directions.

________

Homan & Stone, Gene S. Stone, John P. Garcia; Reed Smith, James M. Davis, Paul Walker-Bright and Evan T. Knott for Plaintiff and Appellant.

Foran Glennon Palandech & Ponzi, Kevin J. Price, Matthew S. Ponzi and Thomas B. Orlando for Defendant and Respondent XL Insurance America, Inc.

Musick, Peeler & Garrett, Larry C. Hart and Cheryl A. Orr for Defendants and Respondents Securitas Holdings, Inc. and Securitas Security Services USA, Inc.

________

Plaintiff Kmart Corporation appeals from the judgment entered in favor of defendants in this insurance dispute involving a security services company that Kmart retained. We affirm in part and reverse in part.

BACKGROUND

In 1997, Kmart and Borg-Warner Protective Services Corporation entered into a National Security Services Agreement (hereafter the services agreement). After a series of business acquisitions and other transactions, Securitas Security Services USA, Inc. (Securitas) acquired some of Borg-Warners accounts, including the Kmart account governed by the services agreement. Under the services agreement, Securitas provided security services to Kmart distribution centers and retail stores at 32 locations in 16 states.

The services agreement required Securitas to maintain a commercial general liability insurance policy naming Kmart as an additional insured, as well as an automobile liability policy, a workers compensation and employers liability policy, and an [u]mbrella/[e]xcess [l]iability policy. The services agreement also provided that Securitas naming of Kmart as an [a]dditional [i]nsured in its liability policies pursuant to this [c]ontract[] shall . . . in no event be construed for any purpose so as to make [Securitas] or its insurer liable for the acts or omissions of Kmart, its agents, servants or employees. A separate provision of the services agreement further required Securitas to indemnify Kmart for any damage or loss arising out of the performance or failure of performance of this [a]greement . . . except when caused by the acts or omissions of Kmart, its agents or employees.

Securitas Holdings, Inc. (Securitas Holdings) purchased commercial general liability and umbrella/excess liability policies from XL Insurance America, Inc. Both Securitas Holdings and Securitas are named insureds on both policies.

The commercial general liability policy includes an endorsement entitled Additional Insured Owners, Lessees or Contractors (Form B), which provides as follows: WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that Insured by or for you. The Schedule to which the endorsement refers appears on the same page. The only entry on the Schedule, under the heading Name of Person or Organization: is Where required by written contract.

The umbrella/excess liability policy provides that an [i]nsured under the policy includes [a]ny person, organization, trustee or estate that has obligated you by written contract to provide the insurance that is afforded by this policy; but only with respect to duties performed by or for you, or to facilities owned or used by you.

In March 2004, a Securitas employee died as a result of an accident at a Kmart facility where Securitas was providing security services pursuant to the services agreement. The estate and survivors of the employee sued Kmart and MVT Services, Inc., the company that operated a truck involved in the accident. The jury in that lawsuit returned a verdict in favor of the plaintiffs and against Kmart and MVT for $7,375,000. The jury apportioned fault 70 percent to Kmart, 29 percent to MVT, and 1 percent to the employee who was killed. The jury was not asked to, and never did, apportion any fault to Securitas.

Kmarts portion of the liability from that lawsuit was later settled. Kmart then asked XL to reimburse the $2.8 million that Kmart paid under the settlement. XL refused, contending inter alia that Kmart is not an additional insured under the Securitas policies.

Kmart filed suit against XL for breach of contract and declaratory relief. Both the complaint and the operative first amended complaint also name Securitas and Securitas Holdings as defendants, but neither pleading alleges any wrongdoing by those defendants nor seeks any relief from them. The first amended complaint alleges claims for breach of contract based on the duty to indemnify (count 1), declaratory relief (count 2), breach of contract based on the duty to defend (count 3), and breach of the implied covenant of good faith and fair dealing (count 4). Each of those four counts is alleged against XL alone, but the caption page and the listing of parties within the body of the pleading still include Securitas and Securitas Holdings as defendants.

In its answer to the original complaint, XL asserted as affirmative defenses that the terms of the insurance policies barred any recovery for Kmart on multiple grounds, including (1) that Kmart failed to comply with the policies notice provisions, and (2) that the policies did not cover Kmart for Kmarts own negligence. Securitas and Securitas Holdings answered both the original complaint and the first amended complaint.

Kmart moved for summary adjudication of (1) XLs eleventh affirmative defense based on the coverage issue and (2) XLs eleventh, twelfth, and thirteenth affirmative defenses based on the notice issue, contending that Kmart had complied with the notice provisions and was an additional insured under the policies. XL filed a motion for summary adjudication based on the opposite contentions.^[1] XL also demurred to counts 3 and 4 (duty to defend and bad faith) of the first amended complaint. Securitas and Securitas Holdings likewise moved for summary judgment on several grounds, including that the first amended complaint did not allege or request any monetary damages or any other relief from them and consequently failed to state or establish a case or controversy between Kmart and Securitas or Securitas Holdings.

The trial court granted XLs motion for summary adjudication, denied Kmarts, and sustained XLs demurrer without leave to amend. The court concluded that the XL policies did not cover Kmart for its own negligence. Kmarts duty to defend and bad faith claims therefore failed as a matter of law. The court also granted Securitas and Securitas Holdings motion for summary judgment on several grounds, including that [t]here are no claims asserted against Securitas and Securitas Holdings, and there is no allegation made by Kmart that any harm will come to Kmart or the Securitas [d]efendants interests by removing the Securitas [d]efendants from this litigation.

The court entered judgment on October 9, 2008. Kmart timely appealed.

STANDARD OF REVIEW

We review the trial courts ruling on a motion for summary judgment or summary adjudication de novo. (Buss v. Superior Court (1997) 16 Cal.4th 35, 60 [summary judgment]; Certain Underwriters at Lloyds of London v. Superior Court (2001) 24 Cal.4th 945, 972 [summary adjudication].) The interpretation of an insurance policy is a question of law, which we review de novo. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18; Brodkin v. State Farm Fire & Casualty Co. (1989) 217 Cal.App.3d 210, 216.) In reviewing a judgment after a demurrer was sustained without leave to amend, we must assume the truth of the complaints properly pleaded or implied factual allegations and must also consider judicially noticed matters, and we determine whether the complaint states facts sufficient to state a cause of action. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)

DISCUSSION

I. The Court Erred by Granting Summary Judgment in Favor of XL

Kmart argues that the trial court erred when it determined that the XL policies do not cover Kmart for its own negligence. We agree.

The basic interpretive issue is easy to summarize: The commercial general liability policy includes an Owners, Lessees or Contractors endorsement that adds as an insured any person or organization Where required by written contract. The services agreement does require Securitas to nam[e] Kmart as an additional insured in its commercial general liability policy, so Kmart would appear to be covered. The services agreement also provides, however, that Securitas naming of Kmart as an [a]dditional [i]nsured in its liability policies pursuant to this [c]ontract[] shall . . . in no event be construed for any purpose so as to make [Securitas] or its insurer liable for the acts or omissions of Kmart, its agents, servants or employees. So the question is: Which is controlling, the requirement that Kmart be named as an additional insured, or the requirement that Kmarts inclusion as an additional insured not be construed as creating coverage for Kmarts negligence?

We conclude that the former controls, because a separate endorsement contained in the same policy shows that when XL wishes to limit coverage by incorporating the terms of an outside contract, it does so expressly. An endorsement to Securitas commercial general liability policy, entitled Additional Insured Designated Person or Organization, provides as follows: WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you. The sole entry on the Schedule is Any person or organization (as per schedule on file with the company), but only to the extent that the named insured has agreed in writing prior to the occurrence or accident to provide insurance for such persons or organizations and then only with respect to liability for bodily injury or property damage arising out of operations performed for such additional insured by or on behalf of the named insured. The endorsement further provides, however, as follows: It is agreed that the insurance provided by this endorsement, subject to all other policy terms, conditions and limits of insurance, does not extend coverage beyond that agreed to in the license agreement, ordinance or contract between the additional insured designated above and the named insured. (Italics added.) That is, if a contract between Securitas (or Securitas Holdings) and a third party requires Securitas (or Securitas Holdings) to provide insurance for the third party, then the third party is included as an additional insured (subject to various limitations), but only for the scope of coverage specified in the third-party contract.

In sum, the Designated Person or Organization endorsement includes an express provision that limits the scope of coverage to whatever is specified in the third-party contract. The Owners, Lessees or Contractors endorsement includes no such provision, so none will be implied. (See Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1115 [we must interpret the terms of an insurance contract in context and give effect to every part of the policy, with each part helping to interpret the other].) The scope of coverage for an organization that is an additional insured pursuant to the Owners, Lessees or Contractors endorsement therefore is not limited by the terms of that organizations contract with Securitas. Kmart is therefore covered for its own negligence under the commercial general liability policy.

Identical reasoning applies to the excess/umbrella policy. That policy extends coverage to [a]ny person, organization, trustee or estate that has obligated you by written contract to provide the insurance that is afforded by this policy; but only with respect to duties performed by or for you, or to facilities owned or used by you. Kmarts written contract with Securitas obligated Securitas to maintain an excess/umbrella policy, so Kmart was an insured under the policy. And the policy does not expressly limit the scope of coverage to whatever is specified in the third-party contractas the Designated Person or Organization endorsement to the commercial general liability policy doesso no such limitation will be implied. Kmart is therefore covered for its own negligence under the excess/umbrella policy as well.

XLs only response to the foregoing line of reasoning is that although the Designated Person or Organization endorsement uses slightly different language from the Owners, Lessees or Contractors endorsement, there is no difference in outcome. In support of that conclusion, XL argues that because the Owners, Lessees or Contractors endorsement adds parties as additional insureds only [w]here required by written contract, and no contract requires Securitas to insure Kmart for Kmarts own negligence, the endorsement does not create such coverage. The Designated Person or Organization endorsement, in contrast, does not use the [w]here required by written contract language, so XL contends it had to include a further provision limiting the coverage to whatever the separate contract required.

We disagree for two reasons. First, by its terms the Owners, Lessees or Contractors endorsement merely adds certain parties as additional insureds under Securitas commercial general liability policy. The services agreement is a written contract that requires Securitas to carry a commercial general liability policy and to add Kmart as an additional insured under that policy. Kmarts inclusion as an additional insured is therefore required by written contract within the meaning of the endorsementthe endorsement adds additional insureds under the commercial general liability policy, and the services agreement does require Securitas to add Kmart as an additional insured under that policy. We therefore reject XLs argument that because no contract required Securitas to insure Kmart against Kmarts own negligence, the Owners, Lessees or Contractors endorsement did not create such coverage. The endorsement added Kmart as an insured under the commercial general liability policy (because the services agreement required that Kmart be so added), and Kmart thereby obtained whatever coverage the policy provided for an insured.

Second, a separate provision limiting the scope of coverage to the terms of third-party contracts is no more necessary in the Designated Person or Organization endorsement than in the Owners, Lessees or Contractors endorsement. The Designated Person or Organization endorsement adds a person or organization as an additional insured only to the extent that the named insured has agreed in writing prior to the occurrence or accident to provide insurance for such persons or organizations. One could argue that the quoted language on its own limits the scope of coverage to whatever terms were agreed in writing, just as XL argues that the scope of coverage under the Owners, Lessees or Contractors endorsement is limited to whatever is required by written contract. Thus, if a further provision limiting the scope of coverage to the terms of third-party contracts were necessary in either endorsement, it would be necessary in both of them. XLs argument therefore fails for that reason as wellthe different language used in the two endorsements does not explain XLs decision to include a separate limiting provision in one endorsement but not in the other.

For all of the foregoing reasons, we conclude that the trial court erred when it determined that the XL policies do not cover Kmart for its own negligence.

II. The Ruling on the Demurrer as to Count 4 Must Be Vacated

The trial court concluded that because XL has not breached any duty owed to Kmart, Kmarts claim for breach of the implied covenant of good faith and fair dealing (count 4) fails as a matter of law. The courts conclusion that XL has not breached any duty was based in part on the courts determination that the XL policies do not cover Kmart for its own negligence. Because that determination was incorrect for the reasons given above, we vacate the trial courts ruling on the demurrer as to count 4. We do not direct the trial court to overrule the demurrer as to that count, however, because XL argued other grounds in support of the demurrer, which the trial court has yet to address and which the parties have not briefed on appeal.^[2]

III. The Court Correctly Sustained the Demurrer as to Count 3

In support of its demurrer to Kmarts claim for breach of the duty to defend (count 3), XL argued that it owed Kmart no duty to defend because the commercial general liability policy includes a $500,000 self-insured retention endorsement that must be exhausted before XL has any defense obligation whatsoever. The trial court agreed and sustained the demurrer without leave to amend, reasoning that the self-insured retention endorsement eliminates XLs duty to defend Kmart . . . until the $500,000 self-insured retention has been exhausted and that liability under the umbrella policy does not attach until coverage under the commercial general liability policy is exhausted, which includes satisfaction of the $500,000 self-insured retention. Kmart argues that the trial courts interpretation of the self-insured retention endorsement is incorrect and that the demurrer as to count 3 should therefore have been overruled. We disagree.

Kmarts argument focuses on a provision in the self-insured retention endorsement dealing with the duty to defend, which states: You shall have the obligation to provide, at your own expense, adequate defense and investigation of any claim and to accept any reasonable offer of settlement within the self-insured retention[.] Because of the references to you and yourterms that refer only to the named insureds, Securitas and Securitas HoldingsKmart reads the phrase any claim as meaning any claim against you. That is, Kmart interprets the provision as meaning that the named insureds have a duty to defend any claims against themselves, but no duty to defend any other claims, such as claims against additional insureds like Kmart. Kmart concludes that the self-insured retention endorsement did not shift from XL to Securitas the duty to defend Kmart.

The argument fails because a separate provision of the self-insured retention endorsement does expressly relieve XL of the duty to defend (until the self-insured retention is exhausted). The endorsement provides that You are obligated to pay the following up to the limit of the self-insured retention: [] a. All compensatory amounts which an insured shall become legally obligated to pay as damages because of bodily injury, property damage, personal injury, or advertising injury sustained by one or more persons or organizations. [] b. All supplementary payments as defined in the policy and all loss adjustment expense including but not limited to the following: All administrative agency and court costs, fees and expenses; fees for service of process; fees to attorneys[.] (Italics added.) That is, the endorsement relieves XL of the obligation to pay all compensatory amounts that an insured becomes liable for as damages, as well as all supplementary payments such as fees to attorneys. In short, the endorsement relieves XL of both the duty to indemnify and the duty to defend the additional insureds within the limits of the self-insured retention.

XLs respondents brief quotes that provision and explains its relevance, but Kmarts reply brief never addresses it. We conclude that it is dispositive of Kmarts duty to defend claim against XL. XL did not owe Kmart a duty to defend until the self-insured retention was exhausted.

IV. The Court Properly Granted Summary Judgment in
Favor of Securitas and Securitas Holdings

Kmart argues that Securitas presence is necessary to the courts ability to provide all parties interested in the XL policies complete relief with respect to the claims asserted by Kmart, so the trial court erred by granting summary judgment in favor of Securitas and Securitas Holdings. We disagree.

Kmarts argument rests entirely on the doctrine of compulsory joinder, as stated in Code of Civil Procedure section 389 and related case law. But assuming for the sake of argument that Kmart is right that the doctrine applies to Securitas and Securitas Holdings, it is irrelevant. Securitas and Securitas Holdings were in fact joined as parties to this action, and the trial court never ruled that they were not subject to compulsory joinder. Rather, the issue before the trial court on Securitas and Securitas Holdings motion for summary judgment was whether there were any disputed issues of material fact as to any claims asserted against those defendants. (See Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) Because there were no claims at all asserted against those defendants (not even a claim for declaratory relief to determine the various parties rights and obligations under the XL policies), there were no disputed issues of material factthere were no material facts, because there were no claims. The motion for summary judgment was therefore properly granted.

Finally, Kmart argues that if we agree with the trial courts rejection of the duty to defend claim against XL (which we do), then we should direct the trial court to grant Kmart leave to amend its complaint in order to add a duty to defend claim against Securitas. We disagree.

Kmart filed its original complaint on November 15, 2006, alleging no claims for relief of any kind against Securitas or Securitas Holdings. On January 24, 2008, Kmart sought leave to amend the complaint, but the proposed amended pleading still alleged no claims for relief against Securitas or Securitas Holdings, and it actually omitted them as defendants on all four causes of action. Securitas and Securitas Holdings filed their motion for summary judgment on February 1, 2008, contending inter alia that because there were no claims for relief of any kind against them they were entitled to judgment as a matter of law. On February 26, 2008, the trial court granted Kmarts motion for leave to amend. On March 27, 2008, XL demurred to the duty to defend and good faith and fair dealing causes of action in the first amended complaint, contending inter alia that the self-insured retention shifted the duty to defend from XL to Securitas until the retention was exhausted. On April 28, 2008, the court heard Securitas and Securitas Holdings motion for summary judgment, and on July 30, 2008, the court entered an order granting the motion. On August 22, 2008, the court heard and sustained XLs demurrer without leave to amend.

At no time before or after the trial court granted Securitas and Securitas Holdings motion for summary judgment did Kmart ask the court for leave to amend in order to allege a duty to defend claim against either of those defendants, even though Kmart was aware before the summary judgment hearing that XL contended that Securitas, rather than XL, had the duty to defend Kmart. There is conflicting authority on the issue of how liberally a trial court should grant leave to amend while a summary judgment motion is pending. (See Bostrom v. County of San Bernardino (1995) 35 Cal.App.4th 1654, 1663, 1664; Record v. Reason (1999) 73 Cal.App.4th 472, 486-487.) But we are aware of no authority for the proposition that when a defendant prevails on summary judgment, leave to amend to add claims against that defendant should be granted when such leave is sought for the first time on appeal. We therefore deny Kmarts request.

DISPOSITION

The judgment is affirmed as to Securitas and Securitas Holdings but reversed as to XL. The superior courts orders sustaining XLs demurrer to the fourth cause of action, granting XLs motion for summary adjudication, and denying Kmarts motions for summary adjudication are vacated. The superior court is directed to enter a new and different order denying XLs motion for summary adjudication and granting Kmarts motion (filed September 14, 2007) for summary adjudication of XLs eleventh affirmative defense on the ground that Kmart is an additional insured under the XL policies. The parties shall bear their own costs of appeal.

NOT TO BE PUBLISHED.

ROTHSCHILD, J.

We concur:

MALLANO, P. J.

CHANEY, J.

Publication courtesy of California pro bono lawyer directory.

Analysis and review provided by Chula Vista Property line attorney.

San Diego Case Information provided by www.fearnotlaw.com

^[1] XL filed the motion as a motion for summary judgment, but the court deemed it a motion for summary adjudication after granting Kmart leave to amend.

^[2] For identical reasons (i.e., the trial court never addressed the issue and no party has briefed it on appeal), we vacate the trial courts denial of Kmarts motion (filed January 29, 2008) for summary adjudication of the notice issue.