Metropolitan News-Enterprise


Friday, November 15, 2002


Page 1


Insurer May Be Required to Defend Against Setoff Claim, S.C. Rules


By KENNETH OFGANG, Staff Writer/Appellate Courts


An insurer may be required to provide a defense and indemnification under a comprehensive general liability policy when the defendant in a suit brought by its insured asserts a covered claim by pleading a setoff as an affirmative defense, the state Supreme Court ruled yesterday.

In a unanimous decision, the court affirmed a ruling by this district’s Court of Appeal that reinstated a bad-faith suit against TIG Specialty Insurance Company. But the court waded through a procedural thicket and reached the decision by a different route than the Court of Appeal panel.

The dispute between TIG and its insured, Construction Protective Services, Inc., grows out of the October 1996 fire that struck the site where a portion of Oakland’s Castlemont High School was being rebuilt.

CPS, which provided security services at the site, sued the builder, SHC/Mark Diversified, 19 months after the fire. The security firm claimed it was owed more than $26,000 for its services at the site.

The builder asserted an affirmative defense of setoff under Code of Civil Procedure Sec. 431.70. SHC claimed that the security firm was responsible for the fire and that the builder’s resulting losses should be offset against any recovery.

Statute of Limitations

Sec. 431.70 provides that when a defendant has a monetary claim for damages against the plaintiff, and both claims existed “at any point in time when neither demand was barred by the statute of limitations,” the defendant may assert its claim in the answer rather than file a cross-complaint.

The defendant may do so even if it would be barred by the statute of limitations from bringing its own suit on the claim, the section says. But it goes on to say that “[i]f the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this section shall not exceed the value of the relief granted to the other party.”

After the builder asserted its setoff defense against CPS, the security firm tendered the claim to its insurer, TIG, which insisted it had no duty to defend or indemnify. CPS later settled with the builder, then sued TIG for bad faith.

Retired Citrus Municipal Court Judge Michael B. Rutberg, sitting on assignment in Los Angeles Superior Court, dismissed the suit on the ground that the insurer had no duty, as a matter of law, to defend its insured against a claim raised as an affirmative defense.

The Court of Appeal, in reversing, concluded that the setoff claim could have resulted in an award of damages against CPS and was thus a “suit” for purposes of insurance coverage.

Justice Janice Rogers Brown, writing for the high court, disagreed on the import of the setoff claim. Such a claim does not seek “affirmative relief,” the justice said.

‘Negative Implication’

Brown rejected the “negative implication” of the statutory language. By barring a defendant from recovering a net award when it pleads an otherwise time-barred claim by way of setoff, the Legislature did not intend to permit such a recovery when a claim that could have been timely raised by cross-complaint is pled in the answer, the justice concluded.

Brown based her interpretation on Sec. 431.30(c), which specifies that “[a]ffirmative relief may not be claimed in [an] answer.”

The jurist wrote:

“We think the best reading of section 431.70 is that a setoff claim may only be used defensively, being in nature a defensive pleading asserting that the claim constituted prior payment for the amount sought in the plaintiff’s complaint….One who has paid a liability in full or in part can allege that payment as a defense to a cause of action, but in that case the defendant merely hopes to defeat the plaintiff’s complaint. If, in addition, the defendant seeks affirmative relief in its favor (such as the recovery of damages), it must file a cross-complaint, because section 431.30, subdivision (c), bars it from claiming affirmative relief by way of the answer.”

But that construction of the statute does not necessarily get TIG off the hook, Brown insisted, noting that the policy itself was not part of the record. Whether the setoff claim was the equivalent of a suit for damages under the policy, the justice wrote, is a question that must be determined according to the policy language.

The plaintiff’s allegations that the legal effect of the policy was to require the insurer to defend and indemnify with respect to a setoff claim that was equivalent to a suit for damages were sufficient to survive demurrer, so the Court of Appeal was correct in reversing the order of dismissal, Brown said.

The case, Construction Protective Services, Inc. v. TIG Specialty Insurance Company, 02 S.O.S. 5755, was argued in the high court by Alan B. Yuter of SelmanBreitman for the plaintiff and Donald B. Devirian of Devirian & Shinmoto for the insurer.


Copyright 2002, Metropolitan News Company