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Posts Tagged ‘insurance law’

Insurance: Evidence of Duty to Defend

September 11th, 2014


Statements Made by Insurance Company’s Employees Can Be Used As Evidence That It Must Provide a Defense

Graham C. Mills, Newmeyer & Dillion

The Court of Appeal of California, in North Counties Engineering, Inc. v. State Farm General Insurance Co., recently issued a significant opinion finding that statements and notes made by an insurance company’s employee can be used as evidence that an insurance company has a duty to defend its policyholder in a lawsuit.  This opinion is important because insurance companies often will argue that such statements and notes cannot be used to establish a duty to defend because such duty only exists when the insurance policy provides coverage against a complaint’s allegations, regardless of what insurance company employees say or write.


North Counties Engineering, Inc. (“NCE”) was an engineering firm which performed a variety of construction related services.  Beginning in 1991, NCE purchased insurance coverage from State Farm General Insurance Company.  Originally, this coverage insured NCE’s completed operations, NCE’s on-going operations, and other types of insurance coverage. Completed operations coverage generally provides protection for property damage that may happen once the work has ceased or been abandoned.  On-going operations coverage generally provides coverage for property damage that occurs before work has been completed or abandoned.  Beginning in 2000, State Farm decided to stop insuring NCE’s completed operations, but continue to insure NCE’s on-going operations.

In the course of business, NCE and its related companies entered into a contract with Lolonis Winery to design and construct a dam for Lolonis.  NCE began its work in the late 1990s and ended its work in the early 2000s. After construction, the State of California sued Lolonis, alleging that the dam was defective and causing excessive sediment in a downstream creek.  Lolonis, in response, sued NCE in the same action filed by the State of California and also in a separate lawsuit.  In both complaints, Lolonis alleged that NCE’s defective work caused property damage downstream.

NCE tendered both lawsuits to State Farm, claiming that State Farm had a duty to defend NCE because both lawsuits alleged that property damage resulted from NCE’s completed operations when State Farm insured NCE’s completed operations.  The duty to defend meant that State Farm had to hire attorneys to defend NCE, pay the costs associated with NCE’s defense, and work with NCE’s attorneys to protect NCE.

State Farm’s Response 

From the beginning, State Farm refused to defend NCE based on a series of mistakes made by State Farm’s employees.  Critically, despite the complaints alleging that NCE’s work caused property damage starting in the late 1990s when State Farm insured NCE’s completed operations, the State Farm employees inaccurately entered the date of loss as May 7, 2004 (i.e., the date on which NCE told State Farm about the complaints).  As a result of this erroneous date, State Farm’s employees only looked at insurance policies in place from May 7, 2004 and going forward in deciding whether State Farm had a duty to defend.  Because the pre-May 2004 policies provided coverage for NCE’s completed operations, while the post-May 2004 policies did not, State Farm erroneously rejected NCE’s tender on the basis that the post May 2004 insurance policies only provided coverage for NCE’s on-going, not completed, operations. That was a key mistake; if State Farm had recognized from the beginning (as it should have) that the complaints alleged property damage during the time period when State Farm insured NCE’s completed operations, State Farm would have acknowledged its duty to defend and paid for NCE’s defense.  But, it did not.

Compounding its mistake, State Farm conducted virtually no investigation to determine if it had a duty to defend NCE.  For example, State Farm’s employees did not search through records to find the earlier insurance policies that insured NCE’s completed operations.  In fact, State Farm maintained its erroneous denial for several years, even though NCE provided State Farm with copies of the pre-May 2004 policies showing that State Farm covered NCE’s completed operations.  As a result of State Farm’s erroneous denial, NCE was forced to pay for its own defense.

Eventually, after years of NCE disputing State Farm’s denial, State Farm hired an attorney to review State Farm’s decision to deny NCE’s claim. The attorney’s investigation revealed that, during the relevant period, State Farm had issued policies covering NCE’s completed operation.  State Farm paid for the NCE’s defense from September 2007 forward, but refused to reimburse NCE’s defense costs incurred before September 2007, which total more than $500,000.  NCE sued State Farm to recover its additional costs, claiming that State Farm had a duty to defend NCE from the beginning and was liable for all of the costs of its defense.

The Litigation 

During the litigation between NCE and State Farm, State Farm employees admitted that State Farm had a duty to defend NCE because the pre-May 2004 insurance policies covered NCE’s completed operations.  Also, these employees testified that they failed to properly investigate NCE’s tender and failed to look for all insurance policies issued by State Farm to NCE.  Based upon their admissions, the Court of Appeal reversed the trial courts directed verdict in favor of State Farm and remanded with instruction that verdict be entered in favor of NCE, i.e., that State Farm be ordered to pay for NCE’s pre-September 2007 defense fees and costs.  In reaching this conclusion, the Court of Appeal noted that the State Farm employees had decision-making authority, namely the ability to accept or deny NCE’s claim.


The North Counties Engineering case also is significant because it highlights the importance of keeping documents, particularly copies of insurance policies.  The Court of Appeal noted that NCE had provided information to State Farm showing that it issued policies which covered completed operations, even though State Farm repeatedly stated that it did not.  Because NCE kept these documents, NCE eventually compelled State Farm to honor its promise to NCE and pay for NCE’s defense.

About the Author

Graham C. Mills is an associate at Newmeyer & Dillion LLP. Mr. Mills specializes in insurance law, with an emphasis on insurance recovery, construction litigation, real estate litigation, and business litigation. He regularly examines and analyzes a wide variety of insurance policies.

Resident in the firm’s Walnut Creek, California, office, Mr. Mills can be reached at



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