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(A revised version of this article appears in The Construction
Lawyer, Volume 24, No. 3, Summer 2003, published by
the American Bar Association's Forum on the Construction
Industry.)
By John W. Ralls
A
general contractor hired a security firm to provide security
at a school construction site. During construction, a fire
broke out, causing damage to the general contractor's work.
Afterward, the general contractor refused to pay the security
firm for its services. The security firm sued to recover
payment for services. The general contractor asserted an
affirmative defense -- that the security firm was legally
responsible for the damages caused by the fire - and claimed
an entitlement to set off those damages. The security firm
tendered the setoff claim to its CGL carrier, which refused
the tender.
The
security firm settled with the general contractor for a
discounted sum. The security firm then brought an action
against its insurance carrier, asserting that the carrier
should have provided a defense and indemnity in connection
with the setoff claim.
The
trial court dismissed the complaint, but the Court of Appeal
reversed, concluding that a liability insurer's duty to
defend includes defense of setoff claims. The Court of Appeal
reasoned that the setoff claim constituted a "suit
for damages" because the claim possibly could result
in an award of damages against the plaintiff.
The
California Supreme Court disagreed with the reasoning but
affirmed. Construction Protective Services, Inc. v. TIG
Specialty Insurance Co., 29 Cal.4th 189, 57 P.3d. 372
(2002). "[A] set off claim may only be used defensively,
being in nature a defensive pleading asserting that the
[setoff] claim constituted prior payment for the amount
sought in the plaintiff's complaint." Because the insurance
policy was not part of the record, the Supreme Court declined
to rule as a matter of law whether a setoff defense constituted
a suit for damages under the insurance policy. The court
found "the allegations [of the complaint] sufficient
to establish a prima facie right to relief" because
the plaintiff alleged the policy covered the setoff claim.
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