Century Surety Co. v. Polisso

Rule of Law:

An insurer has a duty to defend a spouse who is defined as an insured under a policy but is not named as a defendant in the underlying lawsuit, where the spouse's community property is at risk from a potential judgment against the named insured spouse. The genuine dispute doctrine does not shield an insurer from bad faith liability for breaching its duty to defend when facts known to the insurer create a clear potential for coverage, even if the ultimate duty to indemnify is disputed.

Facts:

• In 1990, Charles and Therese Polisso purchased Kinzel Glass Company, which they co-owned and operated as a community asset, although the business was formally registered in Charles's name.
• Charles Polisso purchased a commercial lines insurance policy from Century Surety Company for the business, which defined an insured to include the named insured's spouse 'with respect to the conduct of a business.'
• In 1996, Kinzel contracted with S.W. Allen Construction, Inc. (Allen) to install seven glass panels in an underground viewing chamber.
• After Kinzel completed the installation, a dispute arose with Allen over whether Kinzel was responsible for additional sealant work, and Allen withheld payment.
• A heavy rainstorm subsequently flooded the chamber, causing solvents left by another contractor to coat the glass panels with a film.
• During subsequent cleanup efforts, Allen's workers scratched the glass, causing further damage.
• Allen informed Charles Polisso that it considered Kinzel responsible for all the damage, and Charles notified Century of the claim.
• The Polissos' business and personal finances severely deteriorated during the ensuing dispute with Allen and Century, causing them significant emotional distress, health problems, and eventually leading them to file for bankruptcy.

Procedural Posture:

• S.W. Allen Construction, Inc. (Allen) sued Kinzel Glass Company and Charles Polisso in state trial court for breach of contract and negligence.
• Century Surety Company filed a separate lawsuit in state trial court against Charles Polisso, Kinzel, and Allen, seeking declaratory relief on coverage issues.
• Charles and Therese Polisso filed a cross-complaint against Century for bad faith failure to defend them in the Allen action.
• The trial court granted the Polissos' motions for summary adjudication, ruling that Century had a duty to defend and that the policy covered the glass damage.
• The Polissos amended their cross-complaint to add a claim for malicious prosecution based on Century's declaratory relief action.
• The case proceeded to a jury trial on the Polissos' cross-complaint.
• The jury returned a special verdict for the Polissos, awarding them $637,911 in compensatory damages and $2,015,000 in punitive damages.
• Century Surety Company, as appellant, appealed the judgment to the California Court of Appeal.