Court Opinion

ID: 4111494
Source: CourtListenerOpinion
Date Created: 2016-12-28 00:03:54.902939+00
Date Added: 2024-06-11T07:46:11.540393
License: Public Domain

Filed 12/27/16

                             CERTIFIED FOR PUBLICATION

             IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                             FOURTH APPELLATE DISTRICT

                                        DIVISION THREE

NAVIGATORS SPECIALTY
INSURANCE COMPANY,
                                                      G050759
    Plaintiff and Respondent,
                                                      (Super. Ct. No. 30-2011-00492111)
        v.
                                                      OPINION
MOOREFIELD CONSTRUCTION, INC.,

    Defendant and Appellant.

                 Appeal from a judgment of the Superior Court of Orange County,
David R. Chaffee, Judge. Affirmed in part, reversed in part, and remanded.
                 Mahoney & Soll, Paul H. Mahoney, Richard A. Soll; Myers, Widders,
Gibson, Jones & Feingold and Dennis Neil Jones for Defendant and Appellant.
                 Rutan & Tucker, Gerard M. Mooney, Jr., and Duke F. Wahlquist for
Building Industry Legal Defense Foundation as Amicus Curiae on behalf of Defendant
and Appellant.
                 Greenan, Peffer, Sallander & Lally, Robert L. Sallander, Jr., and Robin L.
Thornton for Plaintiff and Respondent.
                                    *          *          *
                                    INTRODUCTION
              Navigators Specialty Insurance Company (Navigators) issued commercial
general liability (CGL) insurance policies (the Policies) to Moorefield Construction, Inc.
(Moorefield), a licensed general contractor. In this appeal, we address the meaning,
scope, and application of two standard provisions of the Policies. The first is the
coverage A section, which provides that the insurance applies to property damage caused
by an “occurrence,” defined to mean an “accident.” The second is the supplementary
payments provision, which requires the insurer to pay “[a]ll costs taxed against the
insured” in any lawsuit the insurer defends on behalf of the insured.
              Moorefield appeals from a judgment in favor of Navigators, entered in a
lawsuit in which Navigators sought a declaration of its rights and duties under the
Policies. Navigators’s lawsuit was corollary to construction defect litigation arising out
of the construction of a building to be used as a Best Buy store in Visalia, California.
Moorefield was the general contractor for the construction of the building. Moorefield
and the developer, D.B.O. Development No. 28 (DBO), entered into a construction
contract. Several years after the construction was completed, the owner of the building,
JSL Properties, LLC (JSL), sued Moorefield and DBO for breach of the construction
contract and negligence based on claims the flooring had failed. DBO filed a
cross-complaint against Moorefield and various subcontractors for indemnity.
Navigators accepted Moorefield’s tender of defense of JSL’s complaint and DBO’s
cross-complaint, subject to a reservation of rights.
              During the course of litigation, evidence obtained in discovery showed the
most likely cause of the flooring failure was that flooring tiles had been installed on top
of a concrete slab that emitted moisture vapor in excess of specifications. Evidence also
showed that Moorefield knew of the results of two tests showing excessive moisture
vapor emission from the concrete, yet had directed the flooring subcontractor to install

                                              2
the flooring anyway. Evidence also established the cost to repair the flooring was
$377,404.
              The litigation settled for a total settlement sum of $1,310,000. JSL
received $885,000 while DBO received $425,000. On Moorefield’s behalf, Navigators
contributed its policy limits of $1 million toward the settlement. Moorefield
independently contributed an additional $150,000. The remaining $160,000 was made up
of contributions from Best Buy Stores, LP (Best Buy), and the defendant subcontractors.
              In the meantime, Navigators filed this lawsuit seeking a declaration it had
no duty under the Policies to defend or indemnify Moorefield. Navigators contended the
flooring failure was not a covered occurrence under the Policies because it was not the
result of an accident.
              Following a bench trial, the trial court found there was no covered
occurrence under the Policies because Moorefield had directed the flooring subcontractor
to install the flooring despite Moorefield’s knowledge that moisture vapor emission from
the concrete slab exceeded specifications. The trial court found that Moorefield had not
met its burden of proving what portion, if any, of the $1 million paid by Navigators came
within the supplementary payments provision of the Policies. The trial court also found
that Navigators had no duty to make payments under the supplementary payments
provision because Moorefield’s liability arose from a noncovered claim. The judgment
requires Moorefield to reimburse $1 million to Navigators.
              Moorefield’s appeal raises two primary issues, one related to the coverage
A provision of the Policies and the other related to the supplementary payments provision
of the Policies. These two issues are addressed, respectively, in parts I and II of the
Discussion section.
              Issue I: Was the Flooring Failure a Covered Occurrence Within the
Meaning of the Policies? No. The Policies define “occurrence” to mean “an accident,
including continuous or repeated exposure to substantially the same general harmful

                                              3
conditions.” Under California law, “[a]n accident does not occur when the insured
performs a deliberate act unless some additional, unexpected, independent, and
unforeseen happening occurs that produces the damage.” (Fire Ins. Exchange v. Superior
Court (2010) 181 Cal. App. 4th 388, 392 (Fire Ins. Exchange), citing Merced Mutual Ins.
Co. v. Mendez (1989) 213 Cal. App. 3d 41, 51.) The most likely cause of the flooring
failure was moisture vapor emitted from the concrete slab. We conclude Moorefield’s
conduct was not an accident because it was a deliberate decision made with knowledge
that the moisture vapor emission rate from the concrete slab exceeded specifications. The
damage was not produced by an additional, unexpected, independent, and unforeseen
happening.
              Navigators therefore had no duty to indemnify Moorefield and was entitled
to recoup that portion of the $1 million paid toward settlement that was attributable to
damages.
              Issue II: Does the Supplementary Payments Provision Apply to Any
Portion of the $1 Million Paid Toward Settlement by Navigators? Yes. A supplementary
payments provision in a CGL policy includes attorney fees when they are or would be
taxable as costs against the insured. That would include, for example, prevailing party
attorney fees under a contract. The construction contract between Moorefield and DBO
had such an attorney fees provision. Supplementary payments are tied to an insurer’s
duty to defend, not the insurer’s duty to indemnify. Here, the evidence established that
Navigators had a duty to defend Moorefield at the time of the settlement because there
was a potential for coverage of the claim that Moorefield was responsible for the flooring
failure. Although the trial court found, in effect, that Navigators had no duty to defend,
that finding was not retroactive to the time of the settlement.
              Thus, Navigators had a duty to compensate Moorefield under the
supplementary payments provision of the Policies. That duty was not extinguished by the
determination that Navigators had no duty to indemnify.

                                              4
              The trial court found that Moorefield did not prove by a preponderance of
the evidence what portion, if any, of the $1 million settlement payment was attributable
to supplementary payments. Navigators, however, bore the burden of proof on that issue.
The trial court erred by misallocating the burden of proof to Moorefield. The trial court’s
error was prejudicial because substantial evidence does not support an implied finding
that all of the $1 million paid by Navigators was for damages and none was for
supplementary payments. The evidence established conclusively that the cost of repair
damages was $377,404.
              As a result, we conclude Moorefield must reimburse Navigators only for
the portion of the $1 million paid by Navigators that is attributable to damages.
Moorefield may keep that portion of the $1 million paid by Navigators that is attributable
to the supplementary payments provision of the Policies. We therefore affirm in part,
reverse in part, and remand for a new trial limited to the issue of the amount of the $1
million paid by Navigators that is attributable to damages, not attorney fees and costs of
suit under the supplementary payments provision.
                                          FACTS
                                             I.
                                       The Policies
              Moorefield is a licensed general contractor specializing in the construction
of shopping centers, movie theaters, and commercial and retail buildings. The Policies
issued by Navigators to Moorefield were effective from April 1, 2002 to April 1, 2003.
The Policies were renewed annually to April 1, 2006. There is no material difference in
language in the Policies.
              In coverage A, “Bodily Injury and Property Damage Liability,” the Policies
provide: “We will pay those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.
We will have the right and duty to defend the insured against any ‘suit’ seeking those

                                             5
damages.” The Policies state: “This insurance applies to ‘bodily injury’ and ‘property
damage’ only if: [¶] . . . The ‘bodily injury’ or ‘property damage’ is caused by an
‘occurrence’ that takes place in the ‘coverage territory.’” (Italics added.) The Policies
define “occurrence” to mean “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” (Italics added.)
              The Policies include a supplementary payments provision providing that
Navigators will pay “[a]ll costs taxed against the insured” in any lawsuit Navigators
defends on behalf of the insured.
                                            II.

               Contracts, Plans, and Specifications for Construction of
                                the Best Buy Building
              Between 2002 and 2004, DBO developed the Packwood Creek East
Regional Shopping Center project in Visalia, California. In 2003, DBO engaged
Moorefield to act as the general contractor for the shopping center project, which was to
include the construction of a 30,055-square-foot building to be used as a Best Buy store
(the Best Buy Building). In January 2002, DBO entered into a 15-year lease with Best
Buy.
              DBO and Moorefield entered into an owner-contractor agreement dated
April 30, 2003 (the Construction Contract) by which Moorefield agreed to act as general
contractor on the Best Buy Building. The scheduled completion date was August 22,
2003. The Construction Contract provided that if Moorefield failed to complete the Best
Buy Building on time, then Moorefield would pay $1,500 per day in liquidated damages
for the first 30 days and $2,500 per day in liquidated damages thereafter. Due to design
changes, the scheduled completion date was extended to October 2003.
              The plans and specifications for the Best Buy Building called for the
installation of an interior concrete floor slab. The “Project Manual for the Construction
of the Best Buy Store Visalia, CA—BB-529” (the Project Manual) called for installation

                                             6
of both vinyl composition tile (VCT) and carpet tile on top of the concrete slab. Both the
VCT’s and the carpet tiles would be glued onto the concrete slab using a flooring
adhesive.
              Moorefield entered into a subcontract with R.H. Kiggins Construction, Inc.
(Kiggins Construction), to install the concrete foundation and slab for the Best Buy
Building, a subcontract with George Roofing to install the roof, and a subcontract with
Solo Flooring, Inc. (Solo Flooring), to install the VCT’s and carpet tiles.
                                            III.
                   Moisture Vapor Emission from the Concrete Slab
              Work on the Best Buy Building commenced in February 2003. One of the
early construction activities was the pouring of the interior concrete slab on grade that
encompassed the entire footprint of the Best Buy Building. The slab was about 30,055
square feet in area and was four inches thick.
              Concrete slabs are porous and allow the emission of moisture vapor. The
Project Manual required Moorefield to “[e]nsure concrete floors are dry” and have a
maximum moisture content of five pounds per 1,000 square feet. This specification
meant that before the VCT’s were installed, the moisture vapor emitted from the surface
of the concrete slab could not exceed five pounds of moisture vapor for every 1,000
square feet of surface. The specification applied to the VCT’s. For the carpet tiles, the
manufacturer’s specifications of three, four, or five pounds per 1,000 square feet were
used. Jay Cote, Moorefield’s project manager, testified that a moisture vapor emission
rate of five pounds per 1,000 square feet was treated as the specification for both VCT
and carpet tile.
              The American Society for Testing and Materials has approved a standard
test for measuring moisture vapor emission from concrete floors. Designation: F 1869-98
states: “Use this test method to obtain a quantitative value indicating the rate of moisture
vapor emission from a concrete floor and whether or not that floor is acceptable to

                                             7
                                    [1]
receive resilient floor covering.         The moisture vapor emission rate only reflects the
condition of the concrete floor at the time of the test. All concrete subfloors emit some
amount of moisture in vapor form. Concrete moisture emission is a natural process
driven by environmental conditions. All floor coverings are susceptible to failure from
excessive moisture vapor emissions.” (American Society for Testing and Materials,
Standard Test Method for Measuring Moisture Vapor Emission Rate of Concrete
Subfloor Using Anhydrous Calcium Chloride, Designation: F 1869-98 (Aug. 1998)
§ 4.1.)
               Moisture trapped between a concrete slab and a vapor retarder on the
underside of floor tiles can cause flooring adhesive to deteriorate and “turn the glue to
water.” The emulsified adhesive will “seep up in between the joints” of the VCT’s and
cause spider cracks in the tile. The carpet tiles used at the Best Buy Building had a
polyvinyl chloride backing that did not permit breathing, as would a “regular, normal
glue down carpet.” The carpet tiles had a backing made of polyvinyl chloride which
made them impermeable to the transmission of water or water vapor. For that reason,
moisture in the concrete slab could cause the glue used to adhere the carpet tiles to the
slab to turn to liquid.
               Moorefield hired Krazan & Associates (K & A) to conduct a series of
moisture vapor emission tests for the concrete slab of the Best Buy Building. K & A
conducted the first series of tests from July 30, 2003 to August 2, 2003. K & A
conducted a second series of moisture vapor emission tests from August 15 to August 18,
2003. All tests performed by K & A produced results exceeding the specification of five
pounds per 1,000 square feet. In a letter to Moorefield, dated August 6, 2003, K & A
reported the results of the first series of tests were moisture vapor emission readings
ranging from 7.42 to 9.48 pounds per 1,000 square feet. In a letter to Moorefield, dated

 1
     “[R]esilient floor covering” means VCT.

                                                   8
August 25, 2003, K & A reported the results of the second series of tests were moisture
vapor emission readings ranging from 6.6 to 8.8 pounds per 1,000 square feet. Another
four to eight months of drying time were necessary for the concrete slab to cure
sufficiently so that the moisture vapor emission rate would be under five pounds per
1,000 square feet.
                                             IV.
                           The Decision to Install the Flooring
              Cote, Moorefield’s project manager, reviewed the test results from K & A.
Cote, who had 40 years of experience, was not surprised by the results because moisture
vapor emission rates exceeding specifications “happens all the time.” He had been
involved in other projects in which the moisture vapor emission rate exceeded the
specification. In each of those projects, the flooring was laid down anyway, and no
problem ensued. Cote believed there was “[l]ow risk to no risk” that flooring would fail
if laid on a concrete slab with a moisture vapor emission rate of seven to nine pounds,
when the specification was five pounds. In that situation, the decision was “not difficult”
for Cote—“[i]t’s always lay the floor.”
              Moorefield’s president, Michael Moorefield, testified that between 1990
and 2000, Moorefield had been involved in about 50 construction projects in which
concrete slabs were tested for moisture vapor emission. Of those 50, forty-nine had
moisture vapor emission rates exceeding the required specification. In those situations in
which the moisture vapor emission rate exceeded the specification, Michael Moorefield
would speak with the owner, and it would be the owner’s (or the tenant’s) decision
whether to lay the flooring. In each of those situations, Michael Moorefield was
instructed to lay the flooring. In none of those situations did the flooring fail.
              Cote’s practice was to talk with the owner and other persons involved in the
project if the moisture vapor emission rate exceeded the specification. The owner had the
responsibility to decide whether to lay flooring over a concrete slab with a moisture vapor

                                              9
emission rate exceeding the specification. Cote needed authorization to deviate from a
specification. He explained: “The risk is there may be a problem . . . and there may not
be. I’ve never had one, but, it’s a specification. . . . [Y]ou have a specification. You’re
not meeting the specification. That’s the problem. . . . I am going to deviate from that
specification[,] I need your authority on that.”
              Cote discussed the matter of the moisture vapor emission rate test results
with representatives of DBO and Best Buy sometime after August 25, 2003. Both DBO
and Best Buy directed Cote to have the flooring installed (“[t]hey made a decision and
. . . they said put it down”). The decision was based on a cost-benefit analysis: It would
be cheaper to install the flooring immediately so that the Best Buy Building would be
completed and the store open for holiday shopping, and to deal with flooring problems
later.
              Cote thereafter directed Solo Flooring to install the flooring. At the request
of Solo Flooring, Cote signed a letter on behalf of Moorefield releasing Solo Flooring
from any warranty claims. The letter, dated August 22, 2003, stated, “due to the high
moisture of the above-mentioned job that there is no warranty for materials and that Solo
Flooring, Inc. will not be held responsible for any moisture related problems.” Cote
described the letter as “boilerplate” that was presented whenever the moisture vapor
emission rate exceeded specifications.
              Solo Flooring installed the VCT’s and carpet tiles in late August 2003, after
receiving the signed letter from Moorefield. Construction of the Best Buy Building was
substantially completed in late August 2003. The Best Buy store held its grand opening
in October 2003.
                                             V.
                                    The Flooring Fails
              Andres Vargas, a Best Buy mobile manager, noticed carpet tiles not
sticking to the floor as early as the grand opening. The edges of the carpet tiles curled,

                                             10
moisture and adhesive oozed through the edges, staining appeared at the edges, and odors
were detected. The problem was progressive and continuous starting in 2003. Best Buy
dealt with the problems by replacing failed tiles with extra tiles left at the site for repairs.
              In 2009, Best Buy hired Dr. Rene Luft, an engineer with the consulting
engineer firm of Simpson Gumpertz & Heger Inc., to investigate the flooring issues. Luft
inspected the Best Buy Building on March 17 and 18, 2009. He saw curling and cupping
of the edges of carpet tiles, staining at the edges of the carpet tiles from oozing adhesive,
and spotting beneath the carpet tiles indicative of adhesive deterioration. He looked for
sources of moisture other than the concrete slab (such as roof leaks) and found none.
From lifting the tiles, it appeared to Luft that the problems were caused by moisture
coming up from the slab. He explained that alkalize in the concrete together with
moisture caused the adhesive on the tiles to deteriorate.
              Luft retained a firm to conduct a series of tests, including a moisture vapor
emission rate test, a relative humidity test, and a pH test. Based on the test results and his
observations, Luft concluded and informed Best Buy that the cause of the flooring failure
was moisture coming up from the concrete slab and the sand layer immediately beneath
the slab. Because a vapor retarder had been placed underneath the sand, and the backing
on the carpet tiles was fairly impermeable, the only place for moisture trapped in the
concrete and sand to go would be through the tile joints. The vapor retarder placed below
the sand had been “performing its function” of preventing moisture from seeping upward
from the ground. Thus, Luft concluded the moisture in the concrete slab “was there from
the time that the concrete floor was cast” in 2003.
              In March 2009, Best Buy notified DBO and JSL, which had purchased the
Best Buy Building in 2004, by letter of the flooring issues. Moorefield also received
notice of flooring problems at the Best Buy Building. JSL’s owner, Jerry Baker, and his
consultant, Roland Vierra, went to the Best Buy Building and there saw loose VCT’s and

                                               11
carpet tiles. After receiving notice, JSL, DBO, and Moorefield started an investigation
into the potential source of the flooring issues, but did not make repairs.
              In October 2009, Best Buy notified JSL that in 10 days Best Buy would
exercise one of its remedies under the lease. Best Buy commenced repairs of the
flooring. Those repairs included removing existing carpet tiles and VCT’s, scraping off
the adhesive, applying sealant, and installing new carpet tiles. Best Buy notified JSL that
Best Buy would deduct repair costs from its monthly rental payments beginning on
December 1, 2009. Best Buy completed the flooring repairs in November 2009 and,
starting the next month, withheld about $377,404 from monthly rental payments. That
amount included the labor and material costs to remove and replace the damaged flooring
tiles throughout the Best Buy store.
                                             VI.
                       The Underlying Litigation over the Flooring
              In January 2010, JSL filed a complaint against Moorefield and DBO to
recover the amounts withheld by Best Buy from rental payments. JSL later filed a first
amended complaint and a second amended complaint. JSL asserted causes of action
against Moorefield for breach of contract, negligence, breach of implied warranty, and
declaratory relief.
              DBO filed a cross-complaint and a first amended cross-complaint against
Moorefield, Solo Flooring, Kiggins Construction, and George Roofing. DBO asserted
13 causes of action against Moorefield, including equitable indemnity under the
Construction Contract, breach of contract, and express warranty, and asserted causes of
action against Moorefield, Solo Flooring, Kiggins Construction, and George Roofing for
equitable indemnity, implied contractual indemnity, contribution, negligence, and breach
of implied warranty.
              Moorefield tendered JSL’s complaint and DBO’s cross-complaint to
Navigators, which accepted the tender, later made subject to a reservation of rights.

                                             12
Navigators retained the law firm of Jacobson, Hansen, Najarian & McQuillan to represent
Moorefield. Jason Decker and Jube Najarian of that law firm represented Moorefield
until the conclusion of the case. Moorefield filed a cross-complaint against Solo
Flooring, Kiggins Construction, and George Roofing.
              In defending Moorefield, Decker explored various potential causes of the
flooring failure, including roof leaks, plumbing leaks, water migrating up from below the
concrete slab, and equipment use or movement of merchandise in the store. As the case
progressed, Decker uncovered evidence of roof leaks. He concluded, however, that
“[t]he leading candidate was moisture in the slab from original construction.”
              Following an unsuccessful mediation, Najarian prepared and sent to
Navigators a status letter in which he wrote: “During the mediation, it became clear that
a viable claim against George’s Roofing is increasingly unlikely. First, there is
substantial evidence demonstrating that George’s recently replaced the original roof
pursuant to a Manufacturer’s Warranty. As a result, neither JSL nor Best Buy make any
claim that there was significant roof leaks contributing to a moisture problem at the store.
In fact, JSL makes no claims against George’s Roofing whatsoever. [¶] Nor are we
currently aware of any evidence that would establish a connection between the work done
by George’s Roofing and the alleged moisture problems in the Best Buy store.”
              During the litigation, JSL and DBO argued that Moorefield had “purged its
records” to remove the results of the moisture vapor emission rate tests. Decker could
not find the test reports in the documents produced by Moorefield. The absence of the
test reports from those documents was significant to Decker in his evaluation of liability.
              In a report to Navigators, Decker wrote: “Importantly, the Moorefield
records regarding the actual construction work on the Best Buy facilities are completely
devoid of any records regarding the 2003 moisture testing, the results of those tests, and
the agreement with the flooring subcontractor to release it from any subsequent problems.
Although Moorefield maintains its Job File which contains more than 4000 pages of

                                            13
documents on the job, the Job File did not include the requests for moisture testing by
Mr. Cote, the test results or the Agreement with the flooring subcontractor. All of those
documents were obtained from the files of the other parties in this matter or as a result of
subpoenas directed to third parties. The absence of these critical documents will have a
substantial effect on the potential credibility of Moorefield and Jay Cote. In short, a jury
is likely to question why Moorefield’s voluminous files do not contain the critical
moisture tests which were originally requested by Jay Cote. The opposing attorneys will
argue that Moorefield removed the critical records from its files as part of an attempt to
cover up its behavior during the construction process.”
              Ken Smith, the president of Solo Flooring, testified that Larry Moorefield
telephoned him and asked what he remembered about the Best Buy job, “if there was any
moisture test on it.” During the telephone conversation, Larry Moorefield asked Smith to
“lose the folder,” which Smith interpreted to mean “destroy the folder.”
                                            VII.
                        Settlement of the Underlying Litigation
              As damages, JSL sought property damage in the amount of $377,404
(which was the cost of labor and materials to make repairs) and attorney fees pursuant to
the terms of the Construction Contract between DBO and Moorefield. DBO also sought
attorney fees pursuant to the terms of the Construction Contract. Decker concluded,
based on research and analysis, that both JSL and DBO would have the right to seek
attorney fees under the Construction Contract.
              The litigation settled in June 2013 for a settlement sum of $1,310,000. Of
that amount, JSL received $885,000 while DBO received $425,000. On Moorefield’s
behalf, Navigators contributed its policy limits of $1 million. Moorefield independently
contributed an additional $150,000. The remaining $160,000 was made up of
contributions from Best Buy, Kiggins Construction, George Roofing, and Solo Flooring.

                                             14
              Decker testified that he believed at the time of the settlement, “it was more
likely than not there would be a liability finding against Moorefield.” The basis for that
belief, Decker testified, was: “There was evidence which demonstrated that there was
moisture coming from somewhere, and that it was causing problems with the flooring.
There was an absence of evidence which pointed to causes other than the source of that
moisture being the floor or the slab itself, with one substantial exception, which was the
roof.”
                               PROCEDURAL HISTORY
              Navigators filed this lawsuit seeking a declaration that it had no duty to
defend or indemnify Moorefield under the Policies. A bench trial was conducted over six
days in March 2014. At the close of trial, the court issued a tentative decision in favor of
Navigators.
              Moorefield requested a statement of decision. In July 2014, the trial court
issued a statement of decision that included the following findings:
              1. “The construction project, to build a Best Buy ‘big box’ store, came
with a Project Manual (Exh. 6) that included specifications for the installation of floor
coverings. In particular, the Project Manual specified: ‘Ensure concrete floors are dry
(maximum 5 lbs. Per 1000 s.f. moisture content), free of curing compounds and
hardeners, and exhibit negative alkalinity, carbonization, or dusting.’ Exh. 6-506. See
also Exh. 6-510.”
              2. “Construction of this project commenced in February, 2003, and was
completed October 22, 2003. Tests conducted by [K & A] . . . between 7-30-2003 and
8-2-2003, showed moisture content of the concrete slab to range between 7.42 and 9.48
lbs. Exh. 11.”
              3. “Some five to six years later the floor coverings, both carpet and vinyl
began to fail as the adhesives released sufficient for pe[e]ling and separation of individual
tiles and large areas of tiles. Prior to the underlying litigation, Best Buy hired Dr. Rene

                                             15
Luft, P.E., to investigate the source of the flooring issues. Navigators subsequently hired
Dr. Luft as its expert in this action. Testing in or about 2009 by Dr. Luft showed
moisture content in the concrete ranging from 5.4 to 10.6 lbs. Exh. 18. Dr. Luft
concluded, based upon his testing and his direct observation of the conditions on site that
the failure of the floor coverings was directly caused by excessive concrete slab moisture
from original construction.”
              4. “Opposing testimony from Geoffrey Hichborn, [Moorefield]’s expert
engineer was to the effect that the failure of the floor coverings could be attributed to roof
leaks resulting in water accumulating on the floor and migrating under the floor
coverings. Mr. Hichborn did not directly observe or inspect the failed flooring at the Best
Buy [B]uilding and based his opinions largely on criticisms of Dr. Luft’s analysis and
testing methodologies.”
              5. “In this instance, the Court finds the testimony of Dr. Luft to be entirely
credible and reliable; indeed convincing and worthy of great weight. The Court finds
Mr. Hichborn’s testimony falls generally under the heading of mere speculation, and no
weight was given to his opinions as to the cause of the flooring failure.”
              6. “The evidence shows that [Moorefield] was under a contractual
obligation to deliver the completed structure to Best Buy by a date certain or face severe
financial penalties for each day of delay. See Exh. 9. Testimony indicated the deadline
for completion of construction may have been extended from August to October. In any
case, the deadline loomed. Presented with this ‘Hobson’s choice,’ [Moorefield] elected
to take the risk of having the floor coverings installed immediately to allow for store
opening in October rather than wait an extended period for the concrete to eliminate more
of its moisture content. Indeed, Michael Moorefield, a principal of [Moorefield], testified
that in his experience it is ‘safe’ to install these types of floor coverings despite the high
moisture content as failures are rarely experienced.”

                                              16
              7. “Under a reservation of rights Navigators provided a defense and
ultimately paid the policy limit of $1,000,000 in settlement of Best Buy’s lawsuit. In its
investigation Navigators learned for the first time of the waiver and order to install the
floor coverings over the moist concrete slab. Based in large part on this information,
Navigators concluded that the floor coverings failure was no ‘accident’ within the terms
or meaning of the policy of insurance it had issued to Moorefield. The Court agrees.”
              8. “[H]ad Navigators been in a position to know about the problematic
installation of the floor coverings, it likely would have specifically excluded the
coverings, or the failure thereof, from its policy. Instead, [Moorefield] elected to proceed
with installation knowing that the moisture content exceeded design specifications and
knowing that the installer required a waiver to do the installation. Under such
circumstances, [Moorefield] cannot simply pass its liability on to an insurer whose policy
contemplates compliance with product and construction design specifications.”
              9. “As relevant here, the supplementary payments provision obligates an
insurer to pay costs taxed against its insured. The underlying case was settled and no
costs were taxed against [Moorefield]. For purposes of this analysis, however, the Court
will assume, without ruling on the legal issue, that costs included within a settlement are
synonymous with ‘costs taxed against the insured.’”
              10. “[Moorefield] has not proven by a preponderance of the evidence what
portion, if any, of Navigators’ settlement payment was attributable to costs.”
              11. “Regardless, the obligation to pay the costs, if any, included within the
settlement only arises where the obligation to pay costs arises from a potentially covered
claim, which is not the case here. Rather, Moorefield’s potential liability arose from a
non-covered claim.”
              Judgment in favor of Navigators was entered in July 2014. The judgment
was for $1 million plus about $68,274 in prejudgment interest. Moorefield brought a
motion for a new trial and a motion to set aside and vacate the judgment, to amend and

                                             17
correct the statement of decision, and to enter another and different judgment. The trial
court denied both motions. This appeal followed.

                                       DISCUSSION
                                              I.

               Navigators Had No Duty to Indemnify Under the Policies
                        Because the Flooring Failure Was Not
                              a Covered Occurrence.
                           A. Introduction and Background Law
              The trial court found that Navigators had no duty under the Policies to
indemnify Moorefield because the flooring failure at the Best Buy Building was not the
result of an accident. The coverage A section of the Policies states the insurance applies
to bodily injury or property damage that “is caused by an ‘occurrence.’” The Policies
define “occurrence” to mean “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” (Italics added.) The Policies thus
provided coverage to Moorefield only if the property damage to the Best Buy Building
was caused by an accident. The Policies do not define “accident,” but California law
does.
              “In the context of liability insurance, an accident is ‘“an unexpected,
unforeseen, or undesigned happening or consequence from either a known or an
unknown cause.”’ [Citations.] ‘This common law construction of the term “accident”
becomes part of the policy and precludes any assertion that the term is ambiguous.’
[Citations.]” (Delgado v. Interinsurance Exchange of Automobile Club of Southern
California (2009) 47 Cal. 4th 302, 308 (Delgado).)
              “Under California law, the word ‘accident’ in the coverage clause of a
liability policy refers to the conduct of the insured for which liability is sought to be
imposed on the insured. [Citations].” (Delgado, supra, 47 Cal.4th at p. 311.) “An

                                              18
accident does not occur when the insured performs a deliberate act unless some
additional, unexpected, independent, and unforeseen happening occurs that produces the
damage.” (Fire Ins. Exchange, supra, 181 Cal.App.4th at p. 392; see State Farm General
Ins. Co. v. Frake (2011) 197 Cal. App. 4th 568, 579 (Frake).) An accident may exist if
“‘any aspect in the causal series of events leading to the injury or damage was unintended
by the insured and a matter of fortuity.’” (Frake, supra, at p. 580.) However, “[w]here
the insured intended all of the acts that resulted in the victim’s injury, the event may not
be deemed an ‘accident’ merely because the insured did not intend to cause injury.”
(Fire Ins. Exchange, supra, at p. 392.)
              In Frake, the insured struck his friend, John King, in the groin while the
two were engaged in horseplay. (Frake, supra, 197 Cal.App.4th at p. 571.) King
sustained injuries and sued the insured, who tendered his defense to the insurer under a
liability provision of a renter’s policy. (Ibid.) The insurer sued the insured for a
declaration regarding the duty to defend. (Ibid.) The Court of Appeal, reversing the trial
court, held the insurer had no duty to defend because the insured engaged in an
intentional act. (Id. at pp. 582-583.) The Court of Appeal confirmed that under Delgado,
supra, 47 Cal. 4th 302, “the term ‘accident’ does not apply where an intentional act
resulted in unintended harm.” (Frake, supra, at p. 582.)
              In Fire Ins. Exchange, the insureds intentionally constructed a home that
extended across the property line under the mistaken belief they owned a
five-and-one-half-foot strip of land and had the legal right to build on it. (Fire Ins.
Exchange, supra, 181 Cal.App.4th at pp. 390, 396.) Faced with a lawsuit for quiet title,
declaratory relief, and fraud, the insureds tendered defense to their insurer under a
homeowners policy. (Id. at p. 391.) After the insurer refused to defend on the ground
there was no potential for coverage, the insureds sued for breach of contract and bad
faith. (Ibid.) The trial court denied the insurer’s motion for summary judgment. (Ibid.)

                                             19
               The Court of Appeal held that the trial court erred and directed it to grant
the insurer’s motion for summary judgment. (Fire Ins. Exchange, supra, 181
Cal.App.4th at p. 390.) The Court of Appeal concluded the act of constructing the home
was intentional and, therefore, not an accident under the policy, even though the insureds
acted under a mistaken belief they had the right to do so. (Id. at p. 396.) No unexpected
and unintended event occurred between the time of the intentional construction and the
time of the encroachment on the neighbor’s property. (Ibid.) Although the insureds
believed they had the legal right to take the action they did, their “mistaken belief in their
legal right to build does not transform their intentional act of construction into an
accident.” (Ibid.)

       B. Moorefield Performed a Deliberate Act and No Additional, Unexpected,
           Independent, and Unforeseen Happening Produced the Damage.
               It is not disputed that Moorefield acted deliberately in directing Solo
Flooring to install the VCT’s and carpet tiles on the concrete slab at the Best Buy
Building. The evidence at trial established that Moorefield knew at the time that two
separate tests had shown the moisture vapor emission rate from the concrete slab
exceeded specifications. Cote discussed the moisture vapor emission rate results with
representatives of DBO and Best Buy and the decision was made, based on a cost-benefit
analysis, to install the flooring.
               Because Moorefield, the insured, performed a deliberate act, there was no
accident unless “some additional, unexpected, independent, and unforeseen happening
occurs that produces the damage.” (Fire Ins. Exchange, supra, 181 Cal.App.4th at
p. 392.) Such was not the case. After installation of the flooring, nothing else happened
that might have caused the flooring to fail. The trial court found that the VCT’s and
carpet tiles failed due to excessive concrete slab moisture from the original construction.
The court based this finding on the testimony of Dr. Luft, whose testimony the court

                                              20
found to be “convincing and worthy of great weight.” The court rejected other potential
causes, including roof leaks.
              Moorefield argues the trial court erred by not giving greater consideration
to the testimony of its expert, Geoffrey Hichborn, who opined that roof leaks might have
caused the flooring to fail. As the trier of fact, the court was the ultimate judge of the
weight and credibility of witness testimony. (People v. Vu (2006) 143 Cal. App. 4th 1009,
1029; As You Sow v. Conbraco Industries (2005) 135 Cal. App. 4th 431, 454.) The trial
court found Hichborn’s testimony to be “mere speculation” and relied instead on Luft’s
testimony, as the court was entitled to do.
              Excess moisture in the concrete slab, creating high levels of moisture vapor
emission, was not an additional, unexpected, independent, or unforeseen event.
Moorefield knew of the moisture vapor emission test results and knew those results
exceeded specifications. Excess moisture was not independent of Moorefield’s
intentional act but was the topic of discussion before the decision was made to install the
flooring. Solo Flooring anticipated problems due to high moisture and would not install
the flooring unless Moorefield released it from warranty claims.
              The trial court found that “[Moorefield] elected to proceed with installation
knowing that the moisture content exceeded design specifications and knowing that the
installer required a waiver to do the installation.” The court also found that Moorefield
took a risk when it decided to have the flooring installed immediately so the Best Buy
store could open in October rather than wait for the concrete slab to eliminate more of its
moisture content. Substantial evidence supported those findings. Cote testified the
decision to install the flooring was based on a cost-benefit analysis—get the Best Buy
Store open for holiday shopping and deal with any flooring problems later—rather than
on a belief that moisture emission could not cause the flooring to fail.
              Michael Moorefield believed it was safe to install the VCT’s and carpet
tiles despite the high moisture vapor emission rate, and Cote testified he believed there

                                              21
was little to no risk of the floor failing. If Michael Moorefield and Cote sincerely
believed there was little or no risk to installing the VCT’s and carpet tiles, despite the
results of the two moisture vapor emission rate tests, they were mistaken. An insured’s
mistake of fact or law does not transform an intentional act into an accident. (Fire Ins.
Exchange, supra, 181 Cal.App.4th at p. 393.) Moreover, the trial court could have
disbelieved Michael Moorefield and Cote, or discounted their testimony. Evidence that
important documents, including the results of the two moisture vapor emission rate tests,
were missing from the Moorefield job file seriously damaged Michael Moorefield’s and
Cote’s credibility.
              Moorefield argues that in every case in which a court has found “no
occurrence,” either the insured’s act “led directly and immediately to the injury” or “the
act and the injury occurred simultaneously.” According to Moorefield, its act of directing
Solo Flooring to install the VCT’s and carpet tiles was an occurrence under the Policies
because the flooring damage was caused by moisture vapor emission from the concrete
slab over a period of years. This argument fails both factually and legally. Factually,
Moorefield’s decision to have the flooring installed did lead almost immediately to
damage. Evidence at trial showed that problems with the carpet tiles at the Best Buy
Building arose within a few months of flooring installation, as early as the Best Buy store
grand opening.
              Legally, nothing in case law places a restriction on the time between the
insured’s act and the damage for which the insured is being held liable. Moorefield
engaged in an intentional act that produced property damage. The length of time between
the insured’s act and the damage (or its manifestation) might bear upon whether the
damage was produced by an additional, unexpected, independent, and unforeseen
happening. But as we have explained, excess moisture vapor emission from the concrete
slab was none of those things.

                                              22
                             C. Arguments of Amicus Curiae
              Amicus curiae Building Industry Legal Defense Foundation (BILD) argues
a construction defect always should be deemed an “occurrence” within the meaning of
CGL policies, even when the contractor intentionally performs the work with the
“knowledge that work may create a risk of further events that could lead to harm.” For in
that situation, BILD argues, “the harm is nevertheless fortuitous and unintended, and the
result of an ‘accident.’” BILD relies heavily on French, Construction Defects: Are They
“Occurrences”? (2011/2012) 47 Gonz. L.Rev. 1, 48, which posits that “[c]onstruction
defects are ‘occurrences’ under standard form CGL policies.” After surveying case law
from across the nation, that article concludes: “Thus, unless the insurer can prove that
the policyholder/contractor expected or intended its workmanship to be defective and
cause property damage, the faulty workmanship was accidental and thus, an
‘occurrence.’” (Ibid.)
              We emphasize that we need not and do not decide whether all construction
defects are “occurrences” under a standard CGL policy. We only decide whether, based
on the record before us, Moorefield’s conduct for which liability was sought to be
imposed constituted an accident under California law. We conclude Moorefield’s
conduct was not an accident because it was a deliberate decision made with knowledge
that the moisture vapor emission rate from the concrete slab exceeded specifications.
This was not a case in which a contractor engaged in conduct only later discovered or
revealed to constitute a construction defect. Navigators proved that Moorefield knew
about and intended to perform defective work with the hope or mistaken belief the defect
would not cause property damage. Although there was no evidence that Moorefield
intended to cause property damage, under California law, “[t]he insured’s subjective
intent is irrelevant.” (Fire Ins. Exchange, supra, 181 Cal.App.4th at p. 392.)
              We also do not address whether the moral hazard problem applies. The
theory of the moral hazard problem is that “a policyholder/contractor effectively would

                                            23
have little incentive to perform its work well if it were covered for the damages it caused
to third parties.” (French, Construction Defects: Are They “Occurrences”?, supra, 47
Gonz. L.Rev. at p. 42.) Our conclusion that there was no covered accident in this case is
based only on the language of the Policies, the evidence presented at trial, the statement
of decision, and California law. Thus, we have no reason to consider the moral hazard
problem or other public policies disfavoring insurance recovery.

                                              II.

               The Supplementary Payments Provision Applies to Some
                    Portion of the $1 Million Paid by Navigators
                                 Toward Settlement.
                                       A. Introduction
              The Policies have a standard supplementary payments provision stating
that, “with respect to any claim . . . or any ‘suit’ against an insured we defend,”
Navigators will pay “[a]ll costs taxed against the insured.” Navigators tendered policy
limits of $1 million toward the settlement of the underlying litigation. Moorefield argues
that, even if Navigators had no duty to indemnify under the Policies, Moorefield is not
obligated to reimburse all of the $1 million paid by Navigators toward the settlement
because the supplementary payments provision required Navigators to pay that portion of
                                                                  2
the settlement attributable to attorney fees and costs of suit.

 2
    Moorefield’s argument regarding the amount of reimbursement is, in effect, an
argument that damages were excessive. To preserve a claim of excessive or inadequate
damages for appeal, a party must move for a new trial. (Schroeder v. Auto Driveaway
Co. (1974) 11 Cal. 3d 908, 918; Silas v. Arden (2012) 213 Cal. App. 4th 75, 92.)
Moorefield moved for a new trial and in that motion argued Navigators was not entitled
to reimbursement of that portion of the settlement amount attributable to attorney fees
and costs of suit. The issue regarding the amount of reimbursement was therefore
preserved for appeal.

                                              24
               Three points are significant to the standard supplementary payments
provision of the Policies. First, costs of suit include attorney fees when they are, or
would be, taxable as costs of suit. (Employers Mutual Casualty Co. v. Philadelphia
Indemnity Ins. Co. (2008) 169 Cal. App. 4th 340, 349; Insurance Co. of North America v.
National American Ins. Co. (1995) 37 Cal. App. 4th 195, 206-207.) Second,
supplementary payments are tied to the insurer’s obligation to defend and, therefore, the
insurer’s obligation to pay costs of suit arises only if the insurer has a contractual duty to
defend. (State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal. App. 4th 274, 285-286
(Mintarsih).) Third, an insured is entitled to recover costs of suit under the
supplementary payments provision when the lawsuit settles if, and to the extent, the
settlement includes costs of suit. (Employers Mutual Casualty Co. v. Philadelphia
Indemnity Ins. Co., supra, at pp. 348-349; Prichard v. Liberty Mutual Ins. Co. (2000) 84
                         3
Cal. App. 4th 890, 912.) We address each of these points in succession in the Discussion
section, parts II.B, II.C, and II.D.

               B. Contract-based Attorney Fees Are Costs of Suit Under the
                          Supplementary Payments Provision.
               JSL filed a complaint, a first amended complaint, and a second amended
complaint against DBO and Moorefield. JSL’s initial complaint, filed in January 2010,
asserted causes of action against Moorefield for breach of the Construction Contract,
negligence, and declaratory relief. JSL’s first amended complaint, filed two weeks later,
added a cause of action against Moorefield for breach of implied warranty. Both JSL’s
initial complaint and first amended complaint alleged the foundation of the Best Buy
Building had been defectively installed in that curing compound had been sporadically
applied.
 3
   In 2007, the standard CGL form policy was changed to include a provision excluding
from supplementary payments “‘attorneys’ fees or attorneys’ expenses taxed against the
insured.’” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group
2016) ¶¶ 7:160.3a-7:160.3b, p. 7A-77.)

                                              25
              Over two years later, in April 2012, JSL filed its second amended
complaint, which included causes of action against Moorefield for breach of the
Construction Contract, breach of implied warranty, and declaratory relief. JSL alleged
that Moorefield breached the Construction Contract “by negligently installing the
defective Foundation.” In the second amended complaint, JSL alleged, for the first time,
that the foundation of the Best Buy Building was defective in that Moorefield installed
flooring on top of the concrete slab despite knowing about excessive moisture levels.
              JSL’s right to recover attorney fees would have been based on the
Construction Contract. Section 14.7 of the Construction Contract provides: “If any
action at law, in equity, or in arbitration is brought to enforce or interpret the provisions
of this Contract or arising out of or relating to this Contract, the prevailing party will be
entitled to all expenses, costs, and reasonable attorneys’ fees incurred in such action.” In
its cross-complaint and first amended cross-complaint, DBO sought “attorney’s fees and
costs pursuant to contract.”
              Attorney fees, when authorized by contract, are allowable as costs of suit.
(Code Civ. Proc., § 1033.5, subd. (a)(10).) Thus, attorney fees incurred by JSL and DBO
would have been an item of costs falling within the supplementary payments provision of
the Policies. (Employers Mutual Casualty Co. v. Philadelphia Indemnity Ins. Co., supra,
169 Cal.App.4th at p. 349; Insurance Co. of North America v. National American Ins.
Co., supra, 37 Cal.App.4th at pp. 206-207.)
              Relying on Golden Eagle Ins. Co. v. Insurance Co. of the West (2002) 99
Cal. App. 4th 837 (Golden Eagle), Navigators argues that in construction litigation,
attorney fees are an “extension of damage liability.” Golden Eagle does not support that
argument. In Golden Eagle, homeowners brought lawsuits against a contractor for
construction defects. (Id. at p. 843.) The contractor sought indemnity from a
subcontractor pursuant to an indemnity provision in the subcontracts. (Id. at
pp. 842-843.) Some of the lawsuits settled before trial, while in others the homeowners

                                              26
obtained judgment in their favor. (Id. at p. 843.) The subcontractor had tendered the
claim to its insurer under a provision of the standard CGL policy providing coverage for
liability assumed by the insured under a written contract by which the insured expressly
assumed liability for damages covered by the policy. (Id. at p. 846.) Such a “covered
contract” included the subcontracts with the indemnity provisions. (Ibid.)
              The subcontractor’s insurers paid the contractor $305,000 to settle its
indemnity cross-complaint against the subcontractor as “‘damages paid’” to the
homeowners. (Golden Eagle, supra, 99 Cal.App.4th at p. 843.) Later, an arbitrator
awarded the contractor over $605,000 for its attorney fees and costs of suit incurred in the
homeowners’ lawsuits. (Ibid.) One of the insurers, Golden Eagle Insurance Company
(GEIC), sued another of the insurers, Insurance Company of the West (ICW), for
reimbursement of the amount GEIC had paid toward the arbitration award. (Id. at
pp. 843-844.) GEIC contended the contractor was an additional insured on the policies
issued by ICW and, therefore, ICW was solely responsible for the contractor’s defense
costs. (Id. at p. 844.) ICW cross-complained against another insurance company,
Connecticut Indemnity Company, and alleged that insurance company, as the
subcontractor’s insurer, was required to pay a portion of the arbitration award. (Ibid.)
              The trial court, in ruling on cross-motions for summary judgment, found
that the contractor’s defense costs were not damages within the meaning of the CGL
policies and, therefore, the subcontractor’s liability for those costs under the indemnity
provision was not covered. (Golden Eagle, supra, 99 Cal.App.4th at p. 844.) As a
consequence, the trial court ruled, ICW breached its obligation to defend the contractor as
an additional insured. (Ibid.)
              The Court of Appeal addressed the issue, among others, whether the
defense costs of the contractor (the indemnitee) were damages under the insured contract
provision of the CGL policies issued to the subcontractor (the indemnitor). (Golden
Eagle, supra, 99 Cal.App.4th at p. 845.) The Court of Appeal concluded, first, that the

                                             27
subcontracts with the subcontractor, by which the subcontractor assumed the tort liability
of the contractor, were “insured contracts” within the meaning of the CGL policies. (Id.
at pp. 846-847.) The Court of Appeal concluded, next, that the indemnitee’s attorney
fees and costs incurred as a result of that tort liability constituted sums the
indemnitor/insured became “‘legally obligated to pay as damages because of’ covered
tort claims.” (Id. at p. 851.) The court explained that “‘[m]ost construction agreements
or contracts require downstream contractors or subcontractors to protect upstream
contractors’ by way of indemnity provisions” and “many indemnification clauses in the
construction industry ‘include language that can be read to require a defense as well as
indemnity.’” (Id. at pp. 851-852.)
              Golden Eagle dealt with a situation in which the contractor/indemnitee
sought indemnity from the subcontractor/indemnitor for the damages the contractor
incurred as a result of a third party lawsuit. If an indemnitor fails to defend an
indemnitee against a third party, the indemnitee may recover, as damages, its attorney
fees and costs incurred in defending the third party claim. (Code Civ. Proc., § 1021.6
[implied indemnity]; Searles Valley Minerals Operations Inc. v. Ralph M. Parsons
Service Co. (2011) 191 Cal. App. 4th 1394, 1399 [contractual indemnity].) In that
situation, the damages incurred by the indemnitee include the attorney fees and costs it
incurred defending the third party lawsuit. That is because, as the Golden Eagle court
noted, “it is established that the indemnitee’s attorney fees constitute an ‘item of
damages’ for the indemnitor’s breach of its indemnity obligation.” (Golden Eagle, supra,
99 Cal.App.4th at p. 852.)
              In this case, however, Moorefield did not seek indemnification from its
concrete and flooring subcontractors (Kiggins Construction and Solo Flooring) for
damages Moorefield had to pay to JSL. Moorefield was sued by JSL for breach of the
Construction Contract, negligence, and breach of implied warranty to recover damages
JSL incurred for construction defects. JSL sought attorney fees from Moorefield based

                                              28
on the attorney fees provision in the Construction Contract, the rights under which had
been assigned to JSL. Moorefield’s liability to JSL for attorney fees therefore would be
as a cost of suit, not as damages.

         C. Navigators Had a Duty to Defend Moorefield and Therefore Had an
             Obligation to Pay Attorney Fees and Costs of Suit Under the
                         Supplementary Payments Provision.
              The trial court found that Navigators had no obligation to pay costs
included within the settlement with JSL because “Moorefield’s potential liability arose
from a non-covered claim.” We disagree.
              The phrase “‘any “suit” against an insured we defend’” (Golden Eagle Ins.
Corp. v. Cen-Fed, Ltd. (2007) 148 Cal. App. 4th 976, 992) in the supplementary payments
provision of a standard CGL policy has been interpreted to mean the obligation to pay
costs arises only if the insurer had a duty to defend the insured (id. at p. 996). The insurer
has no obligation under a supplementary payments provision if no defense obligation
ever existed. (Id. at p. 996.) The supplementary payments provision applies “only to
those cases where the insurer actually owed a duty to defend.” (Ibid.)
              The duty to defend is broader than the duty to indemnify. (Horace Mann
Ins. Co. v. Barbara B. (1993) 4 Cal. 4th 1076, 1081 (Horace Mann).) “It is by now a
familiar principle that a liability insurer owes a broad duty to defend its insured against
claims that create a potential for indemnity. [Citation.]” (Ibid.) “[T]he test is whether
the underlying action for which defense and indemnity is sought potentially seeks relief
within the coverage of the policy.” (La Jolla Beach & Tennis Club, Inc. v. Industrial
Indemnity Co. (1994) 9 Cal. 4th 27, 44.) “In other words, the insured need only show that
the underlying claim may fall within policy coverage; the insurer must prove it cannot.”
(Montrose Chemical Corp. v. Superior Court (1993) 6 Cal. 4th 287, 300.)
              “Once the defense duty attaches, the insurer is obligated to defend against
all of the claims involved in the action, both covered and noncovered, until the insurer

                                             29
produces undeniable evidence supporting an allocation of a specific portion of the
defense costs to a noncovered claim. [Citations.] . . . Any doubt as to whether the facts
give rise to a duty to defend is resolved in the insured’s favor. [Citation.]” (Horace
Mann, supra, 4 Cal.4th at p. 1081.)
              Navigators accepted Moorefield’s tender of defense. In June 2011,
Navigators made that acceptance subject to a reservation of rights. “[T]he insurer may
unilaterally condition its proffer of a defense upon its reservation of a right later to seek
reimbursement of costs advanced to defend claims that are not, and never were,
potentially covered by the relevant policy.” (Scottsdale Ins. Co. v. MV Transportation
(2005) 36 Cal. 4th 643, 656 (Scottsdale).)
              Navigators filed this lawsuit against Moorefield for declaratory relief to
obtain an adjudication of the duty of Navigators to defend and indemnify. Navigators
moved for summary adjudication of its duty to defend. Navigators argued there was no
potential for coverage as a matter of law due to Moorefield’s decision to have the
flooring installed on a concrete slab with excessive moisture was not an accident.
              In July 2013, the trial court denied the motion for summary adjudication on
alternate grounds. The court denied the motion on the procedural ground that the motion
did not attempt to resolve an entire cause of action but was limited to the duty to defend.
The court also denied the motion on an alternate, factual ground. The court found there
was a triable issue of fact on the duty to defend because “[t]he opposition to the motion
shows that, not only does the affected carpet make up only a tiny fraction of the entire
floor, but that there were other possible causes for the problems reported by the
landlord.”
              When disputed factual issues preclude summary judgment in the insurer’s
favor, denial of a motion for summary judgment establishes the insurer’s duty to defend
absent additional evidence on the issue. (Horace Mann, supra, 4 Cal.4th at p. 1085; see
Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 7:675, p. 7B-70.)

                                              30
Denial of Navigators’s motion for summary adjudication established that Navigators had
a duty to defend Moorefield under the Policies and, accordingly, that Navigators had an
obligation under the supplementary payments provision to pay costs of suit, including
attorney fees. “The insurer must absorb all costs it expended on behalf of its insured
while the duty to defend was in effect—i.e., before the insurer established that the duty
had ended.” (Scottsdale, supra, 36 Cal.4th at p. 657.)
               Later, by means of the statement of decision and judgment, the trial court
determined there was no coverage under the Policies and that Navigators did not have a
duty to defend. A duty to defend can be extinguished only prospectively and not
retrospectively. (Scottsdale, supra, 36 Cal.4th at p. 655.) However, “an insurer, having
reserved its right to do so, may obtain reimbursement of defense costs which, in
hindsight, it never owed”; that is, when the third party lawsuit “never presented any
potential for policy coverage.” (Id. at p. 657.) That situation arises when subsequent
case law establishes, in hindsight, that no duty to defend ever existed. (Id. at
pp. 657-658.) “By law applied in hindsight, courts can determine that no potential for
coverage, and thus no duty to defend, ever existed. If that conclusion is reached, the
insurer, having reserved its right, may recover from its insured the costs it expended to
provide a defense which, under its contract of insurance, it was never obliged to furnish.”
(Id. at p. 658.)
               Here, no case law arose subsequent to Navigators’s acceptance of
Moorefield’s tender of defense which, if applied in hindsight, would have established that
no duty to defend ever existed. The trial court determined that Navigators had no duty to
indemnify because the evidence at trial showed the loss was caused by a noncovered
occurrence—Moorefield’s decision to have the flooring installed over a concrete slab
having a moisture vapor emission rate exceeding specifications. The ultimate
determination that the loss was caused by a noncovered occurrence does not mean that
JSL’s lawsuit (and DBO’s cross-complaint) never presented any potential for policy

                                             31
coverage. If that were so, a determination an insurer has no duty to indemnify would
automatically extinguish the duty to defend retrospectively and give the insurer the right
to seek reimbursement from the insured. That result is inconsistent with the firmly
established principle that the duty to defend is broader than the duty to indemnify.
(Horace Mann, supra, 4 Cal.4th at p. 1081.)
              The claim that Moorefield was responsible for the flooring failure was
potentially covered. At trial, Navigators failed to prove there was never any potential
coverage under the Policies. JSL, in its initial and first amended complaints, alleged the
foundation of the Best Buy Building had been defectively installed in that curing
compound had been sporadically applied. Navigators does not contend the potential for
coverage did not arise under the allegations of JSL’s initial complaint and first amended
complaint. Only in its second amended complaint—filed 27 months after the initial
complaint—did JSL allege that Moorefield had flooring installed over concrete with
excessive moisture. In addition, evidence developed during discovery uncovered other
potential causes, such as roof leaks, for the flooring failure. Although the leading
candidate was and remained moisture in the slab, as of March 2012, Decker believed
there was a 20 percent chance of prevailing on the theory of roof leaks or a design defect.
              The trial court cited, and Navigators relies on, Mintarsih, supra, 175
Cal. App. 4th 274, for the proposition a supplementary payments provision does not give
rise to an obligation to pay costs awarded against the insured that can be attributed only
to claims that were potentially not covered. In Mintarsih, the insureds were sued, and
later held liable, for various tort causes of action and Labor Code wage and hour claims.
(Id. at p. 280.) The trial court ordered the insureds to pay attorney fees as costs pursuant
to Labor Code section 218.5. (Mintarsih, supra, at p. 280.) The insureds had tendered
their defense to their insurer, which had accepted subject to a reservation of rights.
(Ibid.) The insurer brought a declaratory relief action for a determination of the parties’
rights and duties under the insurance policies issued to the insureds. (Id. at pp. 280-281.)

                                             32
The insureds conceded the insurer had no duty to indemnify them for amounts awarded
for the wage and hour violations. (Id. at p. 281.) The trial court in the declaratory relief
action held the insurer had a duty to indemnify the insureds for damages awarded on the
tort causes of action and for costs, but had no duty to indemnify the insureds for attorney
fees. (Ibid.)
                The Court of Appeal concluded that the insurer’s obligation under the
supplementary payments provision of the policies extended only to costs of suit arising
from claims that were potentially covered. (Mintarsih, supra, 175 Cal.App.4th at p. 279.)
The right to recover attorney fees arose only under the statutory wage and hour claims,
which were not potentially covered under the policy. (Ibid.) Because the right to recover
attorney fees arose solely under the Labor Code, and there was never even a potential for
coverage of the wage and hour claims, the insurer was not liable to pay attorney fees
under the supplementary payments provision, notwithstanding the fact the insurer had a
duty to defend the entire lawsuit. (Id. at pp. 286-287.)
                In this case, JSL’s right to recover attorney fees, and Moorefield’s
obligation to pay them, arose under the cause of action for breach of the Construction
Contract. Navigators does not contend the Policies could never cover claims for breach
of contract based on defective construction. While the wage and hour claims in
Mintarsih could not even potentially have been covered, the claims forming the basis of
JSL’s breach of contract cause of action were potentially covered.

           D. The Trial Court Prejudicially Erred by Finding That Moorefield
           Did Not Meet Its Burden of Proving What Portion of the Settlement
                        Was for Attorney Fees and Costs of Suit.
                Because the supplementary payments provision in the Policies covered
attorney fees and costs paid as part of the settlement, and Navigators had a duty to defend
a claim for which JSL and DBO could recover attorney fees, the final issue is whether,

                                              33
and to what extent, the amount paid in settlement included attorney fees and costs of suit
subject to the supplementary payments provision.
              An insurer has an obligation to pay costs under a supplementary payments
provision when a lawsuit settles, even though a court in that situation has not formally
“taxed” costs. (Employers Mutual Casualty Co. v. Philadelphia Indemnity Ins. Co.,
supra, 169 Cal.App.4th at pp. 348-349.) This means that, when litigation settles, and
there was a duty to defend, the insured may recover from the insurer the amount paid
toward the settlement that represented costs under the supplementary payments provision.
              Because Navigators had a duty to defend, it was not entitled to
reimbursement from Moorefield of attorney fees and costs of suit paid under the
supplementary payments provision. The trial court ruled that Navigators was entitled to
reimbursement of the full $1 million it paid toward the settlement. The trial court did not
make an express finding that, of the amount paid in settlement, all was for damages or
none was for attorney fees and costs. Instead, the trial court found that “[Moorefield] has
not proven by a preponderance of the evidence what portion, if any, of Navigators’
settlement payment was attributable to costs.”
              No objections were made to the statement of decision, and no party brought
omissions or ambiguities in it to the trial court’s attention, so we will infer the trial court
made findings favorable to the prevailing party—Navigators—on all issues necessary to
support the judgment. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal. App. 4th
42, 59-60.) We therefore infer the trial court made an implied finding that none of the
$1 million paid by Navigators toward the settlement was attributable to contract-based
attorney fees and costs (or, put another way, that all of the $1 million paid by Navigators
was for damages). We review implied findings for substantial evidence. (Id. at p. 60.)
              The trial court’s allocation of the burden of proof to Moorefield was,
however, a legal error, not a factual one. The insurer, not the insured, has the burden of
proving by a preponderance of the evidence that “the settlement payments were allocable

                                               34
to claims not actually covered, and the defense costs were allocable to claims not even
potentially covered.” (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra,
¶ 15:305, p. 15-57.) In Buss v. Superior Court (1997) 16 Cal. 4th 35, 53, the California
Supreme Court concluded the insurer bears the burden of proving reimbursement of
defense costs from the insured.
              Misallocation of the burden of proof in a bench trial is not reversible error
per se but must be prejudicial to warrant reversal. (Perez v. VAS S.p.A. (2010) 188
Cal. App. 4th 658, 679.) Prejudice means “‘a reasonable probability that in the absence of
the error, a result more favorable to [the appellant] would have been reached.’” (Diaz v.
Carcamo (2011) 51 Cal. 4th 1148, 1161.) A probability does not mean “more likely than
not” but “a reasonable chance, more than an abstract possibility.” (College Hospital Inc.
v. Superior Court (1994) 8 Cal. 4th 704, 715.)
              Whether the trial court’s misallocation of the burden of proof was
prejudicial depends on the sufficiency of the evidence to support the implied finding that
none of the $1 million paid by Navigators toward the settlement was allocable to
contract-based attorney fees and costs. (See In re Marriage of Burkle (2006) 139
Cal. App. 4th 712, 736 [“misallocation of the burden of proof is not ‘reversible error per
se’” and “does not vitiate the substantial evidence rule”]; Merrill v. Normandie Corp.
(1930) 110 Cal. App. 621, 623 [“the question of the weight of evidence and the question
of upon whom rests the burden of proof become purely academic when the trial court has
found upon substantial evidence that the essential facts have been proved”].) If
substantial evidence supported the implied finding, then the trial court’s misallocation of
the burden of proof would be harmless because there would be no reasonable probability
the court’s decision would have been different in absence of the error. In Perez v. VAS
S.p.A., supra, 188 Cal.App.4th at page 679, the Court of Appeal concluded that the trial
court’s failure to use the correct burden-shifting analysis was harmless because

                                             35
substantial evidence supported an express finding on which the trial court based its
            4
decision.
                Here, substantial evidence did not support an implied finding that all of the
$1 million paid toward the settlement by Navigators was attributable to damages and
none was attributable to contract-based attorney fees and costs of suit. At trial,
overwhelming and unquestionably credible evidence was presented that, of the
$1,310,000 paid in settlement to JSL and DBO, at most $377,404 was for cost of repair
damages. That figure was the amount Best Buy withheld from rental payments as costs
to repair the flooring.
                In February 2012, Decker prepared a report to Navigators, which was
admitted in evidence as exhibit No. 59, in which Decker stated: “JSL seeks to recoup
repair/investigation costs in the amount of $377,404. These costs have been verified
through the discovery process, principally by reviewing the documentary record and
deposing the persons most knowledgeable on the subject from JSL and Best Buy.”
Decker believed that amount was too high and defense experts would present reasonable
repair costs “in the range of $100,000-$150,000.” Also in the February 2012 report,
Decker reported that JSL was seeking to recover attorney fees pursuant to the
Construction Contract and that “JSL’s claimed legal fees are $330,578 and are expected
to continue to rise as this case approaches trial.”

  4
    The rule appears to be different when the trial court correctly allocates the burden of
proof, but finds there was a failure to meet that burden. “‘[W]here the issue on appeal
turns on a failure of proof at trial, the question for a reviewing court becomes whether the
evidence compels a finding in favor of the appellant as a matter of law. [Citations.]
Specifically, the question becomes whether the appellant’s evidence was
(1) “uncontradicted and unimpeached” and (2) “of such a character and weight as to leave
no room for a judicial determination that it was insufficient to support a finding.”’”
(Sonic Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal. App. 4th
456, 466.)

                                              36
              A Navigators’s internal pretrial report from March 2012 stated: “JSL’s
damages consist of two claims. First, JSL seeks to recoup the lost rent withheld by Best
Buy for repair costs on the floor. This claim has been firmly set at $377,404.
Additionally, JSL seeks to recover its legal fees in the amount of $330,578 pursuant to
the provision of the Construction Agreement between Moorefield and DBO, which JSL
claims has been assigned to it. . . . Obviously, the claim for legal fees will continue to
increase as trial nears and occurs.” This internal report was admitted in evidence as
exhibit No. 137.
              In a memorandum from November 2012, received in evidence as exhibit
No. 63, Decker concluded that JSL and DBO would be entitled to recover attorney fees
and costs of suit pursuant to section 14.7 of the Construction Contract. JSL submitted a
mandatory settlement conference statement in January 2013. In that statement, admitted
in evidence as exhibit No. 140, JSL’s demand was for $1,305,456 of which $377,404 was
for “Best Buy ‘self-help’ repairs” and $474,923 was for “[l]egal fees and costs (as of
12/31/2012).”
              At trial, Decker testified it was his understanding that JSL planned to make
a claim for cost of repairs that was “fixed” in the amount of about $370,000. He testified
that JSL and DBO would be making a claim for attorney fees which could have been in
the range of $600,000 to $700,000. Later, Decker testified that “[JSL] had a claim for
damages that [it] suffered as a result of the allegedly defective floor or slab. Those
damages were measured in terms of the lost rent that had been withheld, as well as the
cost of investigating the problem and repairing the problem.” Decker testified he
understood that JSL would have sought recovery of attorney fees pursuant to the attorney
fees provision in the Construction Contract.
              In light of this evidence, Navigators’s contention that Moorefield
“presented no evidence at trial that supports its costs versus damages allocation of the
settlement” is patently wrong. To the contrary, the evidence established conclusively that

                                               37
at least some part of the $1 million paid toward the settlement by Navigators was for
attorney fees and costs of suit falling within the supplementary payments provision. The
settlement amount was $1,310,000 of which JSL received $885,000 and DBO received
$425,000. Out of the $1,310,000 paid in settlement, a maximum of $377,404 represented
the cost of repair damages to JSL. If the entire $425,000 received by DBO was for
damages for indemnity from Moorefield, then the amount paid in damages would total
$802,404 ($377,404 + $425,000) which is $197,596 less than the $1 million contributed
by Navigators. That calculation is extremely generous to Navigators because $160,000
of the settlement was made up of contributions from Best Buy, Kiggins Construction,
George Roofing, and Solo Flooring.
              Navigators relies on the provision in the settlement agreement providing
that the parties “shall bear their own respective costs and attorneys’ fees incurred as a
result [of] the claims, the action, the DBO coverage action and in preparing and executing
this agreement.” (Some capitalization omitted.) Navigators argues this cost waiver
provision conclusively establishes that the entire amount paid in settlement was for
damages, for which Navigators had a right to be reimbursed.
              We disagree. An appellate court independently construes a contract when
no extrinsic evidence is introduced or when the extrinsic evidence is not in conflict.
(Founding Members of the Newport Beach Country Club v. Newport Beach Country
Club, Inc. (2003) 109 Cal. App. 4th 944, 955.) As Moorefield explains, such attorney fee
and cost waivers are included in settlement agreements to prevent a party from seeking
prevailing party attorney fees from the court. Based on the language of the settlement
agreement, we interpret the purpose of the cost waiver provision in the settlement
agreement in the same way. Indeed, without such waiver, the plaintiff obtaining a
monetary recovery in a settlement agreement would be the prevailing party under Code
of Civil Procedure section 1032, subdivision (a)(4) and therefore, under section 1032,
subdivision (b), would be able to recover costs, which might include attorney fees under

                                             38
Code of Civil Procedure section 1033.5, subdivision (a)(10). (DeSaulles v. Community
Hospital of Monterey Peninsula (2016) 62 Cal. 4th 1140, 1144.)
              The interpretation urged by Navigators is contrary to the undisputed
evidence that the cost of repair damages was $377,404 and that at least some part of the
settlement was for attorney fees, which JSL and DBO had sought under the attorney fees
provision of the Construction Contract. How the settlement agreement characterized the
amount paid in settlement (damages or costs of suit) is not proof supporting a finding that
Navigators is entitled to recoup the entire $1 million. Navigators had the right to be
reimbursed only that amount paid as damages for property damage to which the Policies
applied, i.e., caused by a covered occurrence. The settlement agreement, to which
Navigators was not a party, cannot alter the meaning of the Policies. In sum, the
settlement agreement neither satisfied Navigators’s burden of proof nor constituted
substantial evidence supporting an implied finding that none of the $1 million paid by
Navigators was for attorney fees and costs of suit.
              Navigators also argues that in construction litigation, the indemnitee’s
attorney fees are characterized and recoverable as damages. As we have explained, JSL
did not sue Moorefield for indemnity. JSL sued Moorefield under the theory that by
negligently installing the foundation and/or negligently having the flooring installed on
concrete emitting excessive moisture vapor, Moorefield breached the Construction
Contract and was liable for negligence and breach of implied warranty. Navigators
identifies no evidence to show that JSL sought to obtain indemnity from Moorefield of
attorney fees JSL spent to litigate against Best Buy. DBO did sue Moorefield for
indemnity, but, as we have explained, even if the entire $425,000 in settlement proceeds
paid to DBO represented indemnification from Moorefield (highly unlikely because DBO
also sought indemnity from Solo Flooring, Kiggins Construction, and George Roofing)
about $198,000 of the $1 million paid by Navigators would be attorney fees and costs of
suit.

                                            39
              Substantial evidence did not support the trial court’s implied finding that
none of the $1 million contributed by Navigators to the settlement was for attorney fees
and costs of suit subject to the supplementary payments provision of the Policies. The
trial court’s error in misallocating the burden of proof to Moorefield, therefore, was
prejudicial. The matter will be remanded for a new trial limited to the issue of the
amount, proven by Navigators, which Moorefield must reimburse from the $1 million
paid by Navigators toward settlement of the underlying litigation. As explained in this
opinion, that amount is limited to damages. Moorefield may keep the amount attributable
to attorney fees and costs of suit under the supplementary payments provision.

                                            III.
                                        Conclusion
              Navigators had no duty under the Policies to indemnify Moorefield because
the flooring failure was not a covered occurrence. Navigators did have a duty to defend
and therefore had an obligation to make payments under the supplementary payments
provision of the Policies. While Moorefield must reimburse Navigators for that portion
of the $1 million paid by Navigators toward the settlement that is attributable to damages,
Moorefield may keep whatever portion is attributable to attorney fees and costs of suit
under the supplementary payments provision.
              The trial court prejudicially erred by allocating to Moorefield the burden of
proving the portion of the $1 million paid by Navigators is attributable to attorney fees
and costs of suit covered by the supplementary payments provision. The matter is
remanded for a new trial solely on the issue of what portion of the $1 million paid by
Navigators is attributable to attorney fees and costs of suit covered by the supplementary
payments provision.

                                             40
                                      DISPOSITION
              The judgment is affirmed insofar as it declares that Navigators had no duty
to indemnify Moorefield under the Policies. In all other respects, the judgment is
reversed and the matter is remanded for a new trial limited to the issue identified in this
opinion. In the interest of justice, no party shall recover costs on appeal.

                                                  FYBEL, J.

WE CONCUR:

O’LEARY, P. J.

MOORE, J.

                                             41