After plaintiff insured settled a contested case with a general contractor, the insured sued defendant, its general liability insurer, for breach of contract and breach of the covenant of good faith and fair dealing, asserting that the insurer should have defended and indemnified it for a setoff amount in the underlying suit. The trial court dismissed the complaint. The California Court of Appeal reversed. The supreme court granted review.
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The insured argued that its insurer should not have been able to avoid its contractual obligation to defend and provide liability coverage by the fortuity that the contractor asserted its claim against the insured as a setoff rather than as a cross-complaint or an independent suit. The insurer argued that the setoff claim asserted in an answer was not a suit seeking damages that triggered the insurer’s duty to defend. The supreme court held that a defendant may not obtain an award of affirmative relief against a plaintiff by way of Cal. Civ. Proc. Code § 431.70; rather, a defendant could only assert the setoff defensively to defeat a plaintiff’s claim in whole or in part. However, the supreme court declined to decide the question of whether a setoff claim constituted a suit seeking damages for purposes of a comprehensive general liability insurance policy where the precise terms of the insurance policy were not before it. Nevertheless, the supreme court concluded that the insured’s adequately stated a prima facie right to relief for breach of a contractual obligation, and therefore the appellate court was correct to reverse the trial court’s order sustaining the demurrer.
The judgment of the appellate court was affirmed.