California duty to defend and duty to indemnify allocation

In Arrowood Indemnity Co. v. Travelers Indemnity Co. of Conn., No. B219491 (Cal. Ct. App. 2nd Dist. Oct. 6, 2010), underlying plaintiff Ashley sued Dunsmore and insured Five Star seeking damages for property damage to an apartment complex Ashley had purchased from Dunsmore.  The complaint alleged that, immediately before the sale, Dunsmore hired insured Five Star to remediate dry rot damage and that Dunsmore failed to repair all of the damage, hid the damage, and failed to disclose the damage to Ashley. Arrowood, Five Star’s CGL insurer at the time of the pre-sale rot remediation work, agreed to defend Five Star.  Arrowood then tendered Five Star’s defense to Travelers who insured Five Star during an earlier policy period, contending that its investigation indicated that Five Star also did rot remediation work during Travelers’ policy period.  Travelers agreed to participate in Five Star’s defense.  After a judgment was entered against Five Star, Travelers refused to pay any indemnity and, except for some defense costs it paid, also reneged on its agreement to pay for part of the defense.  Arrowood indemnified Five Star and then sued Travelers.  Travelers cross-claimed seeking reimbursement of the defense costs it did pay.    Following a bench trial, the trial court entered judgment for Travelers, finding no duty to defend and thus no duty to indemnify.  On appeal, the California intermediate appellate court, reversed.   The court first held that, under California’s liberal duty to defend rule, while the Ashley complaint did not give rise to a duty to defend under the earlier Travelers policy because it only alleged that Five Star performed rot remediation work during Arrowood’s policy period, once Arrowood provided Travelers with extrinsic evidence that Five Star also performed rot remediation work under Traveler’s policy period, a duty to defend arose under the Travelers policy because Ashley could have (although never did) amended its complaint to allege Five Star’s earlier work.   The court next held that that Travelers had a duty to indemnify.  To arrive at this holding, the court first determined that Arrowood, as the insurer which indemnified the insured and seeking contribution from an insurer which did not indemnify the insured, had the initial burden of proof which is the same as the burden of proof on the duty to defend, which Arrowood meet here.  The burden then shifted to Travelers to prove the absence of actual coverage.    Travelers did not meet this burden because, although the Ashley complaint did not allege Five Star work during the Travelers policy period and the jury verdict did not make any allocation to work Five Star did at different times, there was sufficient evidence of Five Star’s earlier work introduced in the underlying trial to preclude the court from determining that it was more likely than not that the verdict was based only on Five Start’s work during the Arrowood policy period.   The appellate court remanded to the trial court for an equitable allocation determination of defense and indemnity.