The Best Defense Is A Good Setoff

If you got it, of course. Today, I’m talking about the common law doctrine of setoff as it applies in California litigation. Contractual offsets are a different topic for another day, such as offsetting worker’s compensation payments from uninsured motorist benefits. That’s not what I’m talking about here, though it is a related concept.

In California, setoff is a doctrine often alleged in an Answer but not actually litigated. The doctrine of setoff (sometimes also called “offset”) applies when the party being sued has or had a claim against the plaintiff/claimant that may be used to reduce the amount of money damages that the plaintiff can recover. Setoff was an equitable concept that the California Legislature codified in Code of Civil Procedure, § 431.70.

Setoff does not apply in every case. A good investigation of the facts, and especially a thorough interview with the insured defendant may disclose the existence of this defense. It applies where cross-claims for money exist or used to exist. Because it is an equitable doctrine, it has unusual characteristics. For example, even if the statute of limitations ran on the defendant’s claim against the plaintiff years before the plaintiff filed suit, the defendant can use this defense to reduce or eliminate the damages the plaintiff is presently seeking.

Take the following example, plaintiff and defendant had a “take or pay” contract for the purchase of motor fuel. In these agreements, the buyer agrees that it will take and pay the seller a minimum of X dollars per month, even if the buyer does not take any fuel. The buyer fails to pay the minimum contract price of $10,000 a month for six months. Six years later, the plaintiff buyer sues the seller for defamation, since the seller told anyone who would listen where a terrible business plaintiff ran. The seller/defendant is insured under a CGL providing a defense for defamation claims.

The statute of limitations for breach of written contract in California is 4 years. The defendant seller cannot sue to recover money from the plaintiff; however, § 431.70 allows that defendant/insured to reduce plaintiff’s recovery by $60,000.

So, if plaintiff tries its case, and obtains a verdict for $50,000, the judgment will be for the defendant/insured, and the insured would be able to recover its litigation costs as “the prevailing party.” Pretty cool, right?

To raise the defense properly, it’s not going to be enough under California or federal law to just plead “Offset” or “Setoff.” When attacked, courts generally hold the defendant has to plead all the facts necessary to support the cause of action or claim that the setoff is based on. If the claim is not time-barred, this can be done by filing a cross-complaint and incorporating the cross-complaint into the setoff defense. Note however that cross-complaints for relief other than indemnity trouble insurance defense counsel (and  the insurers who hire them) because defense counsel defends insureds; they are not hired to prosecute affirmative claims the plaintiff, generally speaking.

The limit of the defense is that the setoff can only be used defensively–especially if the defendant’s claim or cause of action that the setoff is based is time-barred. One other important limitation. If this is the second lawsuit between the plaintiff and the defendant, and the defendant either raised or “should have raised” the claim in prior litigation, the defendant cannot get a second bite at the apple by raising setoff for a claim that was or should have been litigated between the same parties in earlier litigation.

Another useful way that setoff may be used is in defense of a judgment. Let’s say that a judgment against an insured exists. The insured finds someone who the judgment creditor has wronged in the past, and buys that third party’s causes of action against the judgment creditor. The judgment debtor can bring a new action for declaratory relief seeking to setoff the judgment debt by the value of the assigned claims–even if those claims would be time-barrred. This can be helpful to private businesses suffering judgments and in cases where there is a blend of insured and uninsured claims where a well-funded insured may be actively participating in its defense.

Sometimes the best defense is a good offset.

Hotel Liability For Not Supplying Bath Mats—Lack of Similarity of Past Accidents Supports Summary Judgment


By John Armstrong

A recent case out of California’s Fourth District Court of Appeal involving Omni Hotels shows that a good investigation helps support summary judgment—even in California where such summary disposition  of cases are hard to come by.

For adjustors involved in hotel claims, however, it is the last two pages of the opinion that are of interest. The trial court granted summary judgment for defendants that a hotel was not liable for premises liability or under any of the products liability theories advanced for failing to supply bath mats. The trial court however granted plaintiff a motion for new trial on whether the hotel was negligent in either not investigating further or not communicating more widely within the hotel chain the reports of bathtub accidents at Omni hotels. 

The appellate court affirmed the summary judgments, but reversed the trial court’s grant of a new trial to plaintiff based on plaintiff’s evidence of past accidents. The appellate court looked at the hotel incident reports and determined that these did not show the required “substantially similar accidents” and lacked detail about the conditions of or in the bathtubs, and lacked details about the medical conditions of the guests who were reported to have fallen in the hotel’s bathtubs. The court found the reports only provided “speculative or conjectural evidence” that Omni knew or had reason to know of a dangerous condition surrounding its hotel bathtubs.

The court also rejected the argument that hotel’s past reports of bathtub accidents necessarily put on the hotel on a “heightened duty of inquiry” to find out from the bathtub manufacturer, Kohler, if Kohler was aware of similar incidents with its bathtubs. Though the plaintiff alleged he could bring “ample” evidence that Omni had both actual and constructive knowledge that tubs in its hotels were dangerously slippery, he failed to support these claims with anything but his anecdotal witness testimony and opinions. The appellate court found this evidence insufficient to create triable issues of fact.

The lesson? Courts are looking at the foundation of expert declarations mare carefully to see if the evidence relied on is legally sufficient to support having a trial. The appellate court recognized that bathtubs are inherently slippery, meaning that for a plaintiff to impose liability against the hotel, he’d have to prove that either the hotel made dangerously more slippery or was on notice that its tubs were more slippery than other tubs—a very difficult burden. Usually, if there is a clash of expert declarations, most courts will hold a trial and let the jury decide, which is probably why the trial court granted the motion for new trial. The appellate court reversed however because it carefully examined plaintiff’s evidence and found that it was not legally or logically compelling to prove the claim that Omni knew its Kohler tubs were more slippery than other tubs—“even if” the hotel had other reported tub accidents. Implicit in the court’s decision was that it would be likely for any large hotel chain to have tub accidents since they are slippery and since the general public, including persons with a variety of medical conditions, could cause or contribute to causing tub accidents.

The moral? You can get summary judgment granted in California when the plaintiff’s expert’s opinions are based on anecdotal evidence, educated guesses, or are otherwise lacking foundation.