In Shell Oil Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa. (44 Cal App 4th 1633, 52 Cal. Rptr. 2d 580 Cal Ct App, 2d Dist 1996), Shell Oil Co. contracted with S.I.P. Engineering, Inc. (SIP) for SIP to do engineering work at Shell's oil refinery. In the contract with SIP, SIP was required to provide $5 million worth of defense and indemnity to Shell for any claims for personal injury or property loss unless the claim arose from Shell's negligence. In addition, SIP agreed to maintain, inter alia, Comprehensive General Liability Insurance with a limit of $1,000,000 per occurrence and Shell was to be made an additional insured on these insurance policies. SIP's Comprehensive General Liability Policy from National provided that "if specifically required to be included as a named insured, this policy shall include as a named insured any person or organization to whom the named insured i.e., S.I.P is obligated by virtue of a contract, entered into before loss, to provide insurance such as is afforded by this policy, but only to the extent required by said contract and not to exceed the coverages and the limits of liability afforded by this policy" (id. at 1638). SIP also had excess insurers (Lexington, Pacific Employers and Granite State) that provided excess insurance over National's limit to $5 million, in January 1986, an employee of one of SIP's subcontractors suffered severe injuries on the job and in May 1986, the employee sued SIP and Shell for negligence in Washington state court (the "Washington Action"). Shell was also sued in subrogation by the subcontractor's workers' compensation carrier. SIP tendered its defense to National, which accepted and agreed to pay the lawyers SIP had retained. Shell initially retained counsel to defend the action, but after Shell obtained National's and the excess insurer's policies in September 1987, on January 21, 1988, Shell demanded coverage and defense from National and the excess carriers. National and the excess insurers declined to cover Shell. Thereafter, on March 22, 1988, the employee's case as against SIP went to mediation and was settled. National and the excess carriers paid SIP's share of the settlement ($2 million) and Shell paid another $2 million and waived a $225,000 workers' compensation lien it had acquired in settlement with the compensation carrier. Following the settlement, Shell sued SIP for indemnity, but SIP won with the court finding that the accident had been caused by Shell's sole negligence. Following that decision, SIP, National and the excess carriers filed contribution actions against Shell, but Shell prevailed in those actions because the releases given to the employee did not preserve such claims. In this action, Shell sued National and the excess carriers in which it sought a declaratory judgment of the monies Shell expended in the Washington Action to settle the case and for the attorneys' fees and costs incurred. It also sued SIP for breach of contract if it was determined that Shell was not covered. The lower court determined that Shell was entitled to defense and indemnification in the Washington Action based on the contract with SIP and SIP's policies with National and the excess carriers. The excess carriers settled with Shell for $950,000. National went to trial and the court determined that Shell was entitled to $500,000 from National (half of the policy limit) plus prejudgment interest and the attorneys fees incurred in the Washington Action (but not the fees incurred in the declaratory judgment action). On appeal, National argued: (1) the Washington Action did not fall within National's coverage because it involved Shell's sole negligence; (2) National fully discharged its duty to Shell when it paid its policy limits in settlement; and (3) National's duty to defend was limited to the three month period between Shell's formal tender of its defense and National's settlement payment in the Washington Action. The appellate court agreed with the lower court's determination that Shell was covered by the National policy. Addressing National's second argument, the court agreed with the trial court that "National was not entitled to pick and choose between its two insureds in its payment of benefits, 'particularly where no detriment is demonstrated by providing equal treatment to both insureds" (Shell Oil Co., 44 Cal App 4th at 1645). The trial court had determined that Shell received no benefit from National's payment of the $1 million on behalf of SIP because the settlement occurred simultaneously so there was nothing against which Shell could offset National's payment. The appellate court further noted that based on the implied covenant of good faith and fair dealing, "an insurer owes the duty of good faith and fair dealing to each of its insureds, and cannot favor the interests of one insured over the other'" (Shell, 44 Cal App 4th at 1646.) With regard to National's argument concerning its non-liability for pre-tender of defense expenses, the court held that Shell's pre-tender defense expenses were not barred from recovery because they were not voluntary since during that time frame, Shell was trying to find out the insurer's identity. The court rejected National's position that once it paid out the policy limit, it could no longer be liable to Shell based on the policy's provision that National "shall not be obligated to pay any claim, judgment or award or to defend any suit or proceeding after the applicable limit of the company's liability has been exhausted by payment of judgments, settlements or awards" (id. at 1649) noting: National afforded Shell none of the benefits of the policy. It left Shell holding the bag, as to both liability and defense. Although Shell had asked National to tender the policy limit, Shell had done so when demanding coverage for itself. Instead, National ignored its duties to Shell and paid its policy limit on behalf of S.I.P. only. In short, the April 9, 1988 payout marked not simply the monetary limit of National's indemnity undertaking but also the most material breach of its policy with Shell (for which most of the present judgment holds National responsible). National cannot truncate its responsibility and liability to Shell for defense by claiming it fully performed its coverage obligations by the very act of breaching them (id. at 1650).