In the recent case, Certain Underwriters at Lloyds, London v. Arch Specialty Insurance (April 11, 2016, 2016 WL 1436362) the Court of Appeal of California for the Third Appellate District had occasion to consider the application of other insurance clauses in the context of successive primary general liability insurance policies.
Facts of Case
Arch Specialty Insurance (“Arch”) issued a commercial general liability policy to Framecon, Inc. (“Framecon”) for the one year period from October 28, 2002 to October 28, 2003. Certain Underwriters at Lloyds (“Underwriters”) issued a commercial general liability policy to Framecon for a two year period from October 28, 2000 to October 28, 2001 and from October 28, 2001 to October 28, 2002. These two insurers were Framecon’s only general liability policies for the subject three year period.
Framecon was named as a cross-defendant by KB Homes in a series of constructive defect lawsuits involving its work on a housing development. The lawsuits alleged progressive property damage occurring during all three policy periods.
While Underwriters agreed to provide Framecon and an additional insured, KB Homes with a defense, Arch took the position that its defense obligations were excess over Underwriters and even if the policy afforded coverage for the claim, Arch would not pay for a defense. Arch stated that based on the coverage terms of Arch’s “insuring agreement,” “in the event Framecon is already being afforded a defense in this matter by another insurer, even if coverage were found to apply, [Arch’s] policy would be excess with regard to defense of … Framecon.”
Arch further noted the intent of Arch’s policy to be “excess” to any other insurance providing a defense under the excess provision of the “Conditions” section of Arch’s insurance policy. Arch sent a similar letter to KB Home, invoking the “other insurance” provisions to deny a defense.
Additionally, the subject Arch policy contained an excess other insurance clause which stated:
This insurance is excess over any other insurance, and over deductibles or self-insured amounts applicable to the loss, damage, or injury, whether such other insurance is primary, excess, contingent or contributing and whether an insured is a named insured or additional insured under said policy.
When this insurance is excess, we will have no duty under Coverage A or B to defend any claim or suit that any other insurer has a duty to defend.”
Based on its “other insurance” provisions, Arch did not provide a defense to Framecon or KB Home. Arch did not contest an indemnity obligation under the policy, and in fact, paid a proportional share of the underlying settlement, and it funded its allocable share to settle other similar claims. It nevertheless maintained that in light of its policy’s “other insurance” provisions, it had no defense obligations since Underwriters was providing a defense.
Underwriters subsequently brought an equitable contribution claim against Arch. At the trial court level, Arch was granted summary judgment based on the court’s finding that the other insurance clause relieved it of a duty to defend, reasoning the Arch policy’s other insurance clause was not a prohibited escape clause because it was contained in the policy’s insuring agreement.
On appeal, the Appellate Court observed the purpose of “other insurance” clauses is to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss, but that public policy disfavors “escape clauses” regardless of their location in the insurance policy. The Appellate Court further observed this modern trend in California requires equitable contributions on a pro rata basis from all primary insurers, regardless of their respective other insurance clauses.
Arch argued general case law, and California jurisprudence disfavoring excess only clauses in primary policies, should be disregarded because the language concerning its defense obligations was in its policy’s insuring agreement rather than as a condition. The Appellate Court was not persuaded by this argument, noting California case law disfavoring escape or excess other insurance clauses is not premised on whether the language is stated as a condition or as a term of coverage, but instead speaks to a more general public policy concern.
It did not help Arch’s position that while the appeal was pending, the Fourth Appellate District published the case of Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Ins. Co. (2015) 241 Cal.App.4th 721, which held unenforceable an “other insurance” clause purporting to relieve a primary insurer of its duty to defend, despite clearly having a duty to indemnify. ProBuilders contributed toward the indemnification costs in the construction defect case against the insured contractor but resisted defense costs, based on its other-insurance clause that ProBuilders had the “duty to defend … against any suit seeking … damages [to which the insurance applied] provided that no other insurance affording a defense against such a suit is available to you.”
The Appellate Court further noted:
The courts have repeatedly addressed—and rejected—arguments by insurers that an ‘other insurance’ clause in their insuring agreement permitted them to evade their obligations by shifting the entire burden associated with defending and indemnifying a mutual insured onto a co-insurer…. [W]hen ‘the ‘other insurance’ clause … is written into an otherwise primary policy, the courts have considered this type of ‘other insurance’ clause as an ‘escape’ clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance. [Citations.] Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.’ Numerous courts have therefore rejected ‘other insurance’ clauses as a basis for avoiding contribution. [Citations.]. (Underwriters of Interest, supra, 241 Cal.App.4th at p. 731)
As the Appellate Court explained:
“Here too, Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense (‘We have the . . . duty to defend you . . . provided that no other insurance’ is available.) Here too, enforcing Arch’s clause would result in imposing on Underwriters the burden of shouldering a portion of defense costs attributable to claims arising from a time when Arch was the only insurer. Here too, the ‘other insurance’ provision was an escape clause that must be disregarded.
The Appellate Court found it would be unfair to burden Underwriters with the entirety of the defense simply because of the “other insurance” clause in the Arch policy. As such, the Appellate Court held Arch was required to contribute to the insured’s defense on a prorated basis.
ABOUT THE AUTHORS: David P. Ramirez is Senior Counsel at TYSON & MENDES, LLP, and primarily represents clients in complex litigation, including construction defect, insurance law, property disputes, and product liability. Mr. Ramirez was named as a “Top Lawyer” in San Diego for “Complex Litigation” in March 2016 by San Diego Magazine & “Top Lawyer in Southern California 2016” by the Los Angeles Times. Contact David at (858) 459-3365 or email@example.com.
Patrick Mendes is a Partner at Tyson & Mendes and specializes in professional liability, insurance coverage, architects & engineers, real property disputes, and bad faith litigation. Contact Mr. Mendes at 858.459.1953 or firstname.lastname@example.org.