“Escape” “Other Insurance” Clause Contained in Coverage Portion of Primary CGL Policy Not Enforceable in Equitable Contribution Action

(April 11, 2016) ____Cal.App.4th____; 16 C.D.O.S. 3833

A California appeals court held that an “other insurance” clause in a commercial general liability (CGL) policy could not be enforced in an equitable contribution action between successive primary insurers. The court found that enforcement of such a clause in these circumstances would violate public policy. The court also held that the fact that the “other insurance” clause was included in both the insuring agreement and in the conditions section of the CGL policy was not determinative to the enforceability of the clause.

Certain Underwriters at Lloyds, London (“Underwriters”) and Arch Specialty Insurance Company (“Arch”) were both primary insurers of Framecon, Inc. over successive policy years. Framecon was sued by a real estate developer for framing and carpentry work Framecon performed on residential homes in three separate homeowner actions. Framecon tendered the claims to both Underwriters and Arch. Underwriters agreed to defend Framecon under a reservation of rights, while Arch denied a defense obligation. Arch’s basis for denial was the “other insurance” language contained in the insuring agreement and in the conditions section of its policy, which stated: (1) that Arch’s policy is excess if any other insurer provides a defense to Framecon for a claim; and (2) that, when Arch’s policy is excess, Arch has no duty to defend the claim.

The underlying claims against Framecon were eventually settled with both Underwriters and Arch agreeing to indemnify Framecon for damages on a “time on the risk” basis. Underwriters then sued Arch for declaratory relief and equitable contribution seeking recovery of defense costs incurred in the underlying litigation. In cross-motions for summary judgment, Arch argued that the “other insurance” clause in its policy relieved it of any duty to defend. The trial court granted summary judgment in favor of Arch. In doing so, the trial court relied on Chamberlin v. Smith (1977) 72 Cal.App.3d 835 which held that the placement of the “other insurance” clause in the insuring agreement, as opposed to placing it in the policy’s conditions section, makes it an enforceable exception from coverage for defense costs rather than a disfavored “escape” clause against public policy.

On appeal from the trial court ruling, the Court of Appeal noted that the original purpose of “other insurance” clauses was to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss, but that public policy disfavored “escape” clauses. The court explained that “escape” clauses are so named because they permit an insurer to make a seemingly ironclad guarantee of coverage, only to withdraw that coverage – and thus “escape” liability – when other insurance is available. When “other insurance” clauses are found in primary policies, the court observed that such clauses are indeed, “escape” clauses. The Court of Appeal then rejected Arch’s argument that its “other insurance” clause was enforceable because it was located in both the insuring agreement and in the conditions section of the policy. In support of this conclusion, the court noted that Chamberlin predated the “modern trend” which is to distrust “escape” “other insurance” clauses that attempt to shift the burden away from a primary insurer. The Court of Appeal also cited Home Ins. Co. v. St. Paul Fire & Marine Ins. Co. (1st Cir. 2000) 229 F.3d 56 which criticized Chamberlin’s reliance on the location of the “other insurance” clause in the policy as determinative, calling it “semantic microscopy” that “would tend to encourage insurers to jockey for best position in choosing where to locate ‘other insurance’ language, needlessly complicating the drafting of policies, inducing wasteful litigation among insurers, and delaying settlements – all ultimately to the detriment of the insurance-buying public.”

Accordingly, the Court of Appeal concluded that Underwriters was entitled to equitable contribution from Arch as the “other insurance” clause contained in Arch policy was not enforceable based on public policy considerations.

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