In an April 11, 2016 opinion, the Third District Court of Appeal held that a primary commercial general liability insurer (Arch Specialty Insurance Company) had a duty to reimburse defense costs for covered lawsuits notwithstanding language in its Insuring agreement that stated: 

We have the right and duty to defend you, the Named Insured, against any suit seeking tort damages provided that no other insurance affording a defense against such suit is available to you.

See Certain Underwriters at Lloyd’s, London v. Arch Specialty Ins. Co., ___ Cal.App.4th ___ (April 11, 2016 Slip Opinion (“Slip Op.”))  The court found that enforcing this language in a primary CGL would violate public policy.

Discussion of the Arch Decision

Background

Arch Specialty Insurance Company (“Arch”) and Certain Underwriters at Lloyd’s, London (collectively, “Underwriters”) issued CGL coverage to Framecon, Inc. (“Framecon”), but at different times. Underwriters issued two CGL policies covering the periods of October 28, 2000 to October 28, 2001 and October 28, 2001 to October 28, 2002. Arch issued a single CGL policy to Framecon for the policy period of October 28, 2002 to October 28, 2003. Framecon had no other CGL cover during these years.

Framecon entered into subcontracts with a large home developer between 1999 and April 2002 to do carpentry and framing work. In October 2006, owners of some of the homes sued the developer for construction defects, including alleged defects involving Framecon’s work. The developer filed a cross-claim against Framecon seeking defense and indemnity under the subcontracts.

Framecon tendered this continuing loss to Underwriters and Arch, as did the developer claiming it was an “additional insured” under Framecon’s policies. Underwriters agreed to defend Framecon and the developer under a reservation of rights. Arch denied a defense to both entities asserting that its duty to defend was “excess” to any other insurer providing a defense based on the language cited above and language in its “Conditions” that stated, “[w]hen 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.” Slip Op., pp.4-5.

Other suits followed against the developer and Framecon. Underwriters defended these lawsuits subject to a reservation of rights while Arch denied a defense. All lawsuits were eventually settled and both Underwriters and Arch contributed to the settlements based on a “time on the risk” apportionment.

Underwriters subsequently filed suit seeking a declaration that Arch had a duty to defend both Framecon and the developer and was required to reimburse Underwriters for a portion of the defense costs. 

Cross-motions for summary judgment were filed and the trial court granted Arch’s motion and denied Underwriters’. In making its ruling, the trial court agreed that placing the “other insurance” clause in the Insuring Agreement of the Arch policy – as opposed to just in the conditions/limitations section – made such clause an enforceable exception from coverage for defense costs rather than a disfavored escape clause against California public policy. Slip Op., pp.7-8. The Court of Appeal disagreed and reversed judgment for Arch and granted summary adjudication to Underwriters.

Decision by the Court of Appeal

In reaching its decision to reverse the trial court, the Court of Appeal first addressed the general legal principles underlying equitable contribution between insurers and “other insurance” provisions. The court then examined various California cases that previously addressed “excess,” “escape” and “pro rata” “other insurance” clauses, noting that “escape” clauses are disfavored under California public policy.

The court then noted that Arch did not dispute that: (1) its policy covered the loss; (2) it was the only CGL insurer on the risk in October 2002-03; and (3) its policy was primary and not a true excess. Arch’s sole contention for disavowing a defense under its policy was that its “other insurance” language was in both the Insuring Agreement and Conditions. The Court of Appeal was unpersuaded.

In rejecting Arch’s argument, the Court of Appeal held that the location of “other insurance” language in a primary CGL policy did not matter. Citing Underwriters of Interest Subscribing to Policy No. A15274001 v. ProBuilders Spec. Ins. Co., 241 Cal.App.4th 721, 724, 731-732 (2015), the Arch court held that where there are successive primary insurers on the risk in a continuing-loss claim, courts should refuse to allow one insurer to rely on an “other insurance” escape clause to avoid equitable contribution. Slip Op., pp.14-15. “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.” Id., at 16, emphasis in original. 

The Court of Appeal also cited a federal decision from Maine, which, although not binding in California, it found to be consistent with California law:

[W]e see merit in a point made by a federal appellate court in Maine, which criticized Chamberlin’s reliance on location of the clause in the coverage section 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, including wasteful litigation among insurers, and delaying settlements – all ultimately to the detriment of the insurance-buying public.”

Slip Op., pp.18-19, citing Home Ins. Co. v. St. Paul Fire & Marine Ins. Co., 229 F.3d 56, 62-63 (1st Cir. 2000).

In concluding its analysis, the court stated that stranding an insured without coverage is not the only public policy consideration; another consideration is imposing entire liability for a loss on an insurer with a policy providing pro rata coverage, which “would annul that policy’s language, and create the anomaly that courts will only predictably enforce proration between policies when they all have conflicting ‘excess other insurance’ language barring proration.” Slip Op., p.19, emphasis in original. Giving “excess other insurance” clauses priority over policies providing for pro rata apportionment “is completely unrelated to the original historical purpose of such ‘other insurance’ clauses ….” Id. at 20.

In refusing to permit such a result, the Court of Appeal reversed the judgment and remanded the matter back to the trial court for determination of the appropriate amount of contribution to be paid to Underwriters.

View the original opinion.