In Underwriters of Interest v Probuilders Specialty Ins. Co. (Case No. D066615, filed 10/23/15), the California Court of Appeal for the Fourth District, Division One, rejected an insurer’s “escape” clause, ruled that a Contractors Special Conditions endorsement was inapplicable, and confirmed that the statute of limitation for an insurer’s claim for equitable contribution against a co-carrier is tolled until it makes its last defense payment.

Underwriters insured Pacific Trades Construction & Development (“PTCD”) from 2001 to 2003. Probuilders insured PTCD from 2002 to 2004. Pursuant to its policies, Underwriters agreed to defend PTCD in a construction defect action arising out of the construction of single family homes. In contrast, Probuilders denied PTCD’s tender arguing that its policies only provided a duty to defend when “no other insurance affording a defense against such a suit is available to [the insured].” In addition, Probuilders argued its policy included a Contractors Special Conditions (“CSC”) endorsement which provided that as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” PTCD must have: (1) written indemnity agreements with each subcontractor hired; (2) certificates of insurance from each subcontractor’s insurer showing PTCD as an additional insured; and (3) maintained records evidencing PTCD’s compliance with these obligations.

Turning first to Probuilders’ defense obligation, the Appellate Court, citing Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204, held that Probuilders’ other insurance clause was an “escape” clause disfavored under the law.

[C]ourts 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….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.

Reasoning the policies issued by Underwriters and Probuilders were not completely overlapping and provided coverage for at least different periods of time, the Appellate Court refused to enforce Probuilders’ other insurance clause.

The appeals court also rejected Probuilders’ argument that its CSC endorsement obviated a duty to defend because PTCD had failed to secure indemnity and/or additional insured coverage from all of its subcontractors. Noting Probuilders had not conclusively established that all of the claims against PTCD were limited to work performed by subcontractors and that while there was evidence of incomplete compliance with the CSC endorsement at least one subcontract had complied, the court found there was a question of fact precluding summary judgment in Probuilders’ favor.

Next, the appeals court found Underwriter’s equitable contribution claim was timely because while the claim first accrued at the time Probuilders first refused to participate in PTCD’s defense, the statute of limitations was “tolled until all of the defense obligations in the underlying action are terminated by final judgment.”

While not a departure from current case law, the case confirms California’s rejection of “escape” type clauses in contribution disputes between carriers and that under the right set of facts, endorsements requiring insureds to secure additional insured coverage from subcontractors may serve as a means to limit or possibly obviate the duty to defend and/or indemnify.