In what appears to be the first published California decision on the issue, the Second District Court of Appeal recently held that a carrier must defend its insured when the claim may not be covered by the primary policy and “potentially” falls within the carrier’s umbrella coverage. In Legacy Vulcan Corp. v. Superior Court, 2010 WL 1730788, the court rejected the trial court’s holding that although the insurance policy provided both excess and umbrella coverage, for purposes of the duty to defend, the insurer’s obligations were limited to those of an excess insurer. The trial court had also ruled that the duty to defend was only triggered upon the exhaustion of all underlying insurance and that the duty to defend could arise only upon a showing that the claims were “actually covered” by the policy.
The umbrella policy at issue, which afforded broader coverage than the primary policy, expressly provided a duty to defend in connection with the umbrella coverage. The policy stated that the carrier “had the right and duty to defend any suit against the insured…if the damages were not within the terms of coverage of underlying insurance but were within the terms of coverage of this insurance.” The appellate court found that this language did not place any limits on the duty to defend and rejected the insurer’s argument that the duty to defend was modified by the policy’s “retained limit” provision. The court held that without language expressly relieving the insurer of the duty to provide a “first dollar” defense, the insured did not have to incur liability in excess of any “retained limit” before the duty to defend was triggered. As a result, the insured was entitled to an immediate defense from the umbrella carrier. In addition, the court also found that the self-insured retention did not limit the duty to defend and only applied to indemnity payments.
Finally, relying on well-established California case law, the appellate court held that the correct standard for assessing the duty to defend was whether the insured could show a “potential” for coverage. Since the umbrella coverage was acting as primary rather than excess coverage, the court applied the ordinary rules regarding the duty to defend in connection with primary liability coverage. See Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 654-655 (holding “a duty to defend arises if facts alleged in the complaint or other facts known to the insurer, potentially could give rise to coverage under the policy.”).