Why it matters

While the holding sounds straightforward – the reasonable expectations of an additional insured about the scope of an excess liability policy may differ from the reasonable expectations of the named insured – the implications of a recent California appellate court decision are significant. After the named insured had litigated and received coverage for three underlying environmental lawsuits, the additional insured sought coverage based upon the court’s holding in that case. But the appeals court held that it will look to the additional insured’s reasonable expectations about coverage under the policy, rather than the named insured’s. In so doing, the court refused to collaterally estop an insurer from challenging coverage based upon rulings in another action regarding the named insured’s reasonable expectations.

Detailed Discussion
Vulcan Materials Company purchased a commercial excess and umbrella liability insurance policy from Transport Insurance Company. The policy included an endorsement naming R.R. Street & Co., Inc., as an additional insured with respect to its distribution or sale of perchloroethylene, or PCE, a solvent used in the dry cleaning industry.

The schedule of underlying insurance listed nine primary policies issued to Vulcan, although the company also had other coverage.

Three lawsuits were filed against Vulcan and Street over their manufacturing, distribution, and sale of PCE to dry cleaners in the Modesto, California, area. According to the complaints, PCE leaked into the soil and groundwater, causing environmental contamination and property damage.

Transport previously had brought a declaratory relief action to determine the scope of its obligations to Vulcan. In that case, the court held that the term “underlying insurance” as used in connection with the umbrella coverage was ambiguous. Therefore, the issue had to be resolved in favor of the “reasonable expectations of the insured,” i.e., Vulcan, limiting the term “underlying insurance” to mean only the policies explicitly stated as underlying insurance on the policy’s Schedule.

Potentially on the hook for Vulcan’s defense, Transport then filed a second declaratory action to determine its rights with regard to Street. Transport argued that its duty to defend had not been triggered, because all of the primary policies issued to Vulcan had not been exhausted.

Street pointed to Transport’s earlier litigation with Vulcan, arguing that the excess insurer was collaterally estopped from arguing that the term “underlying insurance” referred to anything other than the policies listed on the underlying insurance schedule.

The panel disagreed with Street that collateral estoppel applied, distinguishing the focus of the earlier litigation, which was on Vulcan. “When the party claiming coverage is an additional insured, it is the additional insured’s objectively reasonable expectations of coverage that are relevant, and not the objectively reasonable expectations of the named insured,” the court wrote.

The “unique” status of an additional insured means that although it is not a party to the insurance contract, its “intent is relevant to the construction of that contract because the intent of the named insured in requesting the added coverage is directly dependent on the bargain that the additional named insured made with the named insured.”

Although the court agreed with Transport and reversed the trial court’s grant of summary judgment for Street, whether the outcome is advantageous to an additional insured will depend on their reasonable expectations of coverage.

“Street, an additional insured, and not Vulcan, a named insured, was the party claiming coverage,” the court said. “Thus, the trial court erred when it failed to consider Street’s objectively reasonable expectations of coverage and, instead, relied on Vulcan’s objectively reasonable expectations of coverage.”

To read the decision in Transport Insurance Company v. R.R. Street & Co., click here.