On February 28, 2013, the Fourth District California Court of Appeal issued a significant decision regarding the priority of coverage in matters involving vicarious liability of employers for their negligent employees.  In GuideOne Mut. Ins. Group v. Utica Nat’l Ins. Group , __ Cal. App. 4th __ (2013), the court reversed a summary judgment entered in favor of GuideOne Mutual Insurance Company (“GuideOne”) in a contribution action filed by Utica National Insurance Group (“Utica”).  The Court held that because primary and umbrella policies issued by Utica covered only an employer’s vicarious liability for a negligent employee whose negligence was insured under primary and umbrella GuideOne policies, both GuideOne policies were primary to both Utica policies.

GuideOne involved the $4.5 million settlement of a claim for personal injury resulting from a serious auto accident caused by an individual driving his own car for business purposes.  Pursuant to statute, the negligent driver’s $100,000 personal auto liability policy paid first.  The same statute, Insurance Code section 11580.9, provides that “the insurance provided by any other policy or policies shall be excess.”  In this case, the other relevant insurance consisted of a total of four commercial auto policies issued to the driver’s employer and the subsidiary to which he was assigned to work.   Both the employer and the subsidiary were named in the underlying suit under the theory that the driver was an employee and/or agent of each.  The subsidiary held $1 million primary and $1 million umbrella commercial auto policies issued by GuideOne, both of which covered company-owned and employee-owned vehicles conducting business activities.  The driver’s employer held a $1 million primary commercial auto policy and a $5 million umbrella policy issued by Utica, both of which provided coverage for company-owned vehicles, but which covered employee-owned vehicles conducting business activities only as “excess over any other collectible insurance.”  Both the driver’s employer and the subsidiary were named in the underlying lawsuit under a theory of vicarious liability.

Based on the language of section 11580.9, GuideOne argued that all four commercial auto policies must be treated as excess policies and pay out on the same basis.  The trial court, however, held that both primary level policies had to be exhausted before reaching either umbrella policy.  The trial court then found that the “other insurance clauses” in both the subsidiary and the employer’s policies balanced such that the excess policies would be required to pro rate.  Under this formula, Utica had underpaid by $600,000, and the trial court entered summary judgment in that amount. 

On appeal, however, the court adopted Utica’s argument that because its policies provided coverage for the driver’s vehicle only to the extent that no other insurance was available, whereas GuideOne’s policies provided coverage for the driver’s vehicle to the same extent as vehicles owned by the subsidiary, both of the GuideOne policies were primary to both of the policies Utica issued to the employer.  Central to the court’s decision was the fact that, based on their respective wordings, Utica’s policies were triggered only by the vicarious liability claims against the employer, while GuideOne’s claims were triggered by both the vicarious liability claims against the subsidiary and the negligence claims against the driver.  The court relied heavily on United States Fire Ins. Co. v. National Union Fire Ins. Co. 107 Cal. App. 3d 456 (1980), which held that where an employer’s nonowned aircraft coverage was expressly limited to vicarious liability of the named insured, such coverage “is secondary to any coverage” held by the pilot individually. 

United States Fire, though, did not involve umbrella or excess liability policies, and the GuideOne court’s ruling thus constitutes a notable expansion of the rule set out in United States Fire.  The court found that GuideOne could provide “no rational basis for its proposition that unbrella or ‘excess’ policies should be treated differently than primary policies for the purposes of priority.”  The rule enunciated in United States Fire, said the court, “is based upon principles of vicarious liability, not more general rules governing primary and excess policies.”  Indeed, United States Fire adopted the California Supreme Court’s rule that, as between an employer and an employee who has engaged in an unauthorized negligent act, “the obligation of the employee is primary and that of the employer secondary.”  Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal.2d 423, 467 (1956).