In Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co. (No. C072500; filed 4/11/16), a California appeals court found an “other insurance” provision unenforceable to excuse defense contribution between successive primary insurers, regardless of the fact that the limiting language was contained in the policy’s coverage grant.
Certain Underwriters and Arch each insured Framecon over successive policy periods. Framecon was sued by a developer in a series of construction defect actions, and tendered to both insurers. Underwriters agreed to defend under a reservation of rights but Arch declined, citing the wording of its insuring agreement, which stated:
“We will pay those sums that an insured becomes legally obligated to pay as tort damages for bodily injury or property damage to which this insurance applies. 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 a suit is available to you….”
Further, the insuring agreement stated that where Arch had no duty to defend, it had the right in intervene, and stated that “we will also defend you if you are not being defended by any other insurer.” The Conditions section of the Arch policy stated that the policy was excess to any other insurance available to Frameco and “[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.”
The insurers each took the same position for three different homeowner lawsuits, all of which were settled by payments from both insurers, allocated by a time-on-the-risk formula. Underwriters then sued Arch for declaratory relief and equitable contribution to its defense costs. In cross-motions for summary judgment, Arch contended that it had no duty to defend on a theory that its policy did not afford “coverage” for defense costs because the “other insurance” language was part of the “coverage” section of its policy.
The appeals court disagreed. Reviewing the development of California law on “other insurance” clauses, the Arch court said that: “[T]he original purpose of ‘other insurance’ clauses was to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss. [] On the other hand, ‘other insurance’ clauses that attempt to shift the burden away from one primary insurer wholly or largely to other insurers have been the objects of judicial distrust. Public policy disfavors ‘escape’ clauses, whereby coverage purports to evaporate in the presence of other insurance. [] This disfavor should also apply, to a lesser extent, to excess-only clauses, by which carriers seek exculpation whenever the loss falls within another carrier’s policy limit. [] Partly for this reason, the modern trend is to require equitable contributions on a pro rata basis from all primary insurers regardless of the type of ‘other insurance’ clause in their policies.”
The Arch court found placement of the other insurance clause irrelevant: “Arch persuaded the trial court — and argues on appeal — that the California cases invalidating ‘other insurance’ clauses are distinguishable because the clauses in those cases were located only in the conditions section of the insurance policies, not in the coverage section. However, even assuming the other-insurance clauses in the California cases relied upon by Underwriters were located in the exclusions section rather than the coverage section of the policies, none of the cases discussed or decided that the location mattered.”
The Arch court pointed out that even while the appeal was pending, another appeals court had issued the opinion Underwriters of Interest v. ProBuilders Specialty Ins. Co. (2015) 241 Cal.App.4th 721, in which the court held that in cases of successive primary insurers and continuing losses, courts should decline to allow one of those insurers to employ an “other insurance” escape clause to avoid equitable contribution. The Arch court noted that: “[t]he [Probuilders] court was unpersuaded by the defendant’s argument that escape clauses should be enforced as long as the insured is not left without coverage.”
The Arch court acknowledged that Chamberlin v. Smith (1977) 72 Cal.App.3d 835, involved an insurer escaping liability by placing the “other insurance” clause in not only the “conditions” part of the policy but also in the “coverage” section, but said that “Chamberlin predated the ‘modern trend’ extending the distrust of escape clauses to ‘other insurance’ clauses that attempt to shift the burden away from a primary insurer.”
The Arch court went on stating: “Additionally, we 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, inducing wasteful litigation among insurers, and delaying settlements — all ultimately to the detriment of the insurance-buying public.’”
Thus, the Arch court concluded that Arch’s “other insurance” clause could not be enforced in an equitable contribution action between successive primary insurers, on the ground that enforcement of such a clause in a primary CGL policy would violate public policy, and that Arch had not successfully circumvented that result by including the clause in the “coverage” section of the insurance policy as well as the “limitations” section.
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