Following Form Excess Policy Wording Does Not Also Include Underinsured Motorist Coverage of Primary Policy

In Haering v. Topa Insurance (No. B260235; filed 2/3/16), a California appeals court held that an excess liability insurance policy that “followed form” to an underlying primary policy providing uninsured motorist/underinsured motorist (UM/UIM) coverage did not also provide coverage for first party UM/UIM claims after the underlying policy limit was exhausted, because the excess policy’s insuring agreement unambiguously limited the insurer’s indemnity obligation to third party liability claims.

In Haering, the plaintiff owned a company insured under primary insurance issued by State National that included $1 million in garage operations coverage, and $1 million in UM/UIM coverage provided by endorsement. The UM/UIM endorsement promised to pay “all sums the ‘insured’ is legally entitled to recover as compensatory damages from the owner or driver of an ‘uninsured motor vehicle.’ . . . liability for these damages must result from the ownership, maintenance or use of the ‘uninsured motor vehicle.’”

Topa issued an excess policy to the plaintiff promising “To indemnify the insured for the amount of loss which is in excess of the applicable limits of liability, whether collectible or not, of the Underlying Insurance. . . . The provisions of the immediate underlying policy are incorporated as a part of this policy except for: ‘(a) any obligation to investigate, defend, or pay for costs incident to the same; (b) the amount of the limits of liability; (c) any ‘other insurance’ provision, and (d) any other provisions therein which are inconsistent with the provisions of this policy.” The term “loss” was defined in the Topa policy as “the sum paid in settlement of losses for which the Insured is liable after making deduction for all recoveries, salvages or other insurance (other than recoveries under the policy of the Underlying Insurance) whether recoverable or not, and shall include all expenses and ‘costs.’”

The plaintiff was injured in an accident with another driver having liability limits of $25,000. He settled a claim with the other driver for his policy limit, and made a UIM claim to State National, for which he ultimately recovered the $1 million limit of the primary UM/UIM coverage. He then made a claim to Topa, demanding a further $1 million in excess coverage, on a theory that the Topa policy followed form to the State National policy and incorporated the $1 million UM/UIM endorsement.

Topa denied coverage contending that the policy’s insuring agreement limited coverage to third party liability claims, and not liability imposed under UM/UIM law. In the bad faith lawsuit that followed, the court denied a summary judgment motion by the plaintiff, and the parties stipulated to entry of judgment in favor of Topa, while preserving the right to appeal.

The appeals court affirmed judgment in favor of Topa. The court distinguished first and third party coverages, saying that “[A] first party insurance policy provides coverage for loss or damage sustained directly by the insured . . . . A third party liability policy, in contrast, provides coverage for liability of the insured to a ‘third party’ . . . . In the usual first party policy, the insurer promises to pay money to the insured upon the happening of an event, the risk of which has been insured against. In the typical third party liability policy, the carrier assumes a contractual duty to pay judgments the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by the insured.” (Quoting Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 663.) The Haering court said that “When analyzing coverage under a third party liability policy, the focus is ‘on the insured’s legal obligation to pay for injury or damage.’” (Quoting Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 407-408.) Further, “UM and UIM coverages are not ‘third party’ coverages. They are strictly ‘first party’ coverages because the insurer’s duty is to compensate its own insured for his or her losses, rather than to indemnify against liability claims from others.” (Citing Weston Reid, LLD v. American Ins. Group, Inc. (2009) 174 Cal.App.4th 940, 950.)

The Haering court went on to note that the statutory requirement for UM/UIM coverage of damages that the insured could recover from the owner or operator of an uninsured or underinsured motor vehicle does not apply to excess insurance policies. (See Ins. Code, § 11580.2(a)(1).)

The Haering court said that a “following form” excess policy incorporates by reference the terms and conditions of the underlying primary policy and will generally contain the same basic provisions as the underlying policy, with the exception of any provisions that are inconsistent with the excess policy. And any inconsistency or conflict between the provisions of a following form excess policy and the provisions of an underlying primary policy is resolved by applying the provisions of the excess policy – “It is well settled that the obligations of following form excess insurers are defined by the language of the underlying policies, except to the extent that there is a conflict between the two policies, in which case, absent excess policy language to the contrary, the wording of the excess policy will control.” (Quoting Ostrager & Newman, Handbook of Insurance Coverage Disputes (17th ed. 2014) § 13.01.)

Having thus laid the groundwork, the Haering court then explained why the Topa policy did not afford a further $1 million in UM/UIM coverage after the State National policy exhausted. The plaintiff argued that the Topa policy did not expressly exclude the UM/UIM coverage provided under the State National policy and because it followed form, matters not specifically excluded should be deemed covered. But the Haering court said that the issue of exclusions did not come up unless the insuring language of the Topa policy afforded coverage in the first instance. The court cited Glavinich v. Commonwealth Land Title Ins. Co. ((1984) 163 Cal.App.3d 263, 270), for the rule that “[W]hen an occurrence is clearly not included within the coverage afforded by the insuring clause, it need not also be specifically excluded.”

In addition, the Haering court noted that the Topa policy expressly excepted from incorporation those provisions “which are inconsistent with” the Topa policy. But the crux of the Haering court’s opinion was that the Topa policy promised to indemnify the insured against “loss,” with the critical language found in the definition of “loss,” defined as “the sum paid in settlement of losses for which the Insured is liable. . . .” According to the Haering court, by virtue of that definition, the “plain language” of the Topa policy’s insuring agreement limited Topa’s indemnity obligation to “losses for which the insured is liable,” “i.e., third party liability claims.” Therefore, the plaintiff’s claim for first party UM/UIM benefits did not come within the scope of the Topa policy’s insuring agreement.

The Haering court distinguished the decision in Coca Cola Bottling Co. v. Columbia Casualty Ins. Co. ((1992) 11 Cal.App.4th 1176), where the policy stated that “the terms and conditions of this policy, including all prior endorsements, except with regard to amount of insurance (limits) and premium, are deleted and replaced in their entirety by the terms and conditions of the underlying . . . Policy.” By contrast, the Haering court said that “The Topa policy’s following form provision is nowhere near as broad.”

The Haering court went on to note that its holding was consistent with decisions in other jurisdictions, and rejected an argument that the Topa policy was ambiguous.

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February 4, 2016