Insurance Law Client Alert: Appeals Court Limits Effect of Inter-insured Exclusion

In Gemini Insurance Company v. Delos Insurance Company (no. B239533, filed 12/5/12), a California appeals court found that a subrogation suit by a landlord’s property insurer against the tenant’s liability insurer was not barred by an inter-insured exclusion, despite the fact that the landlord was an additional insured on the tenant’s policy.

Gemini had provided property coverage to the landlord and paid to repair fire damage caused by the tenant, who carried liability coverage with Delos. The landlord had been added to the Delos policy by an additional insured endorsement for property managers and lessors, but the policy also contained an inter-insured exclusion stating:

The liability coverage afforded by this policy does not apply to any claim or ‘suit’ for damages by any ‘insured’ against another ‘insured’ because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’. We have no obligation to defend or indemnify any ‘insured’ as to any such claim or ‘suit’ by another ‘insured’.”

After suing the tenant in subrogation and obtaining a judgment, Gemini brought a direct action against Delos under Insurance Code section 11580(b). However, Delos contended that because the landlord was an additional insured on the Delos policy, and the claim was brought by one insured against another for damages because of property damage, the inter-insured exclusion necessarily barred Gemini’s claim.

The appeals court disagreed, ruling that although it was listed as additional insured on the policy, the landlord was not an “insured” for purposes of the inter-insured exclusion when applied to the fire damage claim. The court pointed out that additional insured status for the landlord was limited to liability claims arising out of ownership maintenance or use of the leased premises, occurring on the premises, and resulting from the tenant’s acts or omissions. The court noted that an additional insured provision “is designed to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured.”

The case at hand, however, did not involve a liability claim against the landlord. Indeed, the court pointed out that no one had ever sought to hold the landlord liable for the fire. But under the terms of the additional insured endorsement, the landlord would only qualify as an additional insured when and where it faced liability arising from the tenant’s acts, undertaken in the course of tenant’s operations on the leased premises.

The court thought it would be absurd to conclude that, despite having required the tenant to add the landlord in the lease, the landlord nonetheless wished to limit its ability to recover in the event that it was injured by the tenant’s negligence. Because the landlord was not an “insured” with respect to the claim for fire damage, the inter-insured exclusion was held not to apply.

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December 5, 2012