United States: Certain Underwriters At Lloyds London V. Arch Specialty Insurance Company

(Primary Insurer Entitled to Contribution from Another Primary Insurer for Defense Cost Payments, Notwithstanding Clause in Insuring Agreement Requiring Payment of Defense Costs Only When There is No Other Insurance Affording a Defense)

In Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Company, 246 Cal.App.4th 418 (April 11, 2016), the California Third District Court of Appeal reversed the trial court's entry of judgment in favor of Arch Specialty Insurance Company ("Arch") in connection with a contribution lawsuit filed for reimbursement of a pro rata share of defense costs paid by Certain Underwriters at Lloyds, London ("Underwriters") in connection with several construction defect lawsuits. Underwriters and Arch were both primary insurers of Framecon, Inc. Underwriters issued two CGL policies to Framecon for the period of October 28, 2000 to October 28, 2002. Arch issued a CGL policy to Framecon for the period of October 28, 2002 to October 28, 2003.

The insuring agreement and other insurance clauses in the Arch policy stated as follows:

 "COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

"INSURING AGREEMENT

"a.       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. Our duty to defend you is further limited as provided below or in the Section of the policy entitled 'EXCLUSIONS: COVERAGES A AND B. ..." (Italics added.)

This provision goes on to state that, in cases where Arch has no duty to defend, it nevertheless has the right to intervene in any suit in which the insured requests a defense or indemnity, and "we will also defend you if you are not being defended by any other insurer."

The "conditions" section of Arch's policy states:

"SECTION IV — COMMERCIAL GENERAL LIABILITY CONDITIONS

"8.       OTHER INSURANCE, DEDUCTIBLES AND SELF-INSURED RETENTIONS

"If other insurance is available to an insured for a loss we cover under Coverage A or B of this policy, our obligations are limited as follows:

"a.       Excess Insurance

"This insurance is excess over any other insurance, and over deductibles or self-insured amounts applicable to the loss, damage, or injury, whether such other insurance is primary, excess, contingent or contributing and whether an insured is a named insured or additional insured under said policy.

"When 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 insuring agreement and other insurance clause in the Underwriters' policies stated as follows:

 "COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

"1.       Insuring Agreement

"a.       We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages ... to which this insurance does not apply. We may, at our discretion, investigate any 'occurrence' and settle any claim or 'suit' that may result ... ."

Underwriters's policies also contain as an endorsement the following:

"OTHER INSURANCE CLAUSE

"In consideration for the payment of premium, it is hereby understood and agreed that subsection 4. Other Insurance, of section IV Commercial General Liability Conditions, is deleted in its entirety and replaced by the following:

"4.       Other Insurance

"a.       Coverage provided under this policy is excess over any other collectable insurance, except:

"(1)      when an Insured Contract specifically states that this insurance shall be primary and the policy is endorsed to be primary with respect to operations performed under that Insured Contract then this policy will be primary only with respect to those operations, performed under such Insured Contract, or

"(2)      in the event that an excess or umbrella policy is purchased which lists this policy in the schedule of underlying insurance.

"b. When this insurance is excess we will have no duty to defend any claim or suit covered by other collectable insurance until the obligation of such other insurance to provide a defense has been met in its entirety."

In October 2006, owners of homes which were constructed by KB Home, wherein it subcontracted carpentry and framing work on the homes to Framecon, filed a construction defect lawsuit. In turn, KB Home filed a cross-complaint against Framecon seeking defense and indemnity under the subcontracts. Framecon tendered the cross-complaint to both Underwriters and Arch. However, only Underwriters agreed to defend Framecon subject to a reservation of rights. Arch refused to pay for the defense of Framecon based on the language in its policies stating that a defense would only be provided when no other insurance affording a defense against a suit is available to Framecon. Subsequently, additional construction defect lawsuits were filed against KB Home which, in turn, filed cross-complaints against Framecon. In each of these lawsuits, Arch refused to share in the defense of Framecon. However, Arch did pay a pro rata share of the settlement amounts paid in connection with these lawsuits based on a time on the risk allocation formula.

Once the underlying construction defect lawsuits had been settled, Underwriters filed a lawsuit for contribution against Arch seeking to recover a portion of the costs of defending Framecon against the construction defect lawsuits. Underwriters argued that Arch's policy terms – excluding it from a duty to defend if another insurer has a duty to defend - are unenforceable "escape clauses" against public policy, regardless of their location in the insurance policy. Arch did not dispute that its insurance policy required it to indemnify the insureds for damages at issue in the construction defect lawsuits. However, Arch took the position that the location of the defense exception in the insuring agreement barred any obligation for it to pay defense costs, wherein, another insurer had agreed to defend Framecon.

In reversing the trial court's entry of summary judgment in favor of Arch, the Court of Appeal held as follows:

Here, 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 conditions section rather than the coverage section of the policies, none of the cases discussed or decided that the location mattered. Underwriters did cite one federal district court case — USF Ins. Co. v. Clarendon America Ins. Co. (C.D.Cal. 2006) 452 F.Supp.2d 972 (USF) — which declined to enforce an "other insurance" clause that was located in the coverage section of an insurance policy. There, however, the same clause appeared in the coverage section of the other insurers' policies. (Id. at p. 1002 [identical provisions in the policies are mutually irreconcilable].) Here, the clauses were not identical, and we therefore do not rely on USF.

Arch invokes general principles that an insurer's duty to defend is not absolute but is measured by the nature and kinds of risks covered by the policy (Rosen v. Nations Title Ins. Co. (1997) 56 Cal.App.4th 1489, 1497 [66 Cal. Rptr. 2d 714] [no duty to defend because loss was not covered under the policy]), that limitations on a promised defense duty must be conspicuous, plain, and clear (Maryland Casualty Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 30 [76 Cal. Rptr. 2d 113] [subcontractor's insurer had duty to defend contractor as additional insured despite policy language that the insurance applied only to the extent the contractor was held liable for subcontractor's conduct]), and that coverage under an insurance policy is determined in the first instance by referring to the policy's insuring agreement, which defines the risk undertaken by the insurer (1119 Delaware v. Continental Land Title Co. (1993) 16 Cal.App.4th 992, 1003 [20 Cal. Rptr. 2d 438] [title policy's failure to disclose conditional use permit came within insuring clause affording coverage against loss sustained by reason of any "encumbrance" on the property and was not expressly excluded under any policy exclusions]).

However, none of these general principles answer the more specific public policy questions presented in this case.

While this appeal was pending, the Fourth Appellate District published Underwriters of Interest, supra, 241 Cal.App.4th 721, which held unenforceable an "other insurance" clause purporting to relieve a primary insurer (ProBuilders) of its duty to defend, despite clearly having a duty to indemnify. ProBuilders contributed toward the indemnification costs in the construction defect case against the insured contractor but resisted defense costs, based on its other-insurance clause that ProBuilders had the "duty to defend ... against any suit seeking ... damages [to which the insurance applied] provided that no other insurance affording a defense against such a suit is available to you." (Id. at p. 724.) The plaintiff's policy said it would be excess over any other primary insurance available to the contractor as an additional insured. (Id. at p. 724, fn. 1.) "The courts have repeatedly addressed—and rejected—arguments by insurers that an 'other insurance' clause in their insuring agreement permitted them to evade their obligations by shifting the entire burden associated with defending and indemnifying a mutual insured onto a co-insurer. ... [W]hen 'the "other insurance" clause ... is written into an otherwise primary policy, the courts have considered this type of "other insurance" clause as an "escape" clause, a clause which attempts to have coverage, paid for with the insured's premiums, evaporate in the presence of other insurance. [Citations.] Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.' Numerous courts have therefore rejected 'other insurance' clauses as a basis for avoiding contribution. [Citations.]." (Underwriters of Interest, supra, 241 Cal.App.4th at pp. 730–731.)

Here too, Arch's policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense. ("We have the ... duty to defend you ... provided that no other insurance" is available.) Here too, enforcing Arch's clause would result in imposing on Underwriters the burden of shouldering a portion of defense costs attributable to claims arising from a time when Arch was the only insurer. Here too, the "other insurance" provision was an escape clause that must be disregarded.

Moreover, the risk of leaving an insured stranded without coverage is not the only public policy consideration. "Imposing the entire liability for a loss on the insurer with a policy providing for pro rata coverage would annul that policy's language, and create the anomaly that courts will only predictably enforce proration between policies when they all have conflicting 'excess other insurance' language barring proration. [Citations.] Giving 'excess other insurance' clauses priority over policies providing for pro rata apportionment of liability among policies is completely unrelated to the original historical purpose of such 'other insurance' clauses, which was to prevent multiple recoveries by insureds in cases of overlapping insurance policies providing coverage for the same loss." (Fireman's Fund, supra, 65 Cal.App.4th at p. 1306, original italics.)

We conclude Underwriters is entitled to receive equitable contribution from Arch. Thus, the trial court erred in granting summary judgment to Arch and in denying summary adjudication to Underwriters.

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