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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.