Tuesday, April 12, 2016
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C.A. Rejects Insurer’s Bid to Avoid Sharing Defense Costs
Panel Rules ‘Other Insurance’ Clause Does Not Allow Shifting of Burden as a Matter of Public Policy
By KENNETH OFGANG, Staff Writer
An “other insurance” clause in a comprehensive general liability will not, as a matter of public policy, permit the insurer to avoid having to share defense costs, the Third District Court of Appeal ruled yesterday.
The court, in an opinion by Justice Harry Hull, overturned a Sacramento Superior Court judge’s ruling in favor of Arch Specialty Insurance Company. Judge Shelleyanne W.L. Chang had accepted Arch’s argument that its policy allowed it to pass the full cost of defending claims against a builder and its subcontractor onto Certain Underwriters at Lloyd’s, London.
The dispute between the two insurers arose from policies each had issued to Framecon, Inc., a carpentry and framing subcontractor that did work for KB Home in Northern California between 1999 and 2002.
Three Lawsuits
Between 2006 and 2009, three groups of homeowners in two separate developments sued KB Home for alleged construction defects. KB Home then cross-complained against Framecon, which tendered its defense to both Underwriters and Arch.
Underwriters was Framecon’s CGL carrier from October 2002 to October 2002, and Arch from October 2002 to October of the following year. It was undisputed that all of that coverage was primary, and that KB Home was an additional insured under both policies.
Underwriters undertook the defense of Framecon and KB Home under a reservation of rights. Arch, however, said that while it would investigate the claims, it would not provide a defense based on the language of its policy.
The Arch policy said, in its “coverage” section, that it would defend the insured in any tort action, “provided that no other insurance affording a defense against such a suit is available to you.” The policy went on to say, in its “conditions” section that “[w]hen this insurance is excess, we will have no duty…to defend any claim or suit that any other insurer has a duty to defend.”
The three suits were eventually settled. Based on the “time on the risk” rule, Underwriters paid the plaintiffs about $300,000 and Arch about $140,000.
Arch refused, however, to contribute to defense costs, and Underwriters sued.
Summary Judgment
In granting summary judgment to Arch, Chang relied on Chamberlin v. Smith (1977) 72 Cal.App.3d 835, which held an insurer successfully escaped responsibility by placing the “other insurance” clause not only in the “conditions” portion of the policy but also in the “coverage” section.
Hull, however, noted that the case “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.”
He cited Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, which dealt with the proof needed to prove the provisions of a lost insurance policy. The court held that even if the primary insurer had a “null and void with excess” other-insurance clause, that would merely entitle it to seek contribution from other insurers and would not affect its obligation to its insured.
Then-Justice Carlos Moreno wrote for the high court:
“[P]ublic 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….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.”
Escape Clause Scorned
Hull said that locating such an escape clause in both the coverage and conditions sections of the policy does not justify a different rule, because, in either case, one insurer would be foisting off its obligation to pay defense costs on another, even though both were on the risk.
Chamberlin, he added, was not only outdated, but was also materially distinguishable, since it dealt with a legal malpractice policy issued by a company that both defended and settled the claim, which was for alleged negligence occurring while the attorney was insured by another company.
Hull explained:
“[I]n Chamberlin, the ‘other insurance’ clause in the coverage section was not just about duty to defend. It actually limited coverage (duty to indemnify) by stating the policy itself applied only if there was no other insurance for the insured’s error or omission. Here, although Arch placed an ‘other insurance’ clause in the coverage section of its policy, the clause addressed only duty to defend, not duty to indemnify. Arch does not dispute the policy itself applied to the loss. The duty to defend is broader than the duty to indemnify and is measured by the nature and kinds of risks covered by the policy.”
The case is Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Company, 16 S.O.S. 1822.
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