Insurer’s Attempt to shift Cost

California Court of Appeal for the Third District finds that an insurer’s attempt to shift cost of defense to another insurer is void as to public policy

By: Lee Jackson

June 12, 2016

In Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co., 246 Cal. App. 4th 418, KB Home was sued in three separate construction defect lawsuits brought by homeowners from two residential developments built by KB Home. KB Home, in turn, filed suit against its carpentry and framing subcontractor Framecon, Inc. (“Framecon”) alleging that Framecon was responsible for some of the defects alleged in the homeowners’ complaints.

During the time periods that Framecon worked on the projects it was insured under two different commercial general liability insurance policies, one issued by Certain Underwriters at Lloyds, London (“Underwriters”) from October 28, 2000 to October 28, 2001, and another issued by Arch Specialty Insurance Company (“Arch Specialty”) from October 28, 2002 to October 28, 2003. KB Home in due course was named as an additional insured under both policies.

KB Home filed their cross-complaint against Framecon, both Framecon (as a primary insured) and KB Home (as an additional insured) tendered the claims to Underwriters and Arch Specialty, both of whom accepted the claims under a reservation of rights. However, unlike Underwriter’s policy, Arch Specialty’s policy included a provision providing that even if a claim was covered under Arch Specialty’s policy, Arch Specialty would not pay for its insured’s (i.e., Framecon’s) defense if defense was already afforded under the policy of another insurer (i.e., Underwriters). Because Underwriter’s policy provided that Underwriters would provide a defense to its insureds, Arch Specialty refused to pay for Framecon’s defense.

All three cases settled with Arch Specialty paying a portion of the settlements together with Underwriters. Subsequently, Underwriters filed a lawsuit against Arch Specialty for declaratory relief and equitable contribution alleging that Arch Specialty should reimburse Underwriters for its costs to defend Framecon despite the “other insurance” provision in Arch Specialty’s policy.

Both insurance companies later filed cross-motions for summary adjudication, with Underwriters arguing in its motion that Arch Specialty was required to reimburse Underwriters for a portion of its costs to defend Framecon despite Arch Specialty’s “other insurance” provision, and Arch Specialty arguing in its motion that was not obligated to reimburse Underwriters for any portion of its costs to defend Framecon because of its “other insurance” provision. The trial court agreed with Arch Specialty, finding that because Arch Specialty’s “other insurance” provision was contained in the “Insuring Agreement” portion of the insurance policy (which defined coverage) as opposed to merely in its  conditions/limitations portion of the policy (which defined conditions and limitations to coverage), the “other insurance” provision was an enforceable exception from “coverage.”

Underwriters then appealed.

On appeal, the Court of Appeals for the Third District noted that unlike “excess” insurance (in which “liability attaches only after a predetermined amount of primary coverage has been exhausted”), and which usually contain “other insurance” provisions providing that the excess policy will not take effect until a primary policy is exhausted, “primary” insurance (in which “liability attaches immediately upon the happening of the occurrence that gives rise to liability” (emphasis in original)), usually requires that primary insurers have a primary duty of defense.

Thus, explained the Court of Appeals, “‘other insurance’ clauses that attempt to shift the burden away from one primary insurer wholly or largely to other insurers have been the objects of judicial distrust” (emphasis in original):

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. 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. It should be noted that several other courts have also rejected “other insurance” clauses as a basis for avoiding defense contributions.

And, here, held the Court of Appeals, “Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense” and “would result in imposing on Underwriters the burden of shouldering a portion of defense costs attributable to claims arising from a time when Arch [Specialty] was the only insurer” (emphasis in original). Thus, the Court held, Arch Specialty’s “‘other insurance’ provision was an escape clause that must be disregarded.”

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