Issue By: David L. Blinn
Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Co.
Court of Appeal, Third Appellate District
(April 11, 2016)
The original purpose of “other insurance” clauses was to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss. However, courts have long disfavored “other insurance” provisions that attempt to shift the burden from one primary insurer to another primary insurer and act as an “escape clause.” This case considered an attempt by one primary carrier to rely on “other insurance” provisions that were included not just in the “conditions” section of the policy but in the “coverage” section as well.
Between 1999 and 2002, Framecon, Inc. (Framecon) entered into subcontracts to do carpentry and framing on homes being developed by KB Home Sacramento, Inc. and KB Home North Bay, Inc. (collectively KB Home). In October of 2006, owners of some of those homes sued KB Home for construction defects, including some defects allegedly attributable to Framecon’s work. KB Home filed a cross-complaint against Framecon, seeking a defense and indemnity under the subcontracts. Certain Underwriters at Lloyds, London (“Underwriters”) was the primary insurer for Framecon for two years from 2000-2002, and Arch Specialty Insurance Company (“Arch”) was the primary insurer in 2002-2003. Framecon tendered the cross-complaint to both Underwriters and Arch, and KB Home tendered the complaint to both carriers as an additional insured under Framecon’s policies.
Underwriters agreed to defend both Framecon and KB Home subject to reservations of rights. Arch denied coverage on the basis that its policy with Framecon had an “other insurance” provisions which stated that if Framecon was already being afforded defense by another insurer, Arch’s policy would be “excess” with regard to defense of Framecon. Specifically, the “conditions” section of the policy provided that if other insurance was available for a loss also covered by Arch’s policy, then Arch’s policy was to be excess over any other insurance. The “Coverage” section of the policy provided that Arch had the right and duty to defend against any suit “provided that no other insurance affording a defense against such a suit is available to you.” Based on its “other insurance” provisions, Arch did not provide a defense to either Framecon or KB Homes. The claims against Framecon in various homeowner lawsuits eventually settled, with both Underwriters and Arch paying indemnity on the settlement based on a “time of risk” basis, with Underwriters paying 2/3 of the settlements, and Arch paying 1/3 of the settlements.
After the settlements, Underwriters brought an action for declaratory relief and equitable contribution against Arch for the defense costs incurred in the underlying litigation. Both sides filed summary judgment motions. The trial court denied Underwriters’ motion and granted Arch’s motion, adopting Arch’s argument that its “other insurance” provisions, and specifically the use of such a provision in the “coverage” section of the policy, relieved Arch of any duty to defend the actions already being defended by Underwriters. Underwriters appealed.
The Court of Appeal reversed, finding that existing case law invalidated “other insurance” clauses such as Arch’s when the policies involved were primary, and not excess.
Both the trial court and Arch had relied on the case of Chamberlin v. Smith (1977) 72 Cal.App.3d 835, which held that 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. However, the Court of Appeal noted that Chamberlin predated the “modern trend” extending the distrust of escape clauses to “other insurance” clauses that attempt to shift the burden away from one primary insurer and on to another. The Court also noted that Chamberlin was distinguishable, since it involved a somewhat different “other insurance” provision applicable to a claims-made attorney malpractice policy, in which the provision was not just about the duty to defend, but was also a limitation on coverage (the duty to indemnify) for acts, errors or omissions occurring prior to the effective date of its policy.
In contrast, while Arch’s policy placed the “other insurance” clause in the coverage section, it only addressed the duty to defend. Arch did not dispute that the policy itself applied to the loss, but claimed the provision successfully limited its duty to defend. The Court of Appeal disagreed.
The Court of Appeal also disagreed with Arch’s argument that enforcement of its “other insurance” clause would not leave the insured without coverage from the other already defending primary policy. The Court noted that the risk of leaving an insured stranded without coverage was not the only public policy consideration. Another consideration was that the only reason originally for honoring an “other insurance” provision was to protect from the insured receiving multiple recoveries, not to protect one primary insurer from paying defense costs on claims it should otherwise equally share with another primary policy obligated to defend.
Summary judgment in favor of Arch was reversed, and the trial court was instructed to enter judgment in favor of Underwriters on its motion determining that Arch did in fact have a duty to defend.
This case reflects the modern trend disfavoring “escape clauses.” Courts will continue to try and require equitable sharing of primary policies when more than one is on the risk.
For a copy of the complete decision, see: