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California Appellate Court disapproves "other insurance" clause eliminating duty to defend when another carrier is defending

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April 2016

 
 
 
 
Client ALERT
 
Written by: Alison Greene
 
 
 

 

 

 

 

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Alison Greene
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Alison Greene's practice encompasses insurance coverage analysis and advice, insurance coverage and bad faith litigation, as well as general business litigation
 
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California Appellate Court disapproves "other insurance" clause eliminating duty to defend when another carrier is defending
 
Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Company
__ Cal. App. 4th ___; 2016 DJDAR 3434
 
Filed April 11, 2016
 
Where two successive primary insurers indemnified their mutual insured in a series of construction defect actions, only Lloyds defended and later sought contribution from Arch.  The Arch policy contained a provision stating it had no duty to defend if any other insurer had such a duty.  While the trial court agreed with Arch, the Court of Appeals disagreed, finding the Arch clause invalid as against public policy.
 
Both Lloyds and Arch insured a framer, who was sued in a series of construction defect actions by the general contractor.  The Arch policy's insuring clause stated in part:  "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."  The Arch policy contained a similar limitation in the Conditions section of the policy.
The framer tendered the claims to Lloyds and Arch.  In each instance, Lloyds agreed to defend, and Arch, relying on its policy terms, declined to defend, but agreed to indemnify the framer.  Lloyds and Arch indemnified their mutual insured based on a time-on-the-risk analysis.
 
After the third suit, Lloyds sued Arch for declaratory relief and equitable contribution for the defense costs incurred in the underlying litigation.  The trial court agreed with Arch, based primarily on the fact that the provision making the Arch policy excess for defense appeared in the Insuring Agreement, rather than just in the Conditions section of the policy, making it an enforceable exception from coverage rather than a disfavored escape clause.
 
The right to equitable contribution arises where several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than it share of the loss or defended the action.  The purpose of contribution is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of the others.  Since the principles of contribution are founded in equity and not in contract, their application is not controlled by the language of their respective insurance contracts.
 
Courts have long disfavored other insurance "escape" clauses, whereby coverage disappears when other insurance applies.  Thus, the modern trend is to require equitable contribution from all primary insurers, regardless of the language of their other insurance clauses.
 
Arch argued that cases invalidating other insurance clauses were distinguishable because they addressed such clauses that appeared only in the Conditions section of the policy.  Relying on public policy against escape clauses, the Court of Appeals rejected Arch's argument.  With successive primary policies, the Court held, it would be inequitable to allow Arch to shift its defense obligation to Lloyds, including for those claims that arose during that period of time that only Arch, and not Lloyds, was on the risk.
The Court concluded that giving effect to an escape other insurance clause would improbably have the effect of nullifying the other insurers' pro rata other insurance clauses, which is unrelated to the historical purpose of other insurance clauses which was to prevent multiple recoveries by insureds in cases with overlapping insurance.
 
 
This article is presented for informational purposes only and is not intended to constitute legal advise