On October 23, 2015, the California Court of Appeal issued its published decision in Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance Company, 193 Cal.Rptr.3d 898. The Court refused to enforce an “other insurance” clause in a primary policy that unambiguously stated the insurer had “the right and duty to defend [the insured] 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.” (Italics supplied.)
The insured was sued in a construction defect lawsuit and Underwriters undertook the insured’s defense. ProBuilders declined to provide a defense to the insured, standing on its “other insurance” clause. After the settlement of the underlying lawsuit, Underwriters sued ProBuilders for equitable contribution for a portion of the defense fees. The trial court granted summary judgment in favor of ProBuilders, enforcing the express terms of the “other insurance” clause. The Court of Appeal reversed.
ProBuilders argued it had the right to limit its coverage and had clearly and explicitly done so through its “other insurance” clause, restricting a defense only to those situations where no other defense is available to the insured.
Citing to insurance cases mainly addressing generic “escape” or “excess” clauses involving cases wherein primary insurers sought to treat themselves as non-contributing or excess because the insured had other available insurance, the Court of Appeal repeated the mantra that “escape” clauses are disfavored under California law as a matter of public policy.
In particular, the Court of Appeal relied upon Travelers Cas. & Sur. Co v. Century Sur. Co. (2004) 118 Cal.App.4th 1156, 1159, to hold ProBuilders had an obligation to share in the insured’s defense costs with Underwriters. Travelers was a case in which a non-contributing primary insurer unsuccessfully relied upon an “excess” “other insurance” clause providing that the insurer’s policy would be excess coverage for a suit that any other insurer had a duty to defend. In Travelers, the defendant insurer was the only insurer on the risk during its policy period.
Invoking principles of equity and substantial justice, Underwriters took a page out of the Travelers’ playbook and argued there was a triable issue of material fact as to whether ProBuilders provided the only primary coverage during its policy period for some of the projects involved in the underlying lawsuit.
Notwithstanding the clear and explicit no duty to defend language in the ProBuilders’ policy, the Court of Appeal refused to enforce it “[b]ecause giving effect to its `other insurance’ provision, in the nature of an escape clause, would result in imposing on Underwriters the burden of shouldering that portion of the defense costs attributable to claims arising from a time when ProBuilders was the only liability insurer covering [the insured] . . . .” (Emphasis in original.)
While the Court of Appeal’s decision could be read as turning on the existence of triable issues of material fact as to whether ProBuilders was the only insurer on the risk during its policy period, the Court did not reverse or remand for determination of any factual issues. Rather, the Court simply reversed and held “the escape clause must be disregarded and Underwriters should be entitled to seek equitable contribution from ProBuilders for defense costs incurred on behalf of their mutual insured.” (Emphasis added.)
It should be expected that the Court of Appeal’s holding will be applied to any continuing or progressive loss case in which an argument can be made that the primary insurer seeking to avoid defense fees is the only primary insurer on the risk during its policy period, even though the language of the “other insurance” clause plainly extends to any situation in which the insured is being provided a defense by another insurer. Given the strong public policy language disfavoring “escape” clauses, it is also likely that trial courts will rely upon ProBuilders to deny enforcement of such “other insurance” clauses even where another insurer provides coverage during the same policy period.
The Court of Appeal also held that an action for equitable contribution may accrue when the non-contributing insurer first refuses to contribute to the defense, but is equitably tolled until all of the defense obligations of the insurer seeking contribution are terminated by a final judgment in the underlying action.
Cheryl A. Orr is a partner with Musick, Peeler & Garrett in its Los Angeles office. Her full bio and contact information can be found at: http://musickpeeler.com/professionals/bio.cfm?id=72