Form Does Matter In Insurance Policy Interpretation

Form Does Matter In Insurance Policy Interpretation


Courts routinely recite the rule that insurance policies "must be construed as an entirety, with each clause lending meaning to the other." Holz Rubber Co., Inc. v. American Star Ins. Co. (1975) 14 Cal. 3d 45, 46. But do the courts always do that?

Consider the Court of Appeal's ruling last month in Carmel Development Co. v. RLI Ins. Co. 2005 WL 56953, a case involving an equitable contribution claim between liability insurers. The Court said that all of the policy provisions must be construed as a whole, but the ruling placed great emphasis on where the policy forms addressed "other insurance" issues: upfront in the insuring agreement or "buried" on the "second to last page in a generally worded 'other insurance' clause." By contrast, the Court found that an "other insurance" limitation set forth "on the first page" of another policy was "more explicit". Indeed.

Here's what happened. Fireman's Fund issued a commercial excess policy, over a primary Commercial General Liability policy, to a general contractor. RLI issued a commercial umbrella policy, also over a primary CGL policy, to a subcontractor that covered the general contractor as an additional insured. After a loss occurred that exceeded all of the primary coverage, Fireman's Fund and RLI disputed the layering of coverage for the general contractor.

Fireman's Fund and RLI both had excess-only "other insurance" clauses. Fireman's Fund asserted that since its policy and RLI's policy had conflicting "other insurance" clauses, both should share in the loss. RLI argued that its umbrella policy actually was a "second-level excess" policy that applied only when all other insurance, including Fireman's Fund's, had exhausted. The trial court agreed with Fireman's Fund and ruled that both insurers should contribute to the loss in excess of the primary coverage in proportion to their respective policy limits.

The Court of Appeal reversed. It ruled that RLI's coverage was excess to Fireman's Fund's. The Court first looked to whether Fireman's Fund and RLI covered the same "level of liability." The Court noted the "prevailing judicial view" in favor of the proration of losses, even when a policy with a pro rata clause is matched against one with an excess-only clause. The Court agreed that, based on the two "other insurance" clauses, the trial court's proration order was correct. The Court disagreed with the trial court, however, as to whether Fireman's Fund and RLI provided "the same level of coverage"-even though both policies were issued over primary CGL policies.

The Court noted that the insuring agreement in the Fireman's Fund policy stated that the coverage was excess over the primary coverage. The insuring agreement of the RLI policy, however, stated that the coverage was excess to any "scheduled" and "unscheduled" underlying insurance. The Court ruled that the insurers "did not place themselves in the same position with regard to other carriers". Fireman's Fund provided coverage upon exhaustion of the primary policy, while RLI stated that its coverage was excess to all other available coverage.

The Court rejected Fireman's Fund's assertion that its "other insurance" clause made its coverage, like RLI's, excess to all other insurance. The Court noted the distinction between the placement of an "other insurance" limitation in the insuring agreement of the policy form, rather than "buried" in the language near the end of the form.

Was the Court of Appeal's ruling sound? Does the insuring agreement of the policy actually carry more weight than the remaining terms of the policy? Are the provisions at the end of the form less important? Why was RLI's limitation "more explicit" because it was on the first page of the policy? Would Fireman's Fund's position have been stronger if its list of exclusions had included losses covered by other insurance?

Perhaps what really happened here is revealed by the Court's statement that the general contractor was "only" an additional insured under the RLI policy. "Only"? Other decisions point out that additional insureds are not second class citizens and, where coverage attaches, they have the same rights as named insureds. Here, however, the Court's ruling suggests that the Court's decision to zero in on the structure of the policy form may have been driven by the knowledge that Fireman's Fund directly insured the general contractor. Otherwise, the ruling suggests that policy interpretation now is shaped by some type of a new rule that "the important stuff comes first."

Oddly enough, the Carmel decision does not address the continuing issue in this context of the importance of indemnity contracts between general and subcontractors on the layering of the insurance coverage. If, for example, the subcontractor in Carmel owed the general contractor express indemnity for the loss, the general contractor's coverage might not have been triggered at all. The interesting-and still open-issue here is the effect of indemnity contracts on the duties of excess insurers. Future decisions surely will wrestle with that issue and may not boil down to a question of which page of the policy has the controlling language.