ALLOCATION AND SCOPE
After years of conflicting
lower court rulings, the California Supreme Court ruled in December 1997
that insureds have no duty to share defense costs on a "time on the risk"
basis. In Aerojet-General Corp. v. Transport Ind. Co., 17 Cal. 4th
38, 70 Cal. Rptr.2d 118, 948 P.2d 909 (1997), the court held that insurers
are obligated to indemnify an insured in full for "all sums" and must provide
a complete defense to any suit that implicates their period of coverage,
even if the suit also encompasses later periods of time.
While rejecting any
assumption that the insurers' obligations are "joint and several," the
Supreme Court adopted the Keene-type “all sums” approach that the
Appeals Court had using in Armstrong and rejected pro-allocation rulings
such as INA v. 48 Insulations, Owens-Illinois and Sharon Steel. In
particular, the Supreme Court ruled that The Court of Appeals had erred
in adopting a "time on the risk" approach or in finding that an insured
must contribute a share corresponding to periods of time for which it "self-insured"
(a term that the Supreme Court described as a "misnomer). As with
Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766
(1997), insureds are only obligated to pay defense costs that are not also
attributable to any period of time for which an insurer owes coverage.
Accordingly, if an insurer only provided coverage for Year 1 and the insured
is sued for damage from Year 1 to Year 30, the insurer must still defend
the entire case, subject only to rights of equitable contribution against
other insurers (but not the policyholder). The Supreme Court gratuitously
added that the "all sums" language in the insuring agreement would also
compel the Year 1 insurer to pay its entire policy limit for any resulting
judgment if any part of the damages are attributable to Year 1 damage.
A federal District
Court has ruled that “the policies for apportioning damages in tort cases,
however, are separate and distinct from the concerns of apportioning liability
among insurers.” Fireman’s Fund Insurance Company v. Commerce and
Industry Insurance Company, C-98-1060 (N.D. Cal. November 7, 2000).
A trial court has
ruled that more than just any property damage during the policy period
is required to trigger “all sums” obligations. Judge Bea ruled in
Pacific Gas and Electric Company v. Lexington Insurance Company, San Francisco
No. 948209 (Cal. Super. April 13, 2000) that the pollution occurring during
the insurer’s policy period must be a substantial contributing cause of
the overall pollution problem.
In Armstrong World
Industries, Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App.4th 1, 52 Cal.
Rptr.2d 690 (1st Dist. 1996), the Court of Appeals had ruled that any insurer
whose policy was triggered must pay its full limits pursuant to the "all
sums" language and may not restrict its payment obligation to the amount
of injury in the policy period. The court ruled that insureds have
no responsibility to self-insure for coverage gaps or orphan shares.
The Court of Appeals declared the “all sums” approach does not result in
inequity as it “insures that the policyholder is indemnified by one insurer
for the full extent of the loss up to the policy limits but apportions
liability among all insurers whose policies were triggered.” 45 Cal.
App. 4th at 55.
In addition to Armstrong
,the Supreme Court cited with approval two other allocation rulings of
the Court of Appeals. In County of San Bernardino v. Pacific Indemnity
Co., 56 Cal.App. 4th 666 (4th Dist. 1997), review denied (Cal. 1997) The
Court of Appeal had ruled that a polluter who failed to purchase coverage
after 1973 had no obligation to contribute to the defense of underlying
trespass suits that alleged injuries both before and during the period
that it had chosen to go bare. The court ruled that self-insurance does
not involve any transfer risk and cannot therefore be considered as "insurance."
The Supreme Court agreed in Aerojet, describing "self-insurance" as a misnomer.
Similarly, in Stonewall
Ins. Co. v. City of Palos Verdes Estates, 46 Cal. App. 4th 1810, 54 Cal.
Rptr.2d 176 (2d Dist. 1996), the Second District had ruled that any shortfall
resulting from inadequate primary limits in some years should be reallocated
among remaining insurers with larger limits. Further, while ruling
that the insured could not obtain reimbursement for retentions and deductibles
from the insurers in the policy years containing such features, the court
left open the issue of whether the insured could obtain repayment from
insurers in other years.
In an unpublished
ruling, the Ninth Circuit declared that a District Court had not erred
in assigning a portion of a pollution loss to an insured for years in which
it had no coverage, not because it was “self-insured” but because the insurers
were not responsible for property damage occurring after their policies
had expired. Alcan Aluminum Corp. v. Prudential Property & Cas. Co.,
1999 U.S. App. LEXIS 6012 (9th Cir. March 31, 1999)
Aerojet left open
the issue of how defense costs and indemnity should be allocated among
insurers. In a decision that was settled while on appeal, the Second
District had declared in IMCERA that courts should look to the policies'
respective "other insurance" clauses. In contrast to its ruling in
IMCERA, the Second District ruled in Stonewall that a "time on the risk"
analysis is the fairest means of allocating defense and indemnity among
multiple policy years. Earlier, in CNA Cas. of California v. Seaboard
Surety Co., 176 Cal. App.3d 598 (1986), the court had ruled that insurers
should apportion defense costs in accordance with their respective policy
Rejecting any “bright
line” allocation test based on each insurer’s “time on the risk,” the First
Appellate District has ruled in Centennial Insurance Company v. U.S. Fire
Insurance Company, 2001 Cal. App. LEXIS 247 (1st Dist. March 30, 2001)
that the cost of providing a defense to construction defect claims against
property developer should have been allocated among the insured’s successive
carriers “pro rata in proportion to their respective coverage of the risk...as
a matter of distributive justice and equity” rather than based upon any
hard and fast bright line rule such as “equal shares” or “time on the risk.”
While agreeing that in this particular case the “time on the risk” method
was more equitable than an equal shares approach since U.S. Fire had only
been on the risk for six months as contrasted with the several years of
coverage provided by Centennial and Travelers. The court distinguished
case law pertaining to equitable contribution claims among insurers with
those relating to the relationship between an insurance company and its
policyholder. “An insurer’s obligations to an insured are governed
by the contract of insurance between the parties. In contrast, the
reciprocal contribution rights and obligations of several insurers covering
the same risk do not arise from and are not governed by contract; instead,
they flow from equitable principles designed to accomplish ultimate justice
and the bearing of a specific burden. Although insurers must respond
in full to a contractual policyholder’s tender of defense, their respective
obligations for contribution to other insurers for the costs of defense
are entirely separate from their obligations to their insured and are adjusted
equitably on the basis of all the circumstances of the case.”
While cases such
as Aerojet call into question the ability of insurers to seek contribution
from policyholders for periods in time in which SIRs or other fronting
arrangements were in place, this rule only applies in "continuing loss"
cases and has no application to situations where the loss occurs entirely
within the period of time for which the policy contains an SIR or similar
fronting arrangement. Pacific Employers Ins. Co. v. Dominos Pizza,
Inc., 144 F.3d 1270 (9th Cir. 1998) (California law). On the other
hand, the Court of Appeals ruled in Montgomery Ward & Company v. Imperial
Casualty & Indemnity Company, 81 Cal. App.4th 356, 97 Cal. Rptr.2d
44 (2000) that “excess” insurers could not insist that the policyholder
exhaust each and every one of the SIRs in their policies. The Court of
Appeals ruled that self-insured retentions are not “primary insurance”
for the purpose of applying the rule of horizontal exhaustion in contrast
to its 1996 ruling in Community Redevelopment, the court ruled that the
policies at issue were primary insurance contracts and that the retained
limits within these policies were not themselves insurance policies.
While agreeing that an SIR in a specific policy year must be exhausted
before the insurer is liable under that policy, the Court of Appeals drew
a distinction between this conclusion and the general analysis applicable
to long-tail claims under Montrose.
Likewise, the California
Court of Appeal ruled in California Pacific Homes, Inc. v.
Scottsdale Ins. Co., 70 Cal. App.4th 1187, 83 Cal.Rptr.2d 328
(1st Dist. 1999), review denied, S078615 (Cal. September 1999) that a liability
insurer whose policies were written over a $250,000 self-insured retention
could not demand that the insured satisfy each of the retentions underlying
its five policies where the sum demanded was less than the limit of coverage
under one of its policies. Without resolving the issue of whether
the insured was obligated to pay more than a single retain limit for claims
involving a single “occurrence” transpiring over multiple years, the court
declared that Aerojet nonetheless plainly compelled Scottsdale to pay the
full amount of the settlement over one SIR since the amount demanded was
within its indemnity limits. Further, the court ruled that the
excess insurers could not insist upon “stacking” self-insured retentions
for losses that occurred over a period of years.
The Court of Appeals
has also ruled in Vons v. Federal Ins. Co., 78 Cal App. 4th 52, 92 Cal.
Rptr.2d 597 (2d Dist. 2000) that a policyholder is allowed to satisfy the
self-insured retentions in one policy through the proceeds of other policies.
In a non-pollution
case, the 9th Circuit ruled in Allstate Ins. Co. v. Chubb Group, 1998 U.S.
App. LEXIS 4479 (9th Cir. March 9, 1998)(unpublished) that where more than
one policy afforded concurrent coverage for a claim, defense and indemnity
should be prorated in proportion to the total limits of coverage rather
than on a "per capita" basis as the district court had ordered.
Aerojet must be considered
in conjunction with the Supreme Court's mid-1997 ruling in Buss v. Superior
Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766 (1997), in which
it assessed "intra-policy" allocation issues. Earlier, the court
had ruled in Horace Mann Ins. Co. v. Barbara B., 4 Cal 4th at 1081 that
an insurer has a duty to defend the entirety of an action even if some
of the claims are not covered. However, In Buss, the Supreme Court
explained that this duty to defend the entire suit was not based on the
wording of the policy, nor was it contractual. Rather, the court
held that the insured's duty to defend the entire "mixed" action prophylactically
was an obligation "imposed by law in support of the policy. To defend
meaningfully, the insured must defend immediately. To defend immediately,
it must defend entirely. It cannot parse the claims, dividing those
that are at least potentially covered from those that are not. To
do so would be consuming, it might also be futile." On the other
hand, as the insured is receiving the benefit of a defense to claims that
are not covered under its policy, the insurer is entitled to restitution
after the fact for those costs that would not otherwise have been incurred
for the defense. In order to recover, the insurer must prove the
amount of such non-covered defense costs by a standard of a preponderance
of the evidence. See also Sentex Systems, Inc. v. Hartford Acc. & Ind.
Co., 882 F.Supp. 930, 946-47 (C.D. Cal. 1995)(recognizing right to apportionment).
The Supreme Court
expanded on this analysis in Aerojet holding that the insured is only obligated
to pay a share of defense costs in long-tail claims if the injuries are
not potentially covered under any insurance policy.
The California Supreme
Court ruled in Barbara B., that allocation between covered and non-covered
claims was impossible in a case where the allegedly negligent act occurred
"in such a place temporal and spacial proximity to the 'excluded acts'
as to compel the conclusion that they are inseparable from it for purposes
of determining whether the insurer owed a duty to defend." 59 Cal.
App. 4th at 659-660.
law, an excess insurer may only bring suit against the primary insurer
on a theory of equitable subrogation. Fireman’s Fund Insurance Company
v. Commerce and Industry Insurance Company, C-98-1060 (N.D. Cal. November
7, 2000). Thus, contribution among insurers is permitted where one
pays a loss or defends a claim for which another shares responsibility.
Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal. App. 4th 1372, 1390
(1993) and Maryland Casualty Co. v. National American Ins. Co., 48 Cal
App. 4th 1822, 1828 (1996). Where several insurers insure the same
risk and are liable for any loss, the action between them is one for equitable
contribution. Pylon, Inc. v. Olympic Ins. Co., 271 Cal. App. 2nd
643, 648, 77 Cal. Rptr. 72 (1969). An insurer seeking equitable contribution
need only demonstrate that the other insurer covered the same risk and
failed to pay its share of the loss. United Pacific Ins. Co. v. Hanover
Ins. Co., 217 Cal. App. 3d 925, 936, 266 Cal. Rptr. 231 (1990).
permits a party who has been required to satisfy the loss created by a
party’s wrongful act to “stand in the shoes” of the injured party and pursue
the wrongdoer. Gulf Insurance Company v. TIG Insurance Company, B135799
(Cal. App. January 22, 2001). As the Court of Appeals declared in
Fireman’s Fund Insurance Company v. Maryland Casualty Company, 21 Cal.
App.4 at 1596, “In the insurance context, the doctrine permits the paying
insurer to be placed in the shoes of the insured and to pursue recovery
from third parties responsible to the insured for the loss for which the
insurer was liable and paid.” Such a right of action has been recognized
in cases where the primary insurer’s conduct resulted in an excess verdict
for which excess liability insurers were allowed to recover against the
primary carrier. Commercial Union Assurance Companies v. Safeway
Stores, Inc., 26 Cal.3d 912, 917 (1980) and Northwestern Mutual Insurance
Company v. Farmers Insurance Group, 76 Cal. App.3d 1031, 1040 (1978).
By contrast, where a primary insurer’s conduct did not result in any injury
to the insured, no right of equitable subrogation has been held to exist.
Gulf Insurance Company v. TIG Insurance Company, B135799 (Cal. App. January
The Court of Appeal
has ruled that an insurer’s right of equitable contribution against another
insurer is not extinguished by the other insurer’s separate settlement
with the insured. In Firemans Fund Ins. Co. v.
Maryland Casualty Co., 65 Cal. App.4th 1279 (1998), the First Appellate
District declared that Firemans Fund was entitled to obtain contribution
from Maryland Casualty for a share of defense costs and indemnity that
Firemans Fund had to pay on its own after Maryland Casualty had declined
coverage, notwithstanding the fact that the insured subsequently sued Maryland
Casualty and entered into a settlement extinguishing its coverage claims.
While agreeing that the settlement extinguished rights deriving from
the insured, the court drew a distinction between principles of equitable
subrogation and an action for equitable contribution among the carriers.
Whereas subrogation seeks recovery from the party primarily liable for
a loss, contribution is the nature of an action against a co-obligor who
shares that liability. Where the insurer has paid a loss that was shared
by the other carriers, the payment should be reallocated among the carriers
“in direct ratio to the proportion each insurer’s coverage bears to the
total coverage provided by all the insurance policies.”
In such cases, defense
costs should be allocated among insurers on an equitable basis. Although
policy wordings should be considered, loss may not be assigned entirely
based on “other insurance” clauses. Pacific Indemnity Company v. Bellefonte
Insurance Company, 80 Cal. App.4th 1226, 95 Cal. Rptr.2d 911 (4th Dist.
2000) and Maryland Cas. Co. v. Nationwide Ins. Co., 2000 Cal. App. LEXIS
511 (4th Dist. June 6, 2000).
have ruled that rights of equitable subrogation only arise among insurers
whose policies “share the same level of obligation on the same risk as
to the same insured.” Fireman’s Fund Insurance Company v. Maryland
Casualty Company, 65 Cal. App. 4th 1279, 1294 (1998) and Fireman’s Fund
Insurance Company v. Commerce and Industry Insurance Company, C-98-1060
(N.D. Cal. November 7, 2000),
An insurer cannot
recover contribution from another carrier if the other insurer has never
been tendered the claim. In Truck Insurance Exchange v. Unigard Insurance
Company, 2000 Cal. App. LEXIS 268 (2d Dist. April 10, 2000), the Second
Appellate District ruled that it would be inequitable to require Unigard
to contribute since the failure of tender had denied it the opportunity
to participate in or control the defense for which it was now being asked
The Second District
has declared that a policy containing an “excess escape” clause could obtain
equitable contribution from a policy with a mere “excess” clause.
The court ruled in American Continental Company v. American Casualty Company
of Reading, PA, B126506 (Cal. App. July 12, 1999) that the professional
liability insurer of a hospital, whose policy also encompassed a nurse
who negligence allegedly gave rise to a claim of wrongful death, was entitled
to reimbursement for the full amount of a $1 million primary policy that
American Casualty had separately issued to the nurse. Even
though both policies applied, the court refused to prorate their contributions
by limits and required the nurse’s insurer to pay the first million dollars
of the excess verdict.
An insurer that erroneously
determined that it had a duty to defend was not permitted to obtain contribution
from other insurers in Old Republic Ins. Co. v. Superior Court, 66 Cal.
App4th 128 (1998).
Recent cases have
declared, however, that such rights of contribution may not be pursued
against policyholders, except to the limited extent permitted by Buss.
In cases such as Truck Ins. Exchange v. Amoco Corp., 35 Cal. App.4th 814,
41 Cal.Rptr.2d 551 (1995); Metro U.S. Service v. City of Los Angeles, 96
Cal. App.3d 678, 683 (1979) and Armstrong World Industries, Inc. v. Aetna
Casualty & Surety Co., 45 Cal. App.4th 1, 52 Cal. Rptr.2d 690 (1st
Dist. 1996), California courts have ruled that "self-insurance" is not
insurance since there is no actual transfer of risk.
Such claims may also
be problematic in long-tail claims where prior payments have exhausted
some primary policies but not all. Where an excess policy stated
that it was excess to all valid and collectible insurance, including but
not limited to the specific primary policy for that year, the Court of
Appeal ruled in Community Redevelopment Agency of the City of Los Angeles
v. Aetna Casualty & Surety Co., 57 Cal. Rptr.2d 755 (2d Dist. 1996)
that the umbrella carrier's coverage obligations did not arise unless and
until underlying insurance, not just the policy underlying that year, had
become exhausted. The court held that this “horizontal exhaustion”
approach was most in keeping with the principles outlined by the Supreme
Court in Montrose. Accord, Stonewall Ins. Co. v. City of Palos Verdes,
46 Cal. App. 4th 1810, 54 Cal. Rptr.2d 176 (2d Dist. 1996) and Iolab Corp.
v. Seaboard Surety Co., 15 F.3d 1500 (9th Cir. 1994).
Reaffirming the Community
Redevelopment “horizontal exhaustion” rule, the Second District has ruled
that the “other insurance” clause in an umbrella policy was not superseded
by an indemnity clause to compel indemnity or contribution for claims by
a “crowd surfer” who was injured in the mosh pit at a Lollapalooza concert.
Despite Reliance’s contention that it was entitled to full indemnification
based upon contract terms in Reliance National Indemnity Company
v. General Star Indemnity Company, 1999 Cal. App. LEXIS 561 (2d Dist.
June 9, 1999) that the contract language did not alter the terms of the
policies, and, particularly, the “other insurance” clause which made the
General Star umbrella policy excess to all other primary insurance, including
the Reliance primary policy.
The Court of Appeal
had earlier refused to adopt a "horizontal exhaustion" requirement for
continuous trigger cases in Assoc. International, Inc. v. St. Paul Fire
& Marine Ins. Co., 220 Cal. App.3d 692, 269 Cal. Rep. 485 (1990), depublished
(Cal. 1995). The court refused to find that the reference to other
applicable insurance in the excess agreement extended to other years, holding
that "other insurance" clauses only apply to concurrent coverages.
The opinion was later depublished by order of the California Supreme Court,
It appears that an
insurer that is found to owe coverage for a claim may obtain a credit for
payments that the insured has obtained for the same loss from other insurers,
as long as the payments were made pursuant to settlements effected prior
to the date that a judgment entered against the claimant insurer. IMCERA
Group v. Affiliated FM Ins. Co., 47 Cal. App. 4th 699, 50 Cal. Rptr.2d
583 (2d Dept. 1996), review granted, 918 P.2d 1164 (Cal. May 22, 1996),
appeal dismissed (Cal. 1997)(off-set permitted under Section 877.6 if settlements
entered into before verdict or judgment entered). However, the Court
of Appeal later ruled in Shell Oil Co. v. National Union Fire Ins. Co.
of Pittsburgh, 44 Cal. App. 4th 1633, 52 Cal. Rptr.2d 580 (2d Dist. 1996)
that such an off-set was not permitted under Section 877 of the California
Code of Civil Procedure did not permit an off-set for settlements that
were entered into after the insured obtained a judgment against the claimant
insurer. See also United Pacific Ins. Co. v. First State Ins.
Co., 59 Cal. App. 4th 1480, 69 Cal. Rptr.2d 872 (2d Dist. 1997) and Topa
Ins. Co. v. Firemans Fund Ins. Co., 39 Cal. App.4th 1331 (6th Dist. 1995)(Section
877 only applies to co-obligors and joint tortfeasors). Further,
in Home Ins. Co. v. Superior Court, 1996 WL 354490 (Cal. App. June 27,
1996), the Second District ruled that a trial court had abused its discretion
in refusing to divulge the amount of primary insurer settlements to the
remaining excess insurer defendants. The court ruled that the excess
insurer had an absolute right to know the amounts of these settlements
and to have these payments allocated to the claims against it.
The California Court
of Appeal has ruled in Bailey v. Reliance Ins. Co., B130799 (Cal. App.
March 28, 2000) that a comp carrier could not use Civil Procedure Section
877.6 to challenge a settlement that its insured had entered into.
The Second District declared that Section 877.6 allows a settling party
to obtain a determination that a settlement was made in good faith so as
to bar future claims by joint tortfeasors but did not permit an insurer
to obtain a determination that a settlement was in bad faith and therefore
have yet to clearly define who is responsible for orphan shares resulting
from insolvencies. The California Insurance Guarantee Association
is only authorized by statute to pay “covered claims.” (California Insurance
Code Section 1063.1). “CIGA is an insurer of last resort and does
not assume responsibility for claims where there is any other insurance
available. R.J. Reynolds Company v. California Insurance Guarantee
Association, 235 Cal. App. 3d 595, 600 (1991). Accordingly, equitable
and legal claims for contribution, indemnity and subrogation by solvent
insurers are prohibited. Section 1063.1(c)(4).
The general rule
in California is that where injury occurs over a period of successive years,
the insured is entitled to the full limits of coverage for each year in
which injury occurred. Kane v. Reliance Insurance Company, No. 98-55589
(9th Cir. February 2, 2000). In Kane, the Ninth Circuit ruled that
Reliance owed that the $250,000 crime coverage limits in successive employee
dishonesty policies that it had issued to an apparel manufacturer by could
be stacked to maximize coverage for theft claims that occurred over the
period of all three policies. See also ABS Clothing Collection, Inc.
v. Home Insurance Company, 34 Cal. App. 4th 1470 (Cal. App. 1995)(insured
entitled to recover full employee dishonesty limit for each policy year
in which thefts continued). The ABS court declined to limit coverage
based upon a “prior loss” or “non-cumulation” provision.
The California Court
of Appeals ruled in Plut v. Firemans Fund Insurance Company, B128620 (Cal.
App. December 4, 2000) that a homeowner’s carrier was entitled to a set-off
for sums that the insured had recovered in its suit against a trucking
company and property manager for a loss of the insured’s property.
The Second Appellate District declared that the collateral source rule
is limited to actions in tort and does not apply to contractual claims.