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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 limits. 

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. 

Under California 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). 

Equitable subrogation 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 22, 2001).

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).

California courts 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 to pay. 

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, however.

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 a nullity.

California courts 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.

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