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Coverage - Other Insurance Clauses – Does not become EXCESS
Century Surety Company v. United Pacific Insurance Company
Applying public policy to avoid a primary insurer escaping liability for a risk that resulted in damage in their policy period, the Court concluded Century was liable to contribute on some equitable basis to the defense and indemnity expenses incurred in this case. To enforce the Century "other insurance" clause and the pro rata clauses of the other insurers was impossible. The only proper result was to ignore the clauses and to apportion the loss pro rata. This was consistent with public policy disfavoring an escape clause where promised coverage evaporates in the presence of other coverage.

Ordinarily, an excess insurer has no duty to participate in the policyholder's defense until primary coverages are exhausted.  Nabisco, Inc. v. Transport Indemnity Co., 143 Cal. App.3d 831 (1983) and Housing Group v. California Ins. Guaranty Association, 1996 WL 346171 (Cal. App. June 25, 1996).  Accordingly, unless contractually provided for, courts have not required excess insurers to defend. Signal Co. v. Harbor Ins. Co., 27 Cal.3d 359, 612 P.2d 889 (1980) and Chubb v. INA, 233 Cal. Rptr. 539, 543 (Cal. App. 1986). 

However, an excess insurer may owe an implied good faith obligation regarding settlement negotiations that implicate its layer of coverage even if the underlying insurance is still not exhausted.  Diamond Heights Homeowners Association v. National American Ins. Co., 227 Cal. App. 3d 563, 277 Cal. Rptr. 906 (1991). 

The refusal of a primary insurer to provide coverage for a claim is not a basis for compelling an umbrella carrier to "drop down."  Lafarge Corp. v. Travelers Indemnity Co., No. CV-F-96-5938 (E.D. Cal. January 17, 1997).  Similarly, the California Court of Appeal ruled in Ticor v. Employers Ins. of Wausau, 40 Cal. App.4th 1699, 48 Cal. Rptr.2d 1168 (1995) that a primary insurer's refusal to defend does not require an excess insurer to "drop down" to provide a defense.

An excess insurer's policy obligations normally do not arise until the exhaustion of the primary policy. State Farm v. Jioras, 24 Cal. App.4th 1619 (1994).  Indeed,  the Ninth Circuit has affirmed that an excess insurer’s policy obligations are not triggered by a primary insurer’s “anticipatory exhaustion.” In County of Santa Clara v. USF&G, No. 97-16759 (9th Cir. April 19, 1999), the Ninth Circuit reversed a California District Court’s ruling that sums that a primary insurer paid into an escrow account were sufficient to constitute exhaustion of the primary limits.

If the excess insurer disputes exhaustion, several California courts have ruled that the primary insurer must continue to defend, subject to rights of reimbursement later on from the excess insurer if it is found to have validly exhausted. .  County of Santa Clara v. USF&G, 868 F.Supp. 274 (N.D. Cal. 1994), rev’d on other grounds   No. 97-16759 (9th Cir. April 19, 1999).  Thus, in Hartford Accident Indemnity Co. v. The Superior Court, 23 Cal. App. 4th 1774, 29 Cal. Rptr.2d 32, 34 (1994), the Court of Appeal held that "If an excess carrier shirks its duty to defend after exhaustion of the primary policy wherein the primary carrier continues to provide a defense under a reservation of rights, principles of equity compel the excess carrier to reimburse the primary carrier for the excess carrier's share of the defense costs."

Even where excess policies do not expressly provide for the payment of defense costs, California courts have sometimes inferred an equitable obligation to pay a portion of defense costs corresponding to the excess insurer's indemnity payments. Pacific Ind. Co. v. Fireman's Fund Ins. Co., 175 Cal. App.3d 1191, 223 Cal. Rptr. 312 (1985); Aetna Cas. & Surety Co. v. Certain Underwriters at Lloyd's, London, 56 Cal. App.3d 791, 801, 129 Cal. Rptr. 47 (1976).

Thus, in City of Oxnard v. Twin City Fire Ins. Co., 37 Cal. App.4th 1072, 44 Cal. Rptr.2d 177 (1995), review denied  (Cal. October 4, 1995), the Court of Appeal rejected an insured's effort to recover a portion of defense costs and settlement payments involving a former waste dump from its excess carrier where the sums were fully within the insured's SIR.  The court refused to find any basis for requiring the excess insurers to drop down or act as the primary carrier, holding that there was no equitable reason for shifting to the excess carrier defense costs which the primary insurer, or as in this case, the policyholder had contracted to pay.

An insurer that had provided a defense to a “continuing injury” claim was not entitled to equitable contribution against another insurer whose policy was written excess of a self-insured retention.  In Golden Eagle Insurance Company v. AIG Claim Services, San Diego, No. 728213 (Cal. Super. February 14, 2000), Judge Haden ruled that, in such circumstances, the other insurer’s defense obligations did not arise until the SIR was exhausted.

Otherwise, California law does not recognize a defense obligation for excess carriers unless and until the underlying limits become exhausted and then only for claims that remain unresolved following exhaustion.  Hartford Acc. & Ind. v. Continental National American Ins. Companies, 861 F.2d 1184, 1186 (9th Cir. 1989).  In Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500 (9th Cir. 1994), the 9th Circuit not only ruled that an excess carrier's policy obligations do not arise until all applicable primary insurance is exhausted, but held that an insured may not bring a declaratory judgment action against excess carriers "until the legal obligations of the primary insurers had been determined."

Unless the provisions of an excess policy provide otherwise, an excess insurer has no obligation to provide a defense to its insured before the primary coverage is exhausted.  Community Redevelopment Agency v. Aetna Casualty & Surety Company, 50 Cal. App. 4th 329, 338, 57 Cal. Rptr.2d 755 (2d Dist. 1996) and Hartford Accident Indemnity Company v. Superior Court, 23 Cal. App. 4th 1774, 1779 (1994).

The Court of Appeal ruled in Community Redevelopment that 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,) 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).

In Lafarge Corporation v. The Travelers Indemnity Company, No. CV-F-96-5938 (E.D. Cal. September 19, 2000), a federal district court ruled that all primary coverage must first be exhausted before any excess policy must respond, rejecting the insured’s contention that cases such as Community Redevelopment were no longer good law in view of the  California Supreme Court’s 1997 ruling in Aerojet .    Further, the court ruled that  the existence of pollution exclusions in later policies did not necessarily preclude the possibility that this might be collectable insurance and tha the insured’s settlement with Travelers did not exhaust the immediate underlying primary policy since the settlement was for less than the full policy limit.

This rule of “horizontal exhaustion” has been held not to apply to “insurance” provided by the policyholder’s SIR obligations, however.  See Montgomery Ward & Company, Inc. v. Travelers Indemnity Co., 81 Cal. App.4th 356, 97 Cal. Rptr.2d 44 (2000) and Southern Pacific Rail Corporation v. Certain Underwriters at Lloyd’s, No. B133099 (Cal. App. September 18, 2000)(unpublished).

In Highlands Ins. Co. v. Continental Cas. Co., 64 F.3d 514 (9th Cir. 1995), the court ruled that an excess insurer had no duty to participate in settlement discussions until the underlying policy was exhausted and permitted the excess carrier to recover the full amount of the excess verdict, including prejudgment interest, from the primary insurer.

An excess insurer's undertaking to reimburse defense costs does not create an express duty to defend. Save Mart Supermarkets v. Underwriters of Lloyd's, 843 F.Supp. 597 (N.D. Cal. 1994).

In Coleman Co. v. California Union Ins. Co., 960 F.2d 1529, 1532 (10th Cir. 1992), an insured was permitted to include defense costs within its retained limit so as to trigger an umbrella carrier's defense obligation.

Like many states, California "drop down" cases turn on the language in the excess policies at issue.  An excess carrier whose coverage was excess of the "amounts recoverable" under the primary policy was ordered to provide coverage in Reserve Ins. Co. v. Pisciotta, 30 Cal.3d 800, 180 Cal. Rptr. 628 (1982).  More recent cases have refused to require coverage, however.  See Denny's, Inc. v. Chicago Ins. Co.,  234 Cal. App.3d 1786, 286 Cal. Rptr. 507 (App. 1991)(3d layer excess) and Span, Inc. v. Associated Int. Ins. Co., 227 Cal. App.3d 463, 277 Cal. Rptr. 828 (1991).  Relying on Span, First District ruled in Wells Fargo Bank v. California Ins. Guarantee Assoc., 38 Cal. App. 4th 936, 45 Cal. Rptr.2d 537 (1st Dept. 1995) that an endorsement specifying that exhaustion may only occur "by payment of losses" precluded any "drop down."  But see  Coca Cola Bottling Co. of San Diego v. Columbia Cas. Ins. Co., 11 Cal. App. 4th 1176, 14 Cal. Rptr.2d 643 (4th Dist. 1992), review denied, No. S030899 (Cal. March 11, 1993)("amounts recoverable" held ambiguous).  An excess insurer whose policy afforded coverage over what was "covered" by an underlying policy was not required to "drop down" in Wells Fargo Bank v. California Ins. Guaranty Association, 38 Cal. App. 4th 936 (1995) since "covered" did not necessarily mean collectible or payable.

For a time, California recognized a doctrine of "triangular reciprocity" with respect to the respective duties of good faith among insureds and primary and excess insurers.  Transit Cas. Co. v. Spink Corp., 94 Cal. App.3d 124, 156 Cal. Rptr. 360 (App. 1979).  However, Spink was overruled by the subsequent decision of the California Supreme Court in Commercial Union Assur. Co. v. Safeway Stores, 26 Cal.3d 912, 164 Cal. Rptr. 709, 610 P.2d 1038 (1980).

However, the Court of Appeal ruled in Fireman's Fund Ins. Co. v. Maryland Cas. Co., 26 Cal. Rptr.2d 772, 21 Cal. App.4th 1586 (1994) that a primary insurer has no independent obligation of good faith to an excess insurer, rejecting the excess insurer's claim that a collusive settlement had impaired its subrogation rights.  Earlier, in Diamond Heights Homeowners Assoc. v. National American Ins. Co., 227 Cal. App.3d 563 (1991), the Court of Appeal ruled that a primary insurer did not require the permission of an excess insurer to negotiate a settlement, even where it impacted on the excess carrier's layer, so long as the settlement was negotiated in good faith.

No excess judgment is necessary for an excess insurer to bring a common law bad faith action against a primary insurer for failure to settle within limits.  Fortman v. Safeco Ins. Co. of America, 221 Cal. App. 3d 1394 (2d Dist. 1990). 

The California Court of Appeal has ruled that an umbrella liability carrier is not barred from pursuing a contribution claim against the insured's professional liability insurer, notwithstanding the fact that the excess carrier had earlier accepted coverage for the underlying claims and had never reserved its rights in any respects.  In Mitchell, Silberberg & Knupp v. Yosemite Ins. Co., 1997 WL 625061 (Cal. App. October 10, 1997), the Second District ruled that the excess insurer's admission of coverage might estop it from recovering any sums back from the insured but did not preclude it from pursuing such claims as it might have against other insurers, even if those recoveries indirectly affected the policyholder. 

An excess insurer is not precluded from challenging whether a primary insurer's settlement was negotiated in good faith by the fact that it was earlier approved by The court.  Topa Ins. Co. v. Fireman's Fund Ins. Co., 39 Cal. App. 4th 1331 (1995).

A following form excess policy "follows the terms and conditions of the underlying policy."  Century Indemnity Company v. London Underwriters, 16 Cal. Rptr.2d 393, 396 (Cal. App. 1993). 

The California Court of Appeal ruled in Housing Group v. California Ins. Guaranty Association, 1996 WL 346171, No. GO15394 (Cal. App. June 25, 1996) that an excess policy which provided that it would provide "broad as primary" coverage was obligated to indemnify a policyholder for a products liability claim, notwithstanding the fact that the excess policy contained a products exclusion where a similar exclusion was not contained in the primary policy.

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