Coverage - Other Insurance Clauses – Does
not become EXCESS
Century Surety Company v. United Pacific
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
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.
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
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.