A California appellate court recently clarified the priority of coverage where multiple insurers are implicated for the acts of a negligent employee. In GuideOne Mutual Insurance Company v. Utica National Insurance Group, 2013 Cal. App. LEXIS 148, the court held that insurers for a negligent employee must provide coverage before the insurance of the vicariously liable insurer applies.
The case arose after a church pastor, while driving his own car for work purposes, negligently struck and injured a man on a motorcycle. The pastor was sued, as were his employers, the church and Christian Evangelical Assemblies (CEA) under which the church operated. The pastor was directly liable for the accident, and both the church and CEA were also vicariously liable because the accident occurred within the course and scope of the pastor’s employment.
The pastor carried a personal auto liability policy with State Farm. The church and its employees were insured by GuideOne under a commercial general liability policy and an umbrella policy. CEA had a commercial general liability policy and an umbrella policy through Utica, which insured CEA as well as “covered autos” including vehicles not owned by CEA but used for CEA business.
The insurers for the pastor, the church and CEA all agreed to settle the claim under their respective policies for a total of $4.5 million. The $100,000 policy limits of the State Farm policy were quickly exhausted and the balance of the settlement relied on the commercial general liability policies and umbrella policies issued by GuideOne and Utica. Initially, GuideOne paid the $1 million limits on its general liability policy and the $1 million limits on the umbrella policy. Utica paid the $1 million limits on its general liability policy and $1.4 million out of the $5 million limits on its umbrella policy. After the settlement was paid, a dispute arose as to how the costs should be allocated among the insurers.
GuideOne thought that it had overpaid and sought contribution from Utica for this alleged overpayment. When multiple insurers are implicated on the same claim and one insurer pays more than its share of the loss, it is entitled seek contribution from other responsible insurers. GuideOne based its claim on California Insurance Code Section 11580.9.
California Insurance Code Section 11580.9 sets forth a priority of coverage for automobile accidents where multiple policies apply. The statute provides that the insurance policy in which the vehicle is described as an owned automobile will be primary and the insurance afforded by any other policy will be excess, but the statute offers no further guidance.
In this case, there was no dispute that the pastor’s State Farm policy was the primary policy, obligated to provide the first coverage. GuideOne argued that Section 11580.9 controlled the priority of coverage and because both GuideOne and Utica were “excess insurers” under the statute, they should have been treated equally and shared the costs according to the proportionate share of the total coverage available. According to GuideOne, after the coverage of the primary insurer, State Farm, was exhausted, the commercial general liability policies of GuideOne and Utica should have applied proportionally until exhausted and the remaining balance should have come from the umbrella policies issued by GuideOne and Utica, again proportionally according to the amount of coverage provided.
The trial court agreed with this reading of the statute and granted GuideOne’s claim for $600,000 in equitable contribution, resulting in the two excess insurers contributing proportionally to the settlement according to their respective available coverages.
Utica disagreed that Section 11580.9 so easily settled the issue between the two excess insurers and appealed the decision. Utica argued that the statutory priority of coverage offered a starting point for allocating the loss by defining the primary and excess insurance, but disagreed that all excess insurers are obligated to share proportionally under the statute. Pointing to the fact CEA was only vicariously liable, Utica argued that GuideOne’s commercial general liability policy and umbrella policy covering the pastor had to be exhausted before Utica was required to contribute anything to cover its insured, CEA.
The appellate court agreed with Utica that the Section 11580.9 did not adequately address the priority of the GuideOne and Utica policies. The court stated that Section 11580.9 defines the primary and excess insurers and the priority of coverage as between those two classes, but “it does not address the priority and allocation of the [excess policies].” GuideOne at 17. In this case, a more thorough analysis was required to determine the priority as between the two excess insurers.
The court turned to general legal principles to determine the priority and allocation issues for the excess insurers. The court relied upon United States Fire Ins. Co. v. National Union Fire Ins. Co. 107 Cal. App. 3d 456 (1980), which stated that insurance covering a vicariously liable insurer was secondary to any coverage of the employee. The court further noted that, “Where a judgment has been rendered against an employer for damages occasioned by the unauthorized negligent act of his employee, the employer may recoup his loss in an action against the negligent employee; that is, as between the employer and employee in such a situation, the obligation of the employee is primary and that of the employer secondary…” GuideOne at 16, quoting Continental Cas. Co. v. Phoenix Constr. Co. 46 Cal.2d 423, 428 (1956).
Applying this logic, the court held that because the pastor was primarily liable, the insurance covering the pastor was primary and should have paid first as between the excess insurers. CEA was only vicariously liable through the negligence of the pastor and because this liability was secondary, the insurance covering CEA was secondary and Utica’s obligations did not arise until after the policies covering the employee were exhausted.
The decision clarifies that an insurer for a vicariously liable employer is required to contribute only after the employee’s insurance has been exhausted. The decision is an important clarification of Section 11580.9 and the law in California.
Excess insurers are not necessarily required to share proportionally in the coverage and other legal principles may be referenced to determine the priority of coverage as between such excess insurers. The decision also demonstrates that a statutory analysis alone may not be sufficient to reach the proper legal outcome. Here, the appellate court recognized that the statute was not complete as to how priority should be determined with excess insurers and it used common law principles to supplement the statute and elicit a just and equitable result. Insurers and insureds should take note that statutes do not always provide a complete statement of the rule and statutory language often requires common law guidance to present a complete picture of the law.