An insurer is ordinarily free to restrict the risks it will underwrite and is responsible only for losses within the coverage wording of its policies of insurance. (Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 280.) The courts at least say they will not rewrite the terms of a policy for any purpose, including to make them conform to judges’ notions of sound public policy. For judges to do so would exceed their authority. (Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1077-1078.) In brief, plain policy language limiting coverage must be respected by the courts. (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 432.)
But – and in law there seems always to be a “but” — an exception to these general rules of policy wording enforcement is recognized regarding “other insurance” clauses generally and “escape” other insurance clauses in particular. “Escape” clauses purport to provide that coverage evaporates in the presence of other insurance, departing from the historical purpose of “other insurance” clauses – to prevent multiple recoveries when more than one policy provided coverage for a particular loss. Partly because “escape” clauses are objects of judicial distrust, the modern trend is to require multiple insurers on a single risk to contribute on a pro rata basis regardless of the type of “other insurance” clauses in their policies. (Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, 1079-1080.)
An example of this judicial distrust is found in a newly published decision of the California Court of Appeal, filed on October 23, 2015, Underwriters of Interest, etc. v. ProBuilders Specialty Insurance Company, 2015 Cal. App. LEXIS 936. In that case, the plaintiff, Underwriters, sued insurer ProBuilders for equitable contribution. Both had issued CGL policies to Pacific Trades Construction & Development, Inc., a general building contractor later sued for negligent construction work, but only Underwriters had paid the cost of Pacific Trades’ defense.
The detailed facts were that Underwriters issued a commercial general liability (CGL) policy, effective between October 23, 2001 and October 23, 2003. ProBuilders issued multiple CGL policies insuring Pacific Trades, effective between December 9, 2002 and December 9, 2004. The ProBuilders policies had an “other insurance” clause that provided that ProBuilders had the right and duty to defend Pacific Trades provided that “no other insurance affording a defense to such a suit is available to [Pacific Trades].” The Underwriters policy “other insurance” clause excused Underwriters from any duty to defend Pacific Trades when that insurance was excess over other primary insurance available to Pacific Trades because it had been designated as an additional insured by attachment of an endorsement to one or more of its subcontractor’s policies. In its decision, the court of appeal noted that there were some claims in litigation against Pacific Trades for which ProBuilders provided the only primary insurance available to the common insured, Pacific Trades.
The court noted, too, that the judiciary has repeatedly addressed and rejected arguments by insurers that their “other insurance” clauses permit them to avoid their policy obligations altogether by shifting the entire burden of defense and indemnity of a mutual insured onto a co insurer. The court therefore adopted the modern trend of requiring equitable contribution on a pro rata basis from all primary insurers regardless of the type of “other insurance” clause included in their policies. The court found most on point the decision of the California Court of Appeal in Travelers Casualty & Surety Co. v. Century Surety Co. (2004) 118 Cal.App.4th 1156. In that case, the insurer seeking equitable contribution issued CGL policies to a framing contractor (Standard) containing an “equal shares” or “pro rata” sharing agreement with other insurers on the risk. The other insurer, Century, issued a CGL policy to the same contractor, covering a later period, making its insurance excess over any available and collectible insurance and negating its obligation to defend in the event there was such other insurance.
Accordingly, the court noted that Standard did not have any other liability insurance during the time that Century’s policy was in force, and that was also recognized by the Court of Appeal in this case to be the situation. The court noted in a footnote that the Underwriters policy coverage expired in October 2003 but many of the plaintiffs in the injury lawsuit purchased homes completed after that date but during the period that ProBuilders’s policy afforded coverage to Pacific Trades. This arguably meant that the Underwriters policy provided no coverage for those claimants, making its “other insurance” clause a true “escape” clause.
The two-fold rationale of the new decision was therefore stated by the court as follows:
“We adhere to the ‘modern trend [of requiring] equitable contributions on a pro rata basis from all primary insurers regardless of the type of ‘other insurance’ clause in their policies. . .”
“Because giving effect to [ProBuilders’s] ‘other insurance’ provision, in the nature of an escape clause, would result in imposing on Underwriters the burden of shouldering that portion of the defense costs attributed to claims arising from a time when ProBuilders was the only liability insurer covering Pacific Trades, Travelers persuades us that the escape clause must be disregarded and Underwriters should be entitled to seek equitable contribution from ProBuilders for defense costs incurred on behalf of their mutual insured.” (Italics in original.)
The first expressed rationale of the new decision sweeps broader than its facts required, but those facts served to distinguish the new decision from three cases cited by ProBuilders, stating that, in “dicta” – not necessary for the decisions – escape clauses will be enforced as long as the insured is not left without coverage. Since the insured in Underwriters could “fall between the cracks” regarding some of the claims brought against it, even the dicta of those three decisions are satisfied.
Additional grounds were asserted by ProBuilders – and rejected by the appellate court – attempting to affirm its summary judgment in the trial court. The only remaining point of lasting impact, however, was the Court of Appeal’s decision on the running of the two year statute of limitations for the performing insurer’s contribution claim against its co-insurer. The court held that the expiration of that limitation period was equitably tolled – suspended – until Underwriters made the last payment in the underlying suit for which it sought contribution from ProBuilders, or until the underlying action is terminated by final judgment. In so holding, the court relied upon the California Supreme Court decision in Lambert v. Commonwealth Land Title Ins. Co. (1991) 53 Cal.3d 1072, quoting from language in Lambert saying that, because the underlying tort litigation may last more than the two year limitation period, a contrary rule would allow expiration of the statute of limitations on a lawsuit to vindicate the duty to defend even before the duty itself expired. This grim result, the California Supreme Court had held in Lambert, is untenable.
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