New Appellate Case Finds “Other Insurance” Provision Invalid

In the new case of Certain Underwriters At Lloyds, London, v. Arch Specialty Insurance Company, California’s Third District Court of Appeal held that an “other insurance” provision in a commercial general liability policy, which purported to excuse an insurer’s defense obligation when other insurance was defending, violated public policy and was unenforceable.

The case arose out of underlying construction defect litigation in Sacramento.  A framer called Framecon was sued in numerous lawsuits involving alleged construction deficiencies in projects where KB Home was the developer and/or general contractor.  Framecon had two years of commercial general liability insurance with Certain Underwriters at Lloyds, London (Lloyds) from 2000 to 2002, and one year of coverage with Arch Specialty Insurance Company (Arch) from 2002 to 2003.

Framecon’s policy with Arch provided, “We have the right to defend you, the Named Insured, against any suit seeking tort damages provided that no other insurance affording a defense against such a suit is available to you.“  The policy further stated that if other insurance is available for a covered loss, Arch’s policy would be excess to other any other insurance, and when Arch’s insurance is excess, Arch would have no duty to “defend any claim or suit that any other insurer has a duty to defend.”

Based on the foregoing policy provisions, Arch refused to defend Framecon in the various underlying lawsuits where Lloyds was already providing a defense to Framecon.  Arch did, however, indemnify Framecon by contributing to the settlements in the underlying lawsuits.  After settlement of the underlying cases, Lloyds filed an equitable contribution action against Arch to recover a portion of the costs paid by Lloyds to defend Framecon.

The trial Court granted summary judgment in favor of Arch, ruling that the “other insurance” provisions prevented any defense obligation by Arch in the underlying lawsuits.  Lloyds appealed.

On appeal, the Court noted that “other insurance” clauses were originally conceived to prevent “multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss.”  However, primary insurers subsequently attempted to use “other insurance” clauses to shift the burden onto other available insurance.  As a result, courts have considered such “other insurance” provisions to be improper “escape clauses,” and have instead required co-primary insurers to contribute on a pro rata basis regardless of the existence of “other insurance” clauses in their policies.

Arch attempted to distinguish this precedent by arguing that those “other insurance” provisions were located only in the conditions sections of the insurance policies, whereas Arch’s provisions were in the coverage section.  The Court of Appeal, however, found such a distinction unpersuasive, and concluded that it would be against public policy to permit Arch to shift the entire loss to a co-primary insurer.  As a result, the Court of Appeal reversed the trial court’s decision, and found that Lloyds was entitled to receive equitable contribution from Arch.

This is a significant case that further deals a blow to so-called “other insurance” provisions.  Given this precedent, it appears clear that an insurer will likely not be able to rely on an “other insurance” provision in order to shift the defense obligation of an insured to a co-insurer.

For more information about the case and its impact, contact Chris Schmitthenner in LGC’s San Diego office.