Umbrella Insurer Has Duty To Defend Claim, Not Covered By Scheduled Underlying Insurance, Which Raises A Potential For Coverage Even Though SIR Not Yet Paid

By: jaklein, June 11, 2010

Summary by Rebecca B. Aherne, Esq.

On April 30, 2010, the Second Appellate District filed its opinion in Legacy Vulcan v. Superior Court, 184 Cal. App. 4th 285, holding Transport Insurance Company had a duty to defend under an umbrella policy where scheduled underlying insurance did not apply and despite the fact that insured’s SIR had not been paid.

Factual and Procedural Background

The City of Modesto and others sued Vulcan alleging a product it manufactured and sold to the dry cleaning industry had resulted in environmental contamination.  The alleged damage was apparently continuous over a number of policy periods, including when Transport’s policy, and the policies directly underlying it, were in effect.  Vulcan tendered the defense of the actions to several insurers, none of which provided a defense.  Vulcan paid for its own defense and settled the lawsuits.  Transport filed a declaratory relief action against Vulcan to determine the rights and obligations under its excess catastrophe policy.

The Transport policy provided the insurer would indemnify Vulcan for the “ultimate net loss (UNL) in excess of the retained limit” that Vulcan became legally obligated to pay as damages because of property damage.  The insuring agreement stated Transport would indemnify Vulcan, for the UNL in excess of the retained limit, with respect to any property damage covered by the Transport policy, but not underlying insurance (clause 1), or if the limits of liability of the underlying insurance are exhausted (clause 2).  The insuring agreement further provided Transport had the duty to defend any suit against Vulcan seeking damages for property damage.

The declarations stated the retained limit was underlying insurance or $100,000 because of property damage arising out of any one occurrence covered by the Transport policy, but not underlying insurance.  Transport’s limit of liability was the UNL in excess of Vulcan’s retained limit which was the greater of “an amount equal to the limits of liability of underlying insurance listed in Schedule A, plus the applicable limits of any other underlying insurance collectible by the insured (clause a), or $100,000 because of property damage not covered by underlying insurance listed in Schedule A (clause b).  The term “underlying insurance” was not defined.

The trial court held the policy provided both excess and umbrella coverage, but that for purposes of the duty to defend, Transport’s duties were limited to those of an excess insurer.  The trial court concluded that a duty to defend could arise under the terms of the policy only upon exhaustion of all underlying insurance (policies directly underlying Transport’s policies and any other underlying policies in effect during the period of loss) and upon a showing that the claims were actually covered.  On appeal, the decision was reversed.

Judicial Holding and Analysis

The appellate court confirmed the Transport policy provided both excess and umbrella coverage.  The umbrella coverage was primary coverage, and the existence of the duty to defend with respect to the umbrella coverage did not depend on the exhaustion of any underlying insurance.  The term “underlying insurance” as used in clause 1 was ambiguous and therefore had to be interpreted in Vulcan’s favor to refer to only the scheduled underlying policies rather than all of the collectible primary insurance available to Vulcan.  Vulcan need not have shown the claims were actually covered to establish the duty to defend with respect to the primary umbrella coverage, but needed only to show a potential for coverage.  The retained limit provision in a policy providing primary coverage relieves the insurer of the duty to provide an immediate, “first dollar” defense only if the policy expressly so provides.  Vulcan need not have incurred a liability in excess of the retained limit before Transport’s duty to defend could arise.

On appeal, Vulcan argued, as respects clause 1, that 1) the duty to defend relates to the umbrella coverage and extends to suits potentially covered, so that Vulcan need not have shown actual coverage to trigger the duty to defend; and 2) the term “underlying insurance” includes only the underlying policies listed in Schedule A, rather than all primary policies in effect during the period of the continuous loss.

The court found that clause a provided excess insurance and clause b provided primary umbrella coverage.  Clause 1 established a duty to defend in connection with the umbrella coverage.  Because the umbrella coverage was primary, the ordinary rules regarding a primary insurer’s duty to defend applied.  As such, Transport had a duty to defend with respect to umbrella coverage under clause 1 if any of the claims were potentially covered by the Transport policy and not covered by the underlying policies listed in Schedule A.

Clause a of the retained limit provision referred specifically to the underlying insurance listed in schedule A, plus the applicable limits of any other underlying insurance.  Clause b limited underlying insurance to the policies listed on Schedule A.  In the court’s mind, this raised the issue as to whether the reference to underlying insurance in clause 1 referenced only the policies listed in Schedule A, or all underlying insurance.

Clause b established an indemnity obligation relating to the umbrella coverage, while clause 1 established a defense obligation regarding that coverage.  The indemnity obligation extended to the underlying insurance listed in Schedule A.  It was reasonable for Vulcan to conclude that the claims for which clause 1 provided a defense obligation were the same claims for which clause b provided an indemnity obligation.  Vulcan reasonably expected Transport to provide a defense for all claims potentially covered by the umbrella provision.

The court held the term “underlying insurance”, as used in clause 1, was ambiguous because it reasonably could have been interpreted to mean either the insurance listed in Schedule A or all underlying insurance.  Resolving the ambiguity in favor of Vulcan (as required), the court concluded the term “underlying insurance”, as used in clause 1, encompassed only the policies listed in Schedule A.  Thus, if the scheduled underlying policies did not provide coverage, and there was a potential for coverage under the Transport policy, Transport had a duty to defend Vulcan, regardless of the availability of other underlying primary coverage.

The court rejected Transport’s argument there is a general rule that an insurer has no duty to defend until the insured has become legally obligated to pay an amount in excess of the SIR.  The impact of an SIR or retained limit on the duty to defend depends on the particular policy language.  The general rule, that an excess carrier has no duty to defend unless the underlying insurance is exhausted, should not apply to insurers who provide primary coverage with an SIR absent clear policy language so providing.  To require the exhaustion of an SIR before an insurer will have a duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.  Any limitation on the insurer’s defense obligation must be conspicuous, plain and clear.  Clause 1 expressly stated that Transport had a duty to defend claims that were not within the coverage of the underlying insurance, but were within the coverage of the Transport policy.  The duty to indemnify with respect to the umbrella coverage was limited to amounts in excess of the $100,000 retained limit, but the policy did not provide that the duty to defend such claims was limited by the retained limit in any manner.  Absent an express limitation on the duty to defend, the court concluded the duty to defend was not so limited.

Comments and Implications

In Community Redevelopment v. Aetna (1996) 50 Cal. App. 4th 329, the court held in favor of an excess insurer on the ground it had no duty to defend until all of the primary insurance had been exhausted. The excess policy unambiguously stated that it was in excess of “any other underlying insurance.” This language included all available primary insurance, not just specifically scheduled underlying policies. Because not all primary insurance policies had been exhausted, the excess insurer’s duty to defend was never triggered.

The different result in Vulcan can be explained by the fact the Transport policy provided umbrella, as well as excess, coverage, and the court was not satisfied that the policy clearly enunciated the insurer’s duties as to the each of the coverages.

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