One Policy Term, May Have Two Meanings

A California Court of Appeal held in Transport Ins. Co. v. Superior Ct. (R.R. Street & Co.) that a named insured’s reasonable expectations of coverage can be different from those of an additional insured’s. This ruling leaves open the possibility that the same policy language can be interpreted differently in the same lawsuit, depending upon whether the named insured or an additional insured is seeking coverage.

Transport issued an excess and umbrella commercial general liability policy to Legacy Vulcan Corp. R.R. Street & Co. was named as an additional insured by endorsement. These two companies were named as defendants in lawsuits alleging that they distributed and sold dry cleaning products that caused environmental contamination. 

A dispute arose between Transport and Legacy about the duty to defend. The dispute turned on whether the term “underlying insurance” included only the specifically scheduled policies identified in the Transport or all potentially applicable primary policies. 

In a previously published opinion, the Court of Appeal held that the term “underlying insurance” was ambiguous in the context of the Transport policy and should be construed in accordance with Legacy’s objectively reasonable expectations.

Continue Reading...

California Court of Appeal Again Finds No Stacking of Liability Policy Limits

Nearly two years ago, the California Court of Appeal for the Second Appellate District issued a decision that upheld the concept of horizontal exhaustion of primary liability policy limits before triggering the obligation of an excess insurer, but also concluded that, in the context of that case, there was no stacking of liability insurance policies. The case was Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, and we reported on it in this blog.

The California Supreme Court accepted review of Kaiser Cement, but then returned the case to the Court of Appeal after the Supreme Court issued its decision in State of California v. Continental Insurance Co., 55 Cal. 4th 186 (2012), a decision we also reported on in a prior blog

In Continental, the Supreme Court adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. With respect to the stacking issue, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” The Court, however, advised that insurers may be able to enforce “anti-stacking” provisions in their policies to avoid such a result.  

In the unanimous opinion of the Court of Appeal panel in Kaiser Cement, the primary policy considered in that case contained such language that precluding stacking of policy limits. Other than its addition of a brief section on the Continental decision (and some other minor revisions), the second opinion in Kaiser Cement, issued April 8, 2013, is virtually identical to the prior opinion issued June 3, 2011.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser, and in an even earlier decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence.

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years, and ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Kaiser and Truck both argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The 2013 Kaiser Cement decision, just like the one in 2011, issued three holdings:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy.

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence. Specifically, the court cited the language in the insuring agreement stating that,

the Company’s liability as respects any occurrence . . . shall not exceed the per occurrence limit designated in the Declarations. (Italics added by court.) 

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

It was in this part of the Court’s analysis that it considered and analyzed the Continental decision, explaining that its “conclusion that Kaiser may not ‘stack’ Truck’s annual liability limits is consistent with the Supreme Court’s analysis in Continental” because Truck’s policy language was the type of provision envisioned by the Continental decision that precluded the stacking of policy limits for any one occurrence.  

Finally, as with the prior decision in Kaiser Cement, the Court of Appeal found that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

As of the moment, the Kaiser Cement decision remains citable law, though its status could change if review is sought from the Supreme Court and such review is accepted.

Barring such action, the case is helpful to excess insures as it affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context.

For primary insurers, the case affords the opportunity to avoid stacking of policy limits in those situations in which specific policy language precludes triggering more than one policy limit per occurrence. As we noted in our prior blog on the Kaiser Cement case, a careful review of the specific policy language found in each primary and excess policy at issue is required.

An Employee's Umbrella Insurance Policy Must Be Exhausted Before Seeking Contribution From Policies Covering The Employer

When an employer is vicariously liable to a third party for its employee’s negligence, and both the employer and employee have primary and umbrella policies covering liability to the third party, the employee’s primary and umbrella policies must first be exhausted before the employer’s policies are implicated.

The California Court of Appeal, Fourth Appellate District in GuideOne Mutual Insurance Company v. Utica National Insurance Group recently held that priority of liability among primary and umbrella insurers of an employer and employee “is based upon principles of vicarious liability, not more general rules government primary and excess policies.” 

GuideOne was an equitable contribution action involving the following scenario: Gary West was a pastor who worked for Crosswinds Community Church (“Crosswinds”) and Christian Evangelical Assemblies (“CEA”). During the course of his work, West was driving and struck a motorcyclist, Robert Jester, who sustained severe injuries. Jester filed suit against West, Crosswinds and CEA for personal injuries, and the case settled for $4.5 million. The liability of Crosswinds and CEA was entirely vicarious to the liability of West.

GuideOne issued primary and umbrella policies to Crosswinds which covered negligent acts by an employee. Utica issued primary and umbrella policies to CEA that covered only the employer. After the underlying case settled, GuideOne filed an equitable contribution action against Utica seeking a pro rata share of the settlement amount

The Court of Appeals ruled that the trial court erred in awarding equitable contribution to GuideOne on a pro rata basis. In support of its decision, the Court held that an employer is only vicariously liable for the actions of the tortfeasor employee, and therefore all of the insurance policies covering the employee, primary and excess, must be exhausted before the umbrella policy of an insurer that covered only the employer must make a contribution. 

Standard CGL Policy "Personal Injury" Coverage Excludes Defense for Housing Discrimination, But Broader Umbrella Policy Provides Duty to Defend

By Samuel Sorich and Larry Golub

In Federal Insurance Company v. Steadfast Insurance Company, issued September 24, the California Court of Appeal, Second Appellate District, held that two primary liability policies that provided “personal injury” coverage for wrongful eviction, wrongful entry and invasion of the right of private occupancy did not impose a duty to defend a complaint alleging discriminatory in housing. At the same time, an umbrella policy that specifically covered discrimination did obligate that insurer to defend the insured.

Sterling managed rental properties. The U.S. Department of Justice filed a complaint against Sterling alleging discrimination based on race, national origin and familial status in violation of the Fair Housing Act. The complaint alleged, among other things, that Sterling perpetuated an environment that was hostile to non-Korean tenants, provided inferior treatment to non-Korean tenants, and refused to rent and discriminated against African Americans. The Department of Justice asserted that Sterling’s discriminatory practices included entering a tenant’s apartment without notice or knocking.

Sterling had two primary liability policies, one for two years with Steadfast Insurance Company followed by three years of coverage with Liberty Surplus Insurance Corporation, and excess-umbrella policies for several years with Federal Insurance Company. The Steadfast and Liberty policies were standard primary policies and provided coverage for “personal injury” resulting from wrongful eviction, wrongful entry or invasion of the right of private occupancy. The umbrella portion of the Federal policies’ “personal injury” coverage not only defined such coverage to include wrongful eviction, wrongful entry and invasion of the right of private occupancy but also covered discrimination based on race or national origin.

Sterling tendered its defense of the Fair Housing Act complaint to the three insurers. When Steadfast and Liberty refused to defend the action, Federal defended under a reservation of rights and then brought a coverage action against the two primary insurers. Steadfast also brought a cross-action against Federal.  

Federal contended that Steadfast and Liberty, as primary insurers, had a duty to defend; and because the insurers had a duty to defend, Federal’s duty to defend under its umbrella coverage did not attach. Federal based its position on the argument that Sterling’s creation of a hostile environment for the tenants amounted to a claim of constructive eviction, thus falling under the personal injury coverage for wrongful eviction, wrongful entry, and the invasion of the right of private occupancy in the Steadfast and Liberty policies. 

The trial court, on cross-motions for summary judgment, found that only Federal’s umbrella policy provided coverage, and not the two primary policies. An appeal followed..

The Court of Appeal affirmed the trial court’s decision, holding that even though the complaint for discrimination alleged acts that might involve wrongful evictions, wrongful entries, or invasions of the right of private occupancy, the essential nature of the complaint was a Fair Housing Act enforcement action.

The court concluded the complaint “cannot be construed as asserting common law theories of wrongful eviction, wrongful entry, or invasion of the right of private occupancy. Only the tenant can claim wrongful eviction, wrongful entry, or invasion of the right of private occupancy.”

The court ruled that neither Steadfast nor Liberty had a duty to defend the Fair Housing Act action, but Federal did have a duty to defend Sterling. The court’s opinion explained,

Because the Sterling action was based on discrimination and only the Federal policies, and not the Steadfast or Liberty policies, provided coverage for discrimination claims, the umbrella coverage in the Federal policies ‘dropped down’ to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the Sterling action.

California Court Says Insureds Can Stack Policies For Max Coverage

Partner Larry Golub was quoted in a Law360 (subscription required) article published on Aug. 9, 2012, about a key California Supreme Court ruling that insurance policyholders with long-term property damage and personal injury claims could force carriers to cover damage outside their policy periods and stack coverage to maximize recovery.

The case, State of California v. Continental Insurance, stemmed from battle between the state of California and six excess insurance over an environmental cleanup estimated to cost as much as $700 million. The court found in the high-profile case that, “all sums” language in California's excess insurance policies means that carriers must cover all damage up to their policy limits and that stacking is allowed because the policies lacked language specifically prohibiting the practice.

Rather than stacking, the insurance companies involved in the case preferred a formula whereby carriers would be assigned a specific amount of damages to cover.

"There were other ways to allocate the loss other than saying basically all the policies, all the time, especially in the case where you had a sophisticated insured like the state of California that chose for a good portion of the time not to insure itself," Golub, who represents insurance companies but was not involved in the case, told the publication. He also said that he thought the ruling might prompt insurers to start including anti-stacking provisions in their policies.

Click here to read Mr. Golub's full analysis of the decision.

State Supreme Court Rules Against Insurers in Stringfellow Acid Pits Case

Larry Golub was quoted in an Aug. 9, 2012, article by The Recorder (subscription required) on the state Supreme Court ruling in State of California v. Continental Insurance, involving the cleanup of the Stringfellow Acid Pits, a notorious hazardous waste site in Riverside County. The court ruled that the insurance company defendants must pay “all sums” due on the insurance policies. It also allowed for the “stacking” of policies.

While considered a blow to insurance companies, the court did say that insurers could include anti-stacking clauses in future policies and rules to limit indemnity.

"Assuming an insurance company puts that language in there, and it's clear and unambiguous ... that may be a way to solve the problem for insurance companies," Golub said. "But a lot of these cases go back a long time."

Click here to read Mr. Golub's full analysis of the decision.

California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases

In a unanimous and long-waited decision, the California Supreme Court today (August 9) adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. The decision is The State of California v. Continental Insurance Co., as authored by Justice Ming Chin.

The specific facts of the case addressed the State of California’s ability to obtain insurance coverage for environmental remediation at the Stringfellow Acid Pits waste site. The State operated the waste disposal site from 1956 to 1972, and the various insurers that were parties to the case provided the State with excess commercial liability insurance coverage from 1964 to 1976. Property damage occurred over the course of many years, including those in which the insurers provided coverage.

The Court addressed two issues: (1) when continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer’s policy limits? and (2) if so, is the “stacking” of limits permitted?  

The Court of Appeal had answered both questions in the affirmative. An earlier Court of Appeal decision, FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), ruled that the State could not stack the policy limits of successive insurance policies, but rather had to pick a single policy year and recover the full amounts of the limits from that period. 

In deciding these issues, the Supreme Court relied on an interpretation of the policy language that was found in the insurers' commercial general liabilility policies, as well as rules announced in two of its past decisions, to find first that each insurer who provided coverage to the insured when some property damage occurred would be “on the loss” and its indemnity obligations triggered up to the extent of its policy limits:

We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was “on the loss.” The coverage extends to the entirety of the ensuing damage or injury . . . and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.

The Court explained that it was not writing on a blank slate on this issue and observed that its decision was in line with a “growing number of states [that] have similarly adopted this interpretation of the all sums language.” It rejected a contrary line of cases from other jurisdictions that have adopted a pro rata allocation of the damage.

In terms of allocating that continuous loss among all similarly implicated insurers, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” In so doing, it expressly disapproved of the FMC Corp. decision. The Court did note, however, that insurers may be able to add “anti-stacking” provisions in their policies to avoid such a result, and indeed such provisions have been used for a number of years. 

The Court also accepted for review, but has held pending the decision in Continental, another Court of Appeal case in which the issue of “stacking” was not permitted, Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of PennsylvaniaWe commented on that case shortly after it was decided in June 2011. Presumably, now that the Continental decision has been issued, the Kaiser Cement case will be returned to the lower court to issue a decision in line with Continental.

Horizontal Exhaustion Analyzed by California Court in Continuous Damage Case

By Larry M. Golub and Travis Wall

On June 3, 2011, the California Court of Appeal for the Second Appellate District issued a decision in Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania that should be of interest to insureds, primary insurers and excess insurers as to the issues of horizontal exhaustion and stacking of liability insurance policies.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser.

In a previous decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. 

Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years. ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Both Kaiser and Truck argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The Kaiser court issued three holdings in its decision:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy. It advised that this ruling was consistent with prior California law addressing the issue of horizontal exhaustion. 

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence.

Specifically, the court cited the language in the insuring agreement stating that,

the Company's liability as respects to one occurrence . . . shall not exceed the per occurrence limit designated in the Declarations." (Italics added.)  

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

The final holding by the court was that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

For excess insurers, this case affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context. 

The anti-stacking ruling also should have a fairly limited scope -- it would only apply to situations in which there is a single insurer providing coverage under all triggered primary policies. 

And, above all, the case requires a careful review of the specific policy language found in each primary and excess policy at issue.

California Court Determines No Coverage Based on Unambiguous Motor Vehicle Exclusion

The California Court of Appeal recently held that an insurer properly denied coverage and had no duty to defend its insured where the policy unambiguously excluded coverage for claims arising from the operation of a motor vehicle by an insured. 

In Sprinkles v. Associated Indemnity Corporation (published September 1, 2010), Plaintiffs were the heirs of a motorcyclist who died in an accident caused by an employee, Juan Bibinz (“Bibinz”), of Sinco Co., Inc. (“Sinco”). Plaintiffs sued Sinco and Bibinz (the “Sinco action”) alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record, who negligently drove his vehicle causing the death of Plaintiffs’ heir. Plaintiffs also alleged that Bibinz was an employee acting within the scope of his authority.

At the time of the accident, Sinco had a commercial automobile policy, an excess and umbrella policy, and a commercial general liability (“CGL”) policy, the latter issued by Fireman’s Fund Insurance Company.  While the auto policy and excess policy paid their limits toward settlement of the claim, Fireman’s Fund denied coverage and a duty to defend under the CGL policy. 

After an arbitrator awarded Plaintiffs more than $27 million in the underlying action, Plaintiffs took an assignment from Sinco and brought claims against Fireman’s Fund for bad faith, wrongful refusal to settle, wrongful failure to defend, and breach of contract, as well as a direct judgment creditor claim under Insurance Code section 11580

On demurrer, Fireman’s Fund contended that no coverage existed for Sinco because Bibinz was an insured under the CGL policy, and therefore the exclusion in the policy for claims arising out of the use of an automobile applied. 

Plaintiffs alleged that Bibinz was not an insured under the policy because, at the time of the accident, Bibinz was not performing duties related to the conduct of Sinco’s business and there was a potential for a finding that Bibinz was not acting in the scope of his employment with Sinco. 

The trial court sustained the demurrer without leave to amend, holding that the CGL policy provided no coverage for the automobile accident that caused Plaintiffs’ damages. 

The appellate court held that as an insured under the policy, Bibinz’s acts were not covered due to an exclusion for bodily injury or property damage “arising out of the . . . use . . . of any . . . acts by any insured.” The court deemed Bibnz’s use of the vehicle as “related to” the conduct of business, in that he was required to use his vehicle to reach various locations for maintenance work. 

The court accordingly upheld the dismissal of all claims against the insurer.

Imprecise Policy Language Results in Umbrella Policy Becoming Primary for Duty to Defend Purposes

On June 11, 2010, the California Court of Appeal for the Second Appellate District reissued its decision (following rehearing) in Legacy Vulcan v. Superior Court (Transport Insurance Company), and held that an umbrella insurer became a “primary umbrella” insurer and was obligated to defend its insured since no scheduled underlying insurance applied, and the $100,000 self-insured retention under the umbrella policy was applicable only to the insurer’s indemnity obligation. 

The decision, while providing a detailed analysis of the umbrella/excess policy issued by Transport, presents more of an isolated instance of an insurer not carefully limiting the scope of its defense obligation under a policy issued nearly 30 years ago, rather than an opinion providing any broad pronouncement that umbrella insurers are to provide a duty to defend from dollar one.

Vulcan was named in multiple lawsuits claiming environmental contamination and alleging damages occurring over a number of years, including when Transport’s Excess Catastrophe Liability Policy was in effect. Vulcan tendered the defense of the actions to several insurers, including Transport, but none of the insurers offered a defense. Vulcan paid for its own defense and settled the lawsuits. Transport filed a declaratory relief action against Vulcan to determine its rights and obligations under the policy.

The coverage action proceeded with the parties stipulating to resolve certain legal issues before trial, and many of the facts of the dispute (including the reasons why the underlying insurers did not provide a defense to Vulcan) did not make their way into the Court of Appeal’s decision. The trial court found that Transport had no duty to defend Vulcan until it established that the applicable underlying insurance had been exhausted and upon a showing that the claims were actually covered.  

In analyzing coverage under the Transport policy, the appellate court went into great detail examining the language used by Transport in its insuring agreements, limits of liability section, definitions, and conditions. The court held that the Transport policy provided both excess and umbrella coverage. With respect to the umbrella coverage portion, and based on the ambiguity of the policy’s use of the unqualified term “underlying insurance” in the insuring agreement, the court held that, under the facts of this case (where no primary or underlying insurer defended Vulcan), Transport’s umbrella coverage was primary umbrella defense coverage. 

Finding the umbrella coverage to be primary, the ordinary rules regarding a primary insurer’s duty to defend applied. As such, Transport was obligated to defend Vulcan regardless of the exhaustion of any underlying insurance and regardless of the provision for a $100,000 retained limit (which, in this case, was found to only apply to the duty to indemnify). Moreover, Vulcan did not need to establish that the claims were actually covered under the Transport policy to trigger the duty to defend, but merely show a potential for coverage. 

In its analysis, the court made clear that the result here was based on the policy language at issue. For example, the court observed that “the impact of a policy reference to a ‘self-insured retention’ or ‘retained limit’ on the duty to defend will depend on the language of a particular policy,” and it referenced cases where policy language expressly stated there was no duty to defend unless the retained limit was exhausted. 

This case therefore stands as another warning to insurers to be careful in drafting policy language, and this is especially true when it come to the duty to defend.