An Additional Insured’s Reasonable Expectations may be Different from the Named Insured’s and Must be Considered to Determine whether the Additional Insured is Entitled to Defense from the Insurer of a Commercial Excess & Umbrella Liability Policy

Jun 04 2014

Transport Insurance Company v. Superior Court (2014) 222 Cal.App.4th 1216.

By: Richard H. Glucksman, Jon A. Turigliatto, and Kacey R. Riccomini
June 4, 2014

The Second District Court of Appeal’s recent decision, Transport Insurance Company v. Superior Court (2014) 222 Cal.App.4th 1216, immediately affects builders and contractors (collectively “builders”) who are often named as additional insureds (AIs) to contractors’ general liability policies. The decision is an important tool for builders’ counsel because the builder’s reasonable expectations can alter the interpretation of ambiguous terms in policies issued to subcontractors. Essentially, the builder’s intent is relevant to the interpretation of policy terms because the subcontractor’s intent in requesting additional coverage depends on the agreement it made with the builder. The salient aspects of the facts, the Appellate Court’s reasoning, and practical considerations are discussed below.

Transport Insurance Company (Transport) issued a commercial excess and umbrella liability policy (Policy) to Vulcan Materials Company (Vulcan), naming R.R. Street & Co., Inc. (Street) as an AI for its distribution of a solvent. The Policy provided that Transport would indemnify and defend the insured for loss caused by property damage if (1) it was not covered by “underlying insurance” but was within the terms of coverage of the Policy, or (2) if the limits of liability of the “underlying insurance” were exhausted during the Policy period due to property damage. The Policy included a Schedule of Underlying Insurance (Schedule) that listed policies issued to Vulcan. Thereafter, Vulcan and Street were named as defendants in several environmental contamination actions (Underlying Actions).

Transport brought a declaratory relief action against Vulcan regarding Transport’s duty to defend. (Legacy Vulcan Corp. v. Superior Court (Legacy Vulcan) (2010) 185 Cal.App.4th 677). The trial court found the term “underlying insurance” ambiguous as it was not expressly defined to include only the policies on the Schedule and could be interpreted to include all primary policies in effect. Vulcan challenged the trial court’s decision by petition for writ of mandate, contending “underlying insurance” only included policies listed on the Schedule. The Court of Appeal found “underlying insurance” ambiguous because it was an expressly qualified term under other Policy provisions but not in the umbrella coverage provision and, thus, it was a generic term that was not limited to policies listed in the Schedule or inclusive of all primary insurance.

Transport brought a similar action against Street and argued that it did not have a duty to defend Street as an AI in the Underlying Actions. Street moved for summary adjudication, arguing that Transport was collaterally estopped by the Legacy Vulcan decision from claiming “underlying insurance” referred to anything other than policies in the Schedule. Street argued that claims in the Underlying Actions were potentially covered by the Policy because Street was not an insured under policies listed in the Schedule. Thus, Street contended that the Policy provided primary coverage and required Transport to provide a defense to Street in the Underlying Actions. The trial court granted summary adjudication, finding that Transport was collaterally estopped by theLegacy Vulcan decision from arguing that the term “underlying insurance” referred to insurance other than the policies listed on Schedule, and denied Transport’s request to continue the hearing to permit additional discovery regarding the term “underlying insurance.”

Transport petitioned for a writ of mandate, which the Court of Appeal granted, vacating summary adjudication and directing the trial court to deny the motion. The Court of Appeal held that the trial court was not bound by collateral estoppel to rely on Vulcan’s objectively reasonable expectations as found in Legacy Vulcan. The Court held further that the reasonable expectations of the AI may be different from those of the named insured for purposes of determining whether an AI to an excess and umbrella general liability insurance policy is entitled to a defense by the insurer. The Court reasoned that although a named AI is not a party to the insurance contract, its intent is relevant to the contract’s construction because the named insured’s intent in requesting the added coverage depends on the named AI’s agreement with the named insured. The Court noted that Street arguably would not expect the Policy to move into first position ahead of Street’s own policies. Because Street’s motion concerned Transport’s duty to defend Street as an AI under the Policy, the trial court should have considered Street’s objectively reasonable expectations of coverage rather than relying on Vulcan’s. Since the relevant inquiry was Street’s and not Vulcan’s objectively reasonable expectations, and Vulcan’s but not Street’s expectations were litigated in Legacy Vulcan, the trial court was not bound by collateral estoppel to rely on Vulcan’s expectations.

In light of this decision, an AI’s counsel should examine policy terms for ambiguities and consider whether the AI could have objectively reasonable expectations of coverage different from the named insured’s. For example, where an AI’s tender of defense is denied by the insurer, counsel should determine whether there is any ambiguity in the provision(s) cited by the insurer as a basis for the denial, even if the named insured has been or would be denied coverage on the same basis. If there are ambiguities and the AI’s objectively reasonable expectations would require a defense, counsel may argue that the insurer has an immediate duty to defend the AI.