By: Ravi R. Mehta and Katherine J. Flores
May 10, 2016
In general, insurers are permitted to limit the risks they assume through provisions within the policy terms. For example, many policies attempt to preclude coverage in instances where another insurance policy providing for defense is available to the insured. California courts generally disfavor these types of “other insurance” or “escape” clauses based on public policy concerns. In two recent decisions, the California Court of Appeal found such clauses unenforceable.
In Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance, Co. (2015) 241 Cal.App.4th 721, Plaintiff, Underwriters of Interest Subscribing to Policy Number A15274001 (“Underwriters”), insured Pacific Trades Construction & Development, Inc. (“Pacific Trades”). Additionally, ProBuilders Specialty Insurance Company (“ProBuilders”) insured Pacific Trades.
Pacific Trades was a defendant in the underlying construction defect lawsuit and Underwriters provided it a defense, while ProBuilders denied a defense obligation, claiming that an “other insurance” clause relieved its duty to defend. The underlying suit settled for approximately $1,000,000 and ProBuilders contributed $270,000 towards the settlement. After the underlying suit was settled and dismissed, Underwriters initiated an action against ProBuilders for equitable contribution for defense costs paid by Underwriters.
In evaluating Underwriters’ claim for equitable contribution, the Fourth District Court of Appeal cited the modern trend of requiring equitable contributions from all primary insurers on a pro rata basis even if the policy includes an escape clause.1 Therefore, despite the fact that insurers are generally given wide latitude to draft a policy as they see fit, the court held that the escape clause was unenforceable. The court explained on public policy grounds that an insurer cannot escape liability for an obligation it was paid to defend simply because another policy may also respond to a loss.
Under similar reasoning, in Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Company (2016) Cal.Ct.App., April 11, 2016, Case No. C072500, the Third District Court of Appeal refused to enforce an “other insurance” clause in a policy between Arch Specialty Insurance Company (“Arch”) and Framecon, the defendant in the underlying suit. Framecon was insured by Certain Underwriters at Lloyds, London (“Lloyds”) from October 2000 through October 2002 and by Arch from October 2002 through October 2003. Arch’s policy with Framecon included an escape clause in both the “coverage” and “limitation” section of the policy documents.
In the underlying litigation, homeowners alleged construction defects against Framecon. Lloyds and Arch agreed to indemnify Framecon for damages based on their respective “time at risk.” However, Arch refused to participate in the defense of Framecon. The court determined that the location of the clause in both the coverage and limitation sections of the policy document was irrelevant, especially since the clauses were not identical. Citing to Underwriters v. ProBuilders, the court determined that the clause was unenforceable. Again expressing a public policy concern, the court refused to enforce the escape clause and concluded that giving effect to an escape clause would allow Arch to avoid a defense obligation attributable to a period during which it was the only insurer (2002-2003).
Notably, in both opinions, the justices emphasized the fact that the “escape clause” at issue was included in a primary general liability policy. Both cases suggest that different outcomes may be possible depending on the type of policy at issue.
Regardless, insurers should be aware and understand the enforceability of these clauses going forward. Furthermore, insurers should reconsider future tender denials premised on an escape clause as California courts appear reluctant to enforce these clauses.
1 “ProBuilders’s policy contained an ‘other insurance’ clause that stated ProBuilders had ‘the right and duty to defend [Pacific Trades] against any suit seeking … damages [to which insurance applied] provided that no other insurance affording a defense against such a suit is available to you.’” Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance, Co. (2015) 241 Cal.App.4th 721, 724.