Some of you may have encountered situations where your clients have more than one insurance policy covering the same risk. This is especially true in the commercial context where businesses not only purchase their own insurance policies, but also request to be named as additional insureds on insurance policies issued to tenants or business partners. At first blush, you might not think this could create a problem because isn’t having two insurance policies better than having just one? Well. . .we all know that common sense doesn’t always apply in the insurance industry (even though it should). The problem in this context is how insurers try to enforce a clause found in many insurance policies called the “other insurance” clause or provision.
Most insurance policies contain “other insurance” clauses that attempt to limit the insurer’s liability to the extent that other insurance (i.e., an insurance policy issued by a different insurer) covers the same risk. Other Insurance clauses are designed to try to control how each insurer that has issued a policy covering the same risk should contribute or share a covered loss.1 Historically, “other insurance” clauses were designed to prevent multiple recoveries when more than one policy provided coverage for a given loss.2 However, insurers today often try to use Other Insurance clauses to convert their policy from primary coverage to excess coverage to avoid having to provide the benefits that policyholders pay for. Insurers try to point the finger at a different insurer and argue that they shouldn’t be forced to cover an insured’s loss because “other insurance” covers the risk.
Importantly, Other Insurance clauses should have no bearing on an insured’s rights and are not intended to prejudice insureds. Instead, the provisions are intended to be used by and between insurers to apportion or prorate the loss between insurers.3
A recent California Court of Appeal decision4 highlighted this issue by frowning upon a primary commercial general liability (“CGL”) insurer’s attempt to try use its “other insurance” provision to avoid paying for the defense of its insured’s construction defect litigation and finding that the insurer’s conduct violated public policy.
The facts underlying the case can be summarized as follows: Certain Underwriters at Lloyds, London (“Lloyds”), and Arch Specialty Insurance Company (“Arch”) were primary insurers of Framecon, Inc., but at different times. Lloyds issued CGL policies to Framecon from October 28, 2000 to October 28, 2002. Thereafter, Arch issued a CGL policy to Framecon effective October 28, 2002 to October 28, 2003. Between 1999 and April 2002, Framecon entered into subcontracts to do carpentry and framing work on homes being developed by KB Home Sacramento, Inc., and KB Home North Bay, Inc. (together, “KB Home”). KB Home was named as an additional insured under the insurance policies issued to Framecon by both insurers.
Subsequently, owners of some homes developed by KB Home and worked on by Framecon sued KB Home for construction defects and KB Home filed cross-complaints against Framecon for indemnity. Both Framecon and KB Home tendered claims to Lloyds and Arch. Although Lloyds agreed to defend both KB Home and Framecon, Arch refused to provide, or otherwise contribute money to, the defense of KB Homes and Framecon on the grounds that its policy was excess over Lloyds’ policy and that its insuring clause and Other Insurance provision didn’t obligate it to defend the insureds because other insurance was available. After providing a defense to the insureds, Lloyds sued Arch for declaratory relief and equitable contribution for the defense costs incurred to defend the insureds.
The trial court ruled that Arch had no duty to defend based on the language in its policy. The Court of Appeal however reversed the trial court’s decision, and found that Arch had a duty to defend despite the “other insurance” provisions. The court reasoned that Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense (“We have the … duty to defend you … provided that no other insurance” is available.) It found that enforcing Arch’s clause would result in imposing on Lloyds the burden of shouldering a portion of defense costs attributable to claims arising from a time when Arch was the only insurer. The “other insurance” provision, the appellate court held, “was an escape clause that must be disregarded.” The appellate court concluded, that Lloyds was entitled to receive equitable contribution from Arch.
While the insureds were lucky in this case because Lloyds stepped up to the plate and agreed to defend them, insureds do sometimes get caught in the middle when insurers play chicken with their respective “other insurance” clauses. When insurers fight over which policy should pay, and in what order, there is always a risk that the insured’s rights can be all but forgotten by the insurers.
When you or your clients face a situation where there might be more than one insurer or insurance policy on a risk, it becomes very important to understand “other insurance” clauses. The most important thing to remember is that “other insurance” provision are tools insurers can use to try allocate liability and expense by and between themselves. However, these provisions do not impact or negate an insured’s right to policy benefits, and in no event should an insurer’s potential rights against another insurer under a “other insurance” provision be allowed to be put before the insured’s rights.
1 See Fire Ins. Exch. v. American States Ins. Co.(1995) 39 Cal.App.4th 653, 659, 46 CR2d 135, 138, fn. 1.
2 Edmondson Property Mgmt. v. Kwock (2007) 156 CA4th 197, 203.
3 Dart Indus., Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, 1080.
4 Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co., No. C072500 (Cal. Ct.App. April 11, 2016).