(Article from Insurance Law Alert, April 2016)
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A California appellate court ruled that two successive insurers that shared indemnity costs on a pro rata basis must also share defense costs, and that the defending insurer was therefore entitled to equitable contribution from the non-defending insurer. Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co., 2016 WL 1436362 (Cal. Ct. App. Apr. 11, 2016).
Underwriters and Arch insured Framecon under successive primary policies. When Framecon was sued in construction defect litigation, it sought a defense from both insurers. Underwriters agreed to defend under a reservation of rights, but Arch refused to defend, citing an “other insurance” provision that stated that if another insurer was providing a defense, Arch’s policy would be “excess” with regard to defense costs, even if coverage were found to apply. The underlying claims against Framecon were ultimately settled. Arch and Underwriters provided indemnification on a pro rata, “time on the risk” basis. Thereafter, Underwriters sought equitable contribution from Arch for the defense costs incurred in the underlying litigation. Both parties moved for summary judgment. A trial court ruled in favor of Arch, concluding that the “other insurance” clause was valid and enforceable with respect to Arch’s defense obligations. The appellate court reversed.
The appellate court ruled that Underwriters was entitled to equitable contribution of defense costs from Arch because both insurers were “on the risk” during the operative time frame. The court held that Arch’s “other insurance” provision was an unenforceable “escape clause” that violated public policy. The court explained that:
Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense . . . . [E]nforcing Arch’s clause would result in imposing on Underwriters the burden of shouldering a portion of defense costs attributable to claims arising from a time when Arch was the only insurer.
In addition, the court ruled that Arch could not circumvent this result by placing the “other insurance” provision in the “coverage” section of the policy as well as the “limitations” section, noting that location is not determinative in this context.