Houdini managed an escape from a straight jacket while suspended 40 feet in the air. But that trick turned out to be easier than a primary insurer’s recent attempt to escape its duty to defend in California. In Underwriters of Interest Subscribing to Policy No. A15274001 v. ProBuilders Specialty Ins. Co., Case No. D066615, Ct. App. Dist. 4, Oct. 23, 2015 (Underwriters), the California Court of Appeal ruled that an “other insurance” clause in a CGL policy that purported to eliminate an insurer’s duty to defend if another insurer picked up the defense was unenforceable.
Underwriters filed an equitable contribution action against a co-insurer, ProBuilders, claiming ProBuilders had shirked its duty to pay a portion of defense costs that Underwriters had agreed to pay to defend a mutual policyholder in a construction defect case. ProBuilders claimed that it had no duty to defend principally based on the language of an “other insurance” clause in its policies. That clause stated that ProBuilders had the right and duty to defend the insured against any suit seeking damages to which the insurance applied, provided that no other insurance affording a defense against such a suit was available to the insured. ProBuilders argued that since Underwriters had agreed to defend the policyholder, there was other defense insurance available to the policyholder, thus excusing ProBuilders from its obligation to provide a defense. The trial court agreed.
Not so fast, the Court of Appeal found. It observed that the “other insurance” clause in the Probuilders’ policies was an “escape” clause—so named because if enforced, it permitted a primary insurer to escape the defense obligation it otherwise agreed to assume. Such clauses, which one court has described as permitting an insurer to escape “a seemingly ironclad guarantee of coverage” in the presence of other insurance, Commerce & Indus. Ins. Co. v. Chubb Custom Ins. Co., 75 Cal. App. 4th 739, 744-745 (1999), are disfavored under California law and are not enforced as written. As noted by the court, the “modern trend” in California is to require all primary insurers on the risk to contribute equitably to the policyholder’s defense on a pro rata basis, regardless of the literal language of the “other insurance” clauses in each of the policies. Notably, the Court of Appeal decision was influenced by two facts: (1) ProBuilders had issued a primary-level insurance policy, and (2) the ProBuilders policies might be the only policies that provided the policyholder a defense as to a portion of its claim (based on the policy period and geographic reach of the ProBuilders’ policies). Based on these facts and the “modern trend” of law, the appellate court found that the escape clause in the ProBuilders policies would not be enforced to bar Underwriters from seeking an equitable contribution of defense costs it had incurred.
The Underwriters decision forcefully reinforces important existing California law that an “other insurance” clause—regardless of its language—cannot relieve a primary-level insurer of its independent duty to defend its policyholder. The underpinning for this rule is sensible: where two insurers each owe a duty to defend and each has a conflicting “other insurance” clause in its policies, a policyholder should not be left without a defense (or in doubt about its defense) while insurers point fingers at one another. An “other insurance” clause is an appropriate equitable mechanism to apportion a covered loss among two or more insurers that share the same risk at the same level, but never at the expense of the policyholder. Underwriters confirms that even among insurers, an insurer cannot avoid an equitable contribution claim on the basis of an “other insurance” clause that purports to foist the entire defense obligation onto the other, at least where primary insurance is at issue and there is a possibility that the policyholder could be left without a defense for some portion of its claim.