Citations
- 150 Cal. App. 4th 984
Full opinion text
Opinion
SILLS, P. J.
I. BACKGROUND
California’s rule of “horizontal exhaustion” in liability insurance law requires all primary insurance to be exhausted before an excess insurer must “drop down” to defend an insured, including in cases of continuing loss. (Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, 339 [57 Cal.Rptr.2d 755].) Unless there is excess insurance that describes underlying insurance and promises to cover a claim when that specific underlying insurance is exhausted (“vertical exhaustion”* ), the rule of horizontal exhaustion applies to cases of alleged continuing property damage—as often happens when the insured is sued for construction defects. (Id. at p. 340.)
Also, in Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th 645, our Supreme Court adopted a “continuous injury trigger” as the test for the defense obligation of traditional, occurrence-based primary, commercial liability insurance when the underlying claims involve continuous or deteriorating damage. The continuous injury trigger generally means (absent consideration of some defense other than trigger itself that would render no claim in the underlying suit even potentially covered) that all primary insurers over the time of the alleged continuous injury will be obligated to defend an underlying action claiming such continuous damage.
Justice Croskey prophesied in Community Redevelopment that the issue of horizontal versus vertical exhaustion would become “increasingly common” in light of the California Supreme Court’s adoption of the continuous injury trigger in Montrose II. (See Community Redevelopment Agency v. Aetna Casualty & Surety Co., supra, 50 Cal.App.4th at p. 340.) This case validates Justice Croskey’s prophecy, in that it presents us with two major problems inherent in. a rule of horizontal exhaustion interacting with a continuous injury trigger.
The first problem involves whether an excess insurer has a duty to “drop down” and defend in an underlying action alleging that the insured caused continuous property damage that existed at points in time prior to the inception of a policy of the only primary insurer that is defending the insured. On this point, the insured’s theory (the insured is the appellant here) is that since there is no way at all that the primary insurer would have any duty to indemnify the insured for any liability for property damage that occurred prior to the primary insurer’s policy inception, there was no “other insurance” available for that prior occurring property damage. Therefore the excess insurer had to drop down and defend because of the potential for liability for the increment of damage occurring before the one' defending primary’s policy period.
The solution to this problem is relatively easy. As we show below, under Buss v. Superior Court (1997) 16 Cal.4th 35 [65 Cal.Rptr.2d 366, 939 P.2d 766], the lone defending primary insurer had a duty to “defend entirely,” and so, from the point of view of the excess insurer, there was indeed “other insurance” available—that is, other insurance to undertake the task of defending the insured. Accordingly, the mere fact that portions of the continuous ■ damage could not possibly have been covered by the primary insurer makes no difference as far as the excess insurer’s duty to defend is concerned.
The other problem builds on the implications of whether there is “other insurance available” within the meaning of the excess insurer’s policy when the lone defending primary insurer’s policy contains a “self-insured retention” or SIR. In Justice Croskey’s own treatise on insurance law, he (or his co-authors) suggest that because SIR’s are not considered insurance, there would be no need to exhaust such an SIR before the policy of an excess insurer covering another policy period could be triggered. The question thus arises: Does the treatment of SIR’s as “not insurance” mean that, in a situation like the present case, there would be no “other insurance available” for the first x dollars (x representing the self-insured retention) spent on the underlying action, and therefore the excess insurer (whose own underlying primary insurer has already exhausted) would have a duty to defend to at least that extent?
We reject the idea for several reasons, the primary of which is it is perfect legal logic leading to absurdity—that is, it would be contrary to the reasonable expectations of all parties by obliterating the distinction between excess and primary insurance. An excess insurer could end up defending a claim before the primary insurer had an obligation to defend that claim! Reasonable insureds don’t expect to receive a defense from a typically much cheaper excess policy unless all the expensive primary insurance they bought has been exhausted. Moreover, such an idea ignores the substance of the lone defending primary insurer’s relationship with the insured. That relationship is to act as primary insurer, with a normal defense duty, not an excess insurer on top of other insurers.
In sum, under the facts of this case, the tail end, lone defending primary insurer cannot “share the misery” with the first-period excess insurer. (See State of California v. Pacific Indemnity Co. (1998) 63 Cal.App.4th 1535, 1545-1548 [75 Cal.Rptr.2d 69] [primary insurer on risk for one year out of 43 had to bear the entire costs of defense of underlying action because insured had no other insurance during any of the other 42 years].) Accordingly, the trial court’s judgment to that effect was correct, and is affirmed.
I. FACTS
There was an underlying continuous damage construction defect suit filed in June 2002 by two homeowners against the developer of their property. Specifically, the suit alleged that foundation vents were blocked with stucco, which stucco work was done by the insured, Padilla Construction Company, Inc., in 1995. (We shall refer to Padilla as “the insured” often in this opinion.) The insured was brought into the suit two months later by way of cross-complaint by the developer.
The insured had four successive primary liability policies from January 1995 until March 1, 2003:
—From the beginning of 1995 to end of 1996: Transcontinental Insurance.
—From the beginning of 1997 to end of 1997: Reliance Insurance.
—From the beginning of 1998 to March 1, 2001: Legion Indemnity.
—From March 1, 2001, to March 1, 2003: Steadfast Insurance.
Additionally, coincident with Transcontinental’s primary policy (Jan. 1995 through the end of 1997), the insured had two yearly commercial umbrella policies issued by Transportation Insurance Company. .
In tabular form, over the period of the continuing loss, the policies may be expressed this way: ..
We will refer to Transcontinental as the Stage 1 Primary Insurer, Transportation as the Stage 1 Umbrella Insurer, and Steadfast (the “lone defending primary insurer” of the introduction) as the Stage 4 Primary Insurer.
Of the four primary insurers, only two were available to defend the insured in the underlying suit. Both Reliance and Legion became insolvent, and both sides in this case have assumed that nothing was available from either carrier by way of a defense. We will also operate on that assumption.
The insured initially requested only Stage 1 Primary Insurer to provide it a defense of the underlying suit. (The request was made in late Sept. 2002.) However, after the Stage 1 Primary Insurer accepted the request for a defense under a reservation of rights, and hired a firm to defend the insured, the newly hired defense counsel then requested a defense from Stage 4 Primary Insurer. The request for a defense, however, was routed through the insured’s third party claims administrator. In April 2003 the third party claims administrator took the position, on the insured’s behalf, that it “elect[ed]” not to trigger the Stage 4 Primary Insurer’s policies, at least in part because the Stage 4 Primary Insurer? s policies had a $25,000 self-insured retention. (The mechanics of the self-insured retention are discussed in part III. below, when we set forth the policy language bearing on this case.)
However, in June 2003—just a few months after the insured’s (at least putative) election not to trigger Stage 4 Primary Insurer’s policies, the Stage 1 Primary Insurer notified the insured that, because of numerous other claims against the insured, its policies were nearing exhaustion. In response, the insured reiterated its position that it elected not to trigger the Stage 4 Primary Insurer’s policies, and requested its defense attorney to “tender the defense and indemnity” to Transportation, which we will refer to as the Stage 1 Umbrella Insurer. The Stage 1 Umbrella Insurer quickly declined the tender on the ground that the Stage 4 Primary Insurer’s policies had not yet exhausted. ■
The Stage 1 Primary Insurer’s exhaustion formally occurred on December 30, 2003. Along with the exhaustion came a formal notification to the insured that the Stage 1 Primary Insurer’s defense was being entirely withdrawn. The insured then assumed its own defense, and, at some point in 2005, reached a settlement with the developer. The settlement was presumably $60,000 or less, to which the Stage 4 Primary Insurer contributed.
This coverage litigation between the insured and the Stage 1 Umbrella Insurer ensued, the insured’s theory being that the Stage 1 Umbrella Insurer had a -duty to “drop down” and defend (and if necessary indemnify) the insured once the Stage 1 Primary Insurer’s limits were exhausted. After an expedited court trial based on stipulated facts and exhibits, the trial court ruled that because there was still “primary coverage available” to the insured in the form of the Stage 4 Primary Insurer’s policies, the Stage 1 Umbrella Insurer was not obligated to provide a defense.
IH. THE POLICIES
A. The Stage 4 Primary Insurer
Whatever else the Stage 4 Primary Insurer’s policies provide, they provide no coverage for “occurrences” not within the Stage 4 Primary Insurer’s policy period, here from March 1, 2001, through March 1, 2003. The policy language is: “This insurance applies to . . . ‘property damage’ only if: [][] . . . m (2) The . . . ‘property damage* 1 **’ occurs during the: ‘policy period’.”
The Stage 4 Primary Insurer’s policies were also clearly commercial general liability (CGL) policies, a fact also stipulated to by the parties.. That is, the policies contained a typical CGL insuring clause. Accordingly, the premiums for the two Stage 4 policies were costly, respectively $315,000 and $356,500 for the two successive policies.
And, by the same token, the policies were also clear—in their “other insurance” clauses—that they were “primary” policies. Here is1 the languagé: “If other valid and collectible insurance is available to the insured for a loss we cover under Coverage A or B of this policy, our obligations are limited as follows: [f] a. Primary Insurance H[] This insurance is primary except when there is other insurance applying on a primary basis. Then b. below applies. [1] b. Excess Insurance [f] This insurance is excess over any of the other insurance, whether primary, excess, contingent or on any other basis. [][] When this insurance is excess, we will have no duty to defend any claim or ‘suit’ that any other insurer has a duty to defend. If no other insurer defends, we will undertake to do so, but we will be entitled to the insured’s rights against all those other insurers. H] When this insurance is excess over other insurance, we will pay only our share of the amount of the loss, if any, that exceeds the sum of'[f] (1) The total amount that all such other insurance would pay for the loss in the absence of this insurance; and [(J[] (2) The total of all deductible and self-insured amounts under any other insurance.” (Italics added.)
As to the self-insured retention endorsement, it began with language that “This endorsement modifies insurance provided under the: Commercial General Liability Coverage Part,” then provided a schedule showing that the retention was $25,000 “Per Occurrence,” but “$N/A Per Claim” and “Aggregate $N/A.” The insured was also required to notify the insurer if there was “potential penetration” of the retention at “50 % of self insured retention.”
The text that followed the schedule was clear that the insured was responsible for defense costs, as well as indemnity costs, up to the retention amount of $25,000 (hence it was truly a “self-insured retention” as distinct from a “deductible”). The “Self Insured Retention Endorsement (Defense Costs Included)” began with a schedule listing $25,000 “Per Occurrence” as the self-insured retention amount, and underneath the schedule provided: “If a Per Occurrence ‘self insured retention’ amount is shown in the Schedule of this endorsement, you shall be responsible for payment of all damages and ‘defense costs’ for each ‘occurrence’ or offense, until you have paid ‘self insured retention’ amounts and ‘defense costs’ equal to the Per Occurrence amount shown in the Schedule, subject to the provisions of A. 3. below, if applicable. [A. 3 below involved aggregate self-insured retention, which, on this insured’s schedule, was specifically not applicable.] The Per Occurrence amount is the most you will pay for ‘self insured retention’ amounts and ‘defense costs’ arising out of any one ‘occurrence’ or offense, regardless of the number of persons or organizations making claims or bringing suits because of the ‘occurrence’ or offense.” Thus, after the $25,000 was exhausted, the Stage 4 Primary Insurer was obligated to defend.
One of the facts to which the parties stipulated was that the insured’s defense costs in the underlying suit “currently exceeds $25,000.”
B. The Stage 1 Umbrella Insurer
There is no argument that the Stage 1 Umbrella Insurer’s policies were “primary” policies. They weren’t. In comparison with the $315,000 annual premiums paid by the insured for the Stage 4 Primary Insurer’s policy, the cost of the two Stage 1" Umbrella Insurer’s policies was (even for the mid-1990’s) a relatively cheap $20,067 and $27,389 a year respectively for the years 1995 and 1996.
The Stage 1 Umbrella Insurer’s policies had an “Other Insurance” clause which makes its insurance excess over any unexhausted primary policies otherwise providing coverage to the insured, regardless of whether they are listed on the umbrella carrier’s schedule of underlying insurance. Here is the entire “other insurance” clause from the policy: “Whenever you are covered by other: [ft] a. primary [ft] b. excess; or c. excess-contingent [ft] insurance not scheduled on this policy as ‘scheduled underlying insurance’, this policy shall apply only in excess of,- and will not contribute with; such other insurance. This policy shall not be subject to terms, conditions or limitations of other insurance. In the event of payment under this policy where you are covered by such other insurance, we shall be subrogated to all of your rights of recovery against such other insurance and you shall execute and deliver instruments and papers, including assignment of rights, and do what is necessary to secure such rights.”
The Stage 1 Primary Insurer was indeed listed on the schedule of underlying insurance in the two policies in the record.
Another section of the policies dealt with “Defense Payment and Related Duties” which further bore on the issue of the policies’ interactions with other policies. We will call this clause the “defense clause” because it fastened an obligation onto the insurer given the circumstance of exhaustion by all primary insurers. The defense clause read in pertinent part: “1. If a claim or ‘suit’ alleges damages covered by underlying policies and the obligation of all ‘underlying insurers’ either to: [f] a. investigate and defend the insured; or [f] b. pay the costs of such investigation and defense; fft] ceases solely through the exhaustion of all underlying limits of liability through payment of a combination of covered expenses, settlements or judgments for ‘incidents’ taking place during our policy period, then we will either: [f] a. assume the investigation and defense of the insured against ‘suits’ seeking damages; or [‘ft] b. if we elect nqt to assume the investigation and defense in l.a. above, we will reimburse the insured for reasonable defense costs and expenses incurred with our written consent. . . . [f] 2. We will investigate and defend ‘suits’ brought against an insured for a claim or ‘suit’ that alleges damages from an ‘incident’ not covered under: [f] a. ‘scheduled underlying insurance’; and [