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In Suit Alleging Property Damage Occurring Over Multiple Years, Successive Primary Insurers Must Contribute Toward Insured's Defense Costs, Notwithstanding "Other Insurance" Language in One Insurer's Policy

In a construction defect suit involving allegations that an insured was liable for continuous and progressive property damage occurring over a period of years, successive primary insurers were obligated to contribute toward the insured's defense costs, notwithstanding "other insurance" language contained in one insurer's policy. (Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co. (2016) WL 1436362)

Facts

Between 1999 and 2002, KB Home Sacramento, Inc. and KB Home North Bay, Inc. (collectively KB) entered into subcontracts with Framecon, Inc. (Framecon) pursuant to which Framecon performed carpentry and framing work on homes being developed by KB.

Following completion of construction, various homeowners filed lawsuits against KB seeking to recover for alleged construction defects, including defects allegedly attributable to Framecon's work. In each lawsuit, KB filed a cross-complaint for indemnity against Framecon. The construction defect litigation involved allegations of property damage that potentially occurred over several years.

Framecon was the named insured, and KB was an additional insured, on consecutive primary general liability policies issued by Certain Underwriters at Lloyds, London (Underwriters) for the period of October 2000 through October 2002, and Arch Specialty Insurance Company (Arch) for the period of October 2002 through October 2003. Framecon and KB thus tendered the defense of the construction defect litigation to both insurers. In response, Underwriters agreed to defend Framecon and KB. Arch, on the other hand, declined to participate in the defense of Framecon and KB because (1) the Arch policy's insuring agreement stated that Arch would only defend an insured if "no other insurance affording a defense … is available" to the insured, and (2) the Arch policy's conditions section stated that "if other insurance is available to an insured for a loss we cover," the Arch policy would be "excess" and Arch "will have no duty … to defend…."Arch asserted that since "other insurance" (i.e., the Underwriters policies) was "available" for the defense of Framecon and KB, Arch had no duty to participate in defending Framecon and KB.

Eventually, the underlying construction defect lawsuits were settled. Although Arch did not contribute anything toward Framecon's and KB's defense costs, Arch did contribute approximately $143,000 on behalf of Framecon toward the settlements.

Following the settlements, Underwriters filed an equitable contribution lawsuit against Arch. In the equitable contribution lawsuit, Underwriters sought to recover from Arch a share of the defense costs that Underwriters had paid on behalf of Framecon and KB in the underlying construction defect litigation. Arch moved for summary judgment, contending that because Underwriters had been obligated to defend Framecon and KB in the underlying litigation, the Arch policy's "other insurance" language excused Arch from defending. The trial court agreed with Arch and entered summary judgment in favor of Arch. Underwriters appealed.

Holding

The Court of Appeal reversed, and held that Underwriters was entitled to contribution from Arch.

According to the appellate court, the "other insurance" language in the insuring agreement and conditions sections of the Arch policy essentially functioned as an "escape" clause. That is, the Arch policy provided that Arch would defend an insured against a covered claim unless "other insurance affording a defense … is available" to the insured. The appellate court emphasized that "escape" type "other insurance" clauses are "disfavored," and that "the modern trend is to require equitable contributions on a pro rata basis from all primary insurers regardless of the type of 'other insurance' clause in their policies." Arch could not avoid that result simply by including "other insurance" language in both the insuring agreement and the conditions sections of the Arch policy.

The appellate court also emphasized that Underwriters and Arch provided primary coverage to Framecon and KB at different times (i.e., Underwriters was on the risk from October 2000 through October 2002, while Arch was on the risk from October 2002 through October 2003). In the underlying construction defect litigation, the homeowners had sought damages from Framecon and KB for property damage that potentially occurred during both Underwriters' and Arch's policy periods. Thus, giving effect to Arch's "other insurance" provisions would "unfairly impose on Underwriters the burden of paying defense costs attributable to claims arising from a time when Arch was the only insurer" for Framecon and KB. In short, Arch could not rely on its "other insurance" language to deny a defense against allegations of property damage that occurred during periods of time when there was no "other insurance."

Based on the above, Underwriters was entitled to recover from Arch a share of the defense costs that Underwriters had paid on behalf of Framecon and KB in the underlying construction defect litigation. The appellate court thus remanded the case to the trial court for a determination of the amount owed by Arch.

Comment

The above case, decided by the Third Appellate District, is consistent with an earlier case entitled Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Ins. Co. (2015) 241 Cal.App.4th 721, decided by the Fourth Appellate District. Both cases stand for the proposition that "escape" type "other insurance" language will not excuse one primary insurer from contributing toward defense costs which another primary insurer is required to pay on behalf of an insured in a case involving allegations of continuous and progressive property damage. This is true whether the "other insurance" language is included in the insuring agreement, the conditions, or both.

 

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