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Insurance Law News - February 2016

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"Following Form" Excess Liability Policy Does Not Include Uninsured Motorist/Underinsured Motorist Coverage Provided In Underlying Primary Policy

A "following form" excess liability policy did not include uninsured motorist/underinsured motorist coverage that was provided in the underlying primary policy. (Haering v. Topa Insurance Company (2016) WL 409532)

Facts

Larry Haering was the owner of California Fleet, Inc. California Fleet was the named insured under a State National Insurance Company primary policy which provided various types of coverage, including garage operations coverage with a $1 million limit and uninsured motorist/underinsured motorist (UM/UIM) coverage with a $1 million limit. The State National policy's UM/UIM endorsement stated that State National would "pay all sums that the insured is legally entitled to recover as compensatory damages from the driver of an uninsured motor vehicle."

California Fleet was also the named insured on a Topa Insurance Company excess liability policy with a $1 million limit. The Topa excess policy provided that Topa would "indemnify the insured for the amount of loss which is in excess of the applicable limits of liability … of the Underlying Insurance [i.e., the State National policy]." The Topa policy further provided that "the provisions of the immediate underlying policy are incorporated as a part of this policy except for … any other provisions therein which are inconsistent with the provisions of this policy." The Topa policy defined "loss" as "the sum paid in settlement of losses for which the insured is liable…."

Haering was seriously injured in a motor vehicle accident caused by a negligent driver who had an auto policy with a $25,000 liability limit. Haering settled his claim against the negligent driver by accepting the $25,000 policy limit from the negligent driver's insurer.

Haering then submitted a UIM claim to State National pursuant to the $1 million UM/UIM endorsement to the State National policy. Eventually, Haering recovered the UIM policy limit from State National.

Thereafter, Haering submitted a claim to Topa for $1 million in excess coverage. Haering argued that the Topa policy "followed form" to the State National policy and thus "incorporated" the State National policy's UM/UIM coverage. Topa denied Haering's claim, asserting among other things that the Topa policy's insuring agreement limited coverage to third party liability claims and did not cover first party UM/UIM claims.

Following Topa's denial of coverage, Haering sued Topa for breach of contract and bad faith. The trial court concluded that the Topa excess policy only covered third party liability claims, not first party UM/UIM claims. Thus, the trial court entered judgment in favor of Topa. Haering appealed.

Holding

The California Court of Appeal affirmed the judgment in favor of Topa. According to the appellate court, the Topa excess policy's insuring agreement plainly "limits the insurer's indemnity obligation to 'losses for which the insured is liable,' i.e., third party liability claims." The appellate court thus concluded that Haering's "claim for first party UM/UIM benefits does not come within the scope of that agreement."

Haering nevertheless argued that the Topa policy was a "following form" excess policy that provided coverage on the identical terms as the underlying State National policy, including the UM/UIM coverage provided under the endorsement to the State National policy. The appellate court rejected that argument. The court reasoned that the language of the Topa policy that incorporated the provisions of the State National policy also expressly excepted from incorporation those provisions "which are inconsistent with" the Topa policy. Because the Topa policy's insuring agreement expressly limited coverage to third party liability claims, first party UM/UIM coverage would be "inconsistent" with that limitation.

Comment

The appellate court in this case relied on the distinction between first party insurance, which provides coverage for loss sustained directly by the insured, and third party insurance, which provides coverage for liability of the insured to a third party. The court held that UM/UIM coverage is first party coverage, not third party coverage, because the insurer's duty is to compensate its insured for his or her losses, rather than to indemnify the insured for losses sustained by others.

 

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Uninsured Tortfeasor Can Assign Claim Against Broker, and Rule of Superior Equities Does Not Apply to Contractual Assignment

An uninsured tortfeasor can assign a negligence claim against a broker for failing to obtain insurance, and the rule of superior equities that might apply in equitable subrogation does not apply to an independent contractual assignment. (AMCO Insurance Company v. All Solutions Insurance Agency, LLC (2016) WL 490134)

Facts

Amarjit Singh (Singh) owned a commercial building that, due to Singh's negligence, caught fire. The fire caused substantial damage to Singh's property and spread to two adjacent commercial properties owned by others.

AMCO Insurance Company (AMCO) was the first-party insurer of the owner of one of the adjacent properties. AMCO paid its insured for the property damage caused by Singh's negligence, and then filed a subrogation action against Singh. The owners of the other adjacent property also filed a separate action against Singh to recover for the damages they had suffered.

Singh tendered both of the lawsuits to a liability insurer, but the insurer denied coverage on the grounds Singh did not have a policy in force at the time of the fire. Singh asserted that the lack of coverage was due to negligence by All Solutions Insurance Agency, LLC (All Solutions), a broker that had allegedly failed to procure insurance Singh requested prior to the fire.

Later, Singh entered into settlement agreements with AMCO and the owners of the other property. As part of the settlements, Singh stipulated to a judgment totaling about $371,000 in favor of AMCO and a judgment totaling about $194,000 in favor of the owners of the other property. In addition, Singh assigned to AMCO and the owners of the other property all of Singh's rights against All Solutions.

Acting as Singh's assignee, AMCO and the owners of the other property filed separate actions for negligence against All Solutions. The trial court ordered that the two lawsuits be consolidated.

The trial court granted summary judgment in favor of All Solutions. Among other things, the trial court ruled that (1) Singh's claims against All Solutions were not assignable and (2) even if the claims were assignable, they were barred by the doctrine of superior equities. AMCO and the owners of the other property appealed.

Holding

The Court of Appeal reversed. First, the appellate court held that Singh was indeed able to assign his negligence claim against the broker.

Second, the appellate court held that, in the context of insurance law, the doctrine of superior equities applies to a contractual assignment only if the assignee is an insurance company and the assignor was that insurance company's policyholder. Here, AMCO (an assignee) was an insurer, but Singh (the assignor) was never AMCO's policyholder. Further, the owners of the other property (also assignees) were not insurers. Thus, because the rights of AMCO and the owners of the other property arose by virtue of contractual assignment (not equitable subrogation), the doctrine of superior equities could not apply.

Comment

In this case, the appellate court reiterated that, as a general rule, a negligence claim against an insurance broker can be assigned to a third party. In fact, based on various statutes and prior case law, most claims can be assigned to a third party. (Although most claims can be assigned, notable exceptions exist for claims for personal injury; slander; malicious prosecution; legal malpractice; and certain claims for fraud.)

In addition, the appellate court pointed out the distinction between "equitable subrogation" (which arises by operation of law where an insurer has paid a loss to its insured) and "contractual assignment" (which is based on a voluntary agreement between the party transferring the rights and the party receiving the rights). Under existing California law, when an insurer acquires rights by equitable subrogation, the insurer generally does not acquire any additional rights by a contractual assignment (because the contractual assignment is viewed as being redundant).

One of the elements of equitable subrogation is the rule of superior equities, which holds that the right of equitable subrogation may be invoked against a third party only if that party is guilty of some wrongful conduct which makes the party's equity inferior to that of the insurer. The rule of superior equities is partly based on the idea that the insurer already has been compensated (by receipt of premiums) for issuing the policy and should not be allowed to shift the very loss contemplated by the policy to a third party, even though that third party, as between itself and the insured, would be liable. All Solutions argued (successfully in the trial court but unsuccessfully in the appellate court) that its equitable position was superior to AMCO's equitable position, because All Solutions did not cause the fire but, instead, allegedly failed to procure coverage for Singh (who actually caused the fire).

The appellate court noted that AMCO and the owners of the adjoining property did not issue an insurance policy to Singh and, therefore, their rights did not arise by equitable subrogation. Instead, the rights of AMCO and the owners of the adjoining property arose solely by virtue of an independent contractual assignment that was not subject to the rule of superior equities.

 

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