Insurance Law News - June 2009

• In Accident Involving Tractor-Trailer Rig, Statute Makes Trailer Lessor’s Policy “Excess” To Tractor Owner’s Policy
• Insurer’s Duty of Equitable Contribution for Defense Costs Arises Where, After Notice of Litigation, Diligent Inquiry Would Reveal Equitable Contribution Exposure

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In Accident Involving Tractor-Trailer Rig, Statute Makes Trailer Lessor’s Policy "Excess" To Tractor Owner’s Policy

The California Supreme Court has held that, with respect to an accident involving a tractor-trailer rig, California Insurance Code section 11580.9(b) made the trailer lessor’s commercial auto policy “excess” to the tractor’s owner’s commercial auto policy. (Sentry Select Ins. Co. v. Fidelity & Guaranty Ins. Co. (2009) 46 Cal.4th 204)

Facts

John's Trucking, Inc. (JTI) was a trucking company that routinely leased nearly three quarters of its commercial fleet of trailers to independent truckers with whom it contracted for hauling jobs. In 1999, JTI entered into a standard “trailer lease agreement” with independent trucker Richard Justice (Justice), whereby JTI leased two trailers to Justice. 

In May 1999, Justice was driving his own tractor while pulling the two trailers leased from JTI. The tractor-trailer rig collided with another vehicle, resulting in injuries to April Russo (Russo) and Patricia Nila (Nila). At the time of the accident, Justice had a commercial auto policy listing his tractor through Sentry Select Insurance Company (Sentry), and JTI had a commercial auto policy listing the two trailers through Fidelity & Guaranty Insurance Company (Fidelity).    

Russo and Nila brought personal injury actions against both Justice and JTI, but JTI obtained a dismissal. Justice’s insurer, Sentry, then settled Justice’s alleged liability to Russo and Nila for $600,000 (an amount within Sentry’s policy limit).    

Sentry (insurer of Justice and his tractor) subsequently filed a federal court equitable contribution action against Fidelity (insurer of JTI and the leased trailers). (Apparently Sentry’s theory was that since Justice was a “permissive user” of the trailers leased from JTI, Justice qualified as an “insured” under the Fidelity policy.) Fidelity defended the federal court action by arguing that under California Insurance Code section 11580.9(b), the Fidelity policy was conclusively presumed to be “excess” to the Sentry policy, and therefore Fidelity owed nothing to Sentry. However, the United States District Court held that Insurance Code section 11580.9(b) did not apply, and that Sentry and Fidelity thus provided concurrent “primary” coverage for Justice’s liability in the underlying personal injury case

Fidelity appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit, in turn, asked that the California Supreme Court issue an opinion regarding the proper interpretation of Insurance Code section 11580.9(b).

Holding

The California Supreme Court ruled that under section 11580.9(b), the policy Fidelity had issued to JTI for the leased trailers was conclusively presumed to be “excess” to the policy Sentry had issued to Justice for the tractor. At the time of the accident, section 11580.9(b) provided that if a leased commercial vehicle is involved in an accident, and the lessor of that vehicle is “engaged in the business of renting or leasing motor vehicles without operators,” then the lessor’s policy is conclusively presumed to be excess to any other insurance covering the loss.  

The Supreme Court acknowledged that California Courts of Appeal had rendered conflicting decisions as to the meaning of the phrase “engaged in the business of renting or leasing motor vehicles without operators,” with some courts focusing on the nature of the insured's primary business, and other courts focusing on the factual circumstances surrounding the lease of the particular commercial vehicle involved in the accident. However, the Supreme Court concluded that it was not necessary to resolve the conflicting appellate court decisions, because under either test, JTI was “engaged in the business of renting or leasing motor vehicles [i.e., the two trailers] without operators.” As such, under section 11580.9(b), the policy Fidelity had issued to JTI for the leased trailers was conclusively presumed to be “excess” to the policy Sentry had issued to Justice for the tractor. Therefore, Sentry was not entitled to contribution from Fidelity. 

Comment

Note that at the time of the accident in this case, section 11580.9(b) applied to an insured who was “engaged in the business of renting or leasing motor vehicles without operators.” Effective January 2007, the Legislature amended the statute, deleting the above phrase and replacing it with the phrase “who in the course of his or her business rents or leases motor vehicles without operators.” This amendment of the statutory language eliminates any ambiguity as to whether the leasing of commercial vehicles must be a regular part of the insured's business in order for the conclusive presumption to apply. As amended, section 11580.9(b) now clearly provides that the renting or leasing of commercial vehicles without operators in the course of any business can qualify for the conclusive presumption that the insured's coverage is excess, where all the statutory requirements are otherwise met.

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Insurer’s Duty of Equitable Contribution for Defense Costs Arises Where, After Notice of Litigation, Diligent Inquiry Would Reveal Equitable Contribution Exposure

The California Court of Appeal held that an insurer’s obligation of equitable contribution for defense costs arises where, after receiving actual or constructive notice of the lawsuit, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution. (OneBeacon America Insurance Co. v. Fireman’s Fund Insurance Co. (2009)2009 WL 1782979)

Facts

OneBeacon America Insurance Company (“OneBeacon”), Insurance Company of the West (“ICW”), and Fireman’s Fund Insurance Company (“FFIC”) were primary coinsurers under liability insurance policies of common insureds. These common insureds — the Mouren-Laurens Oil Company, along with its owners, directors, and officers (collectively “MLOC”) — were sued in 1998 for allegedly contaminating real property with petroleum products from the 1950s onward. 

In 1999, OneBeacon agreed to defend MLOC in the underlying action. MLOC also tendered its defense to ICW and FFIC in 1999 under the belief that ICW and FFIC had insured MLOC during the period in question. As of 1999, however, MLOC did not have any physical evidence of the primary policies issued by FFIC and ICW. Thus, in their tender letters and supplementary correspondence, MLOC asked that ICW and FFIC locate and provide all policies they issued to MLOC. Both insurers denied coverage on the grounds that they did not issue any primary policies to MLOC.

Three years later, in 2002, MLOC provided ICW with copies of a number of ICW primary policies that MLOC was able to obtain through an ICW agent. MLOC also sent ICW a declaration from another ICW agent who attested that he sold a primary policy to MLOC in 1978. In 2002, MLOC also provided FFIC with a declaration from one of FFIC’s agents, who attested that he handled MLOC’s purchase of primary FFIC policies for the 1948-1962 policy years. Using the information from the declaration, FFIC was able to locate evidence of an FFIC primary policy within a matter of weeks. At that point, both ICW and FFIC agreed to defend MLOC under a reservation of rights.

OneBeacon demanded contribution from ICW and FFIC for the costs of defense from 1999 to 2002. ICW and FFIC refused payment, citing defects as to notice and tender. OneBeacon then filed the subject action for equitable contribution against FFIC and ICW. The trial court ruled against OneBeacon, and OneBeacon appealed.

Holding

The Court of Appeal found that OneBeacon was entitled to equitable contribution from 1999 forward. The Court first observed that under California law, tenders can be accomplished through constructive notice, which might be as simple as sending a copy of the complaint to the insurer without any tender letter. The Court then cited a number of public policy reasons for allowing constructive notice (as opposed to requiring formal notice by an insured): constructive notice clarifies the duties of the parties; it takes into account the greater knowledge and sophistication of the insurer; and although it places a burden on the insurer to ask the insured whether it is seeking a defense, that burden is not onerous. 

Based on California’s recognition of constructive notice and the foregoing public policy considerations, the Court held that an insurer’s duty of equitable contribution for defense costs arises where, after receiving notice of the litigation, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution. The Court further observed that insurers are charged with knowledge of all information that a diligent inquiry would have revealed. 

Applying this rule to ICW and FFIC, the Court then concluded that ICW and FFIC both had an equitable obligation to contribute to the costs of MLOC’s defense from 1999 forward. The Court held that neither ICW nor FFIC demonstrated that their search was diligent. In fact, there was no showing that the information available to ICW or FFIC in 2002 was any different from the information that would have been available to them upon a diligent inquiry in 1999. Rather, the record showed that ICW did not conduct any search whatsoever and instead placed the burden of discovering the policies on MLOC. Also, FFIC’s search was clearly inadequate, as there was no sufficient explanation for why FFIC was able to locate the policy in 2002 but not in 1999. 

Thus, since ICW and FFIC received constructive notice of the lawsuit in 1999, and since a diligent inquiry would have revealed that they had in fact issued primary policies to MLOC exposing them to a claim for equitable contribution, both ICW and FFIC were equitably obligated to contribute to the defense from 1999 onward.

Comment

One of the reasons that the trial court ruled against OneBeacon was that it held that ICW and FFIC had no affirmative obligation to conduct a diligent inquiry into the existence of the policies. The Court of Appeal quickly dispelled with this notion and unequivocally imposed the burden on the insurer to locate policies. Insurers should be mindful of this burden whenever they receive correspondence from insureds or fellow insurers regarding missing policies. 

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