An “escape clause” within a liability insurance policy creates the illusion of coverage that is ultimately extinguished where a second primary insurance policy covers the same risk. Historically, these escape clauses were designed to prevent the insured from multiple recoveries arising where more than one policy provided coverage for a particular loss. Change the context of the provision’s application, and it may be deemed against public policy and unenforceable.
The Court of Appeal, Third District of California recently held in Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Company (2016) WL 1436362 that the “other insurance” provision in equitable contribution actions against successive primary insurers is against public policy and thus unenforceable.
The “other insurance” clause is created through contractual language which provides that the insurer has the right and duty to defend “. . . provided that no other insurance affording a defense against such a suit is available to . . .” the insured. Id. at 2. This language attempts to evaporate the insurer’s primary coverage liabilities unless it provides the policy holder’s “exclusive defense.” The court recognized the “other insurance” language was akin to an “escape clause” where insurers “. . . make a seemingly ironclad guarantee of coverage, only to withdraw that coverage (and thus escape liability) in the presence of other insurance.” Id. at 5.
This “other insurance” issue arose between Certain Underwriters at Lloyds, London and Arch Specialty Insurance Company, as both were primary insurers over successive periods providing commercial general liability policies to Framecon, Inc. Framecon subcontracted to provide carpentry and framing work on behalf of a home developer between 1999 and 2002. The work performed was alleged to have contributed to construction defects in three separate suits brought by homeowners. The developer filed a cross-complaint against Framecon, and Framecon tendered to both Underwriters and Arch. Underwriters agreed to defend Framecon and the home developer as an additional insured, both with reservation of rights. Based on the “other insurance” provision, Arch refused to contribute to the cost to defend Framecon.
The three cases ultimately settled and both Underwriters and Arch agreed to indemnify Framecon on a “time on the risk” basis for homes completed during each carrier’s policy period. Underwriters filed suit against Arch seeking declaratory relief and equitable contribution for the defense costs incurred in the underlying litigation. The trial court granted Arch’s motion for summary judgment, agreeing with a previous holding in Chamberlin v. Smith (1977) 72 Cal.App.3d 835 that where an “other insurance” provision is placed in both the “conditions” and “coverage” section to the agreement, it is valid and enforceable.
Underwriters appealed the trial court’s decision to enforce the “other insurance” provision. The Court of Appeal held that the precedent set forth in Chamberlin and relied upon by the trial court predated the public policy extending distrust of escape clauses to “other insurance” provisions.
Accordingly, the Court of Appeal vacated the trial court’s order and held that primary insurers’ provisions attempting to extinguish liability are against public policy and unenforceable—Arch being liable to Underwriters for contribution of the costs to defend Framecon.
Blog by: Colin Jennings, San Diego, Associate