Contribution actions between insurers sometimes blur the distinct and different requirements for proving the duty to defend versus the duty to indemnify. In the recent case of Advent, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 6 Cal.App.5th 443 (2016), the Sixth District of the California Court of Appeal issued a reminder that it is significantly more difficult to obtain contribution for indemnity than it is for defense.
The Advent decision also provides an enlightening examination of when excess policies are triggered. Excess insurers often rely on the principle of horizontal exhaustion to argue that their policies are not triggered until all other underlying policies which may provide coverage have exhausted their policy limits. Because most excess policies explicitly state that they are not only excess to specific scheduled primary policies, but also excess to other “valid and collectible insurance,” California courts have often enforced horizontal exhaustion. See North American Capacity Ins. Co. v. Claremont Liab. Ins. Co., 177 Cal.App.4th 272, 293 (2009). However, there are limitations. California courts will apply the competing principle of vertical exhaust if an excess policy is written specifically excess to a single policy. See Travelers Cas. & Sur. Co. v. Transcontinental Ins. Co., 122 Cal.App.4th 949, 959 (2004). The Court in Advent held that in order to determine whether horizontal or vertical exhaustion apply, the language of the relevant policies must be carefully examined.
The Advent decision arose from an underlying personal injury lawsuit filed by an injured construction worker, Jerry Kielty. Kielty was employed by Johnson Western Gunite, which had subcontracted with Pacific Structures, Inc. which itself had subcontracted with the general contractor of the project, Advent, Inc. Kielty was severely injured in a fall and ultimately settled his claim for $10 million which was paid by various insurers. National Union paid $1 million of the settlement under a primary policy issued to Johnson. Landmark American Insurance Company paid $1 million under a primary policy issued to Advent. Topa paid $5 million as the excess insurer for Advent. The remaining amount was paid by other insurers. National Union denied coverage under its excess policy issued to Johnson and did not contribute to the settlement under that policy.
After some procedural maneuvering, Topa prosecuted a complaint against National Union seeking indemnity and contribution. Topa argued that Advent was an additional insured on the National Union excess policy and, as such, that National Union had a duty to indemnify Advent with respect to the settlement. National Union disputed it had any obligation for several different reasons. Topa and National Union filed cross-motions for summary judgment. The trial judge denied Topa’s motion and granted National Union’s motion. Topa appealed. The appellate Court upheld the trial court’s ruling on two grounds.
Initially, the Court rejected Topa’s claim against National Union, finding that Topa failed to show that Kielty’s injuries were caused by National Union’s named insured, Johnson. This part of the decision relies on close analysis of the actual evidence presented in the underlying case. The Court noted that while a duty to defend can be premised on potential coverage, because this case involved only indemnity, Topa had the burden to prove that there was actual coverage under the National Union policy. Topa argued that because Kielty would not have been at the site but for his employment by Johnson they had proven liability and actual coverage. The Court rejected this argument, distinguishing cases cited by Topa. The Court concluded that there was no evidence that Johnson was liable for Kielty’s injuries and that, therefore, Topa had not proven actual coverage under the National Union policy. This portion of the decision is likely of little precedential value due to its heavy reliance on the specific facts of the underlying incident. Moreover, this outcome appears to be a close call. Although the Court held that Kielty’s presence at the jobsite was inadequate evidence of liability for his employer, other courts might well disagree. However, the decision reinforces the fact that to obtain contribution from another insurer for indemnity, proof that the policy provides actual coverage will be required. Moreover, when cases settle, and there is no determination of specific fault, meeting this requirement may be challenging.
The second ground upon which the Court affirmed was its determination that the Topa policy was subject to vertical exhaustion while the National Union policy was subject to horizontal exhaustion. In reaching this conclusion, the Court compared the language of the two policies.
The Court focused first on the facts that 1) the Topa policy stated that it was excess over “Underlying Insurance” as scheduled in the Topa policy and the schedule listed only the Landmark primary policy and 2)the Topa policy contained no “other insurance” clause and had no language placing it excess over all other “valid and collectible insurance.” Although Topa cited to its defined term “Loss” (which stated that “Loss” was the amount the insured was liable for “after making deduction for all recoveries, salvages or other insurance . . .”), the Court refused to interpret the reference to “other insurance” as an “other insurance” clause, relying on the holding in Fireman’s Fund Indemnity Co. v. Prudential Assurance Co., 192 Cal.App.2d 492, 496-497 (1961). The Court next compared the Topa language to the National Union language. The National Union policy stated that it “will not make any payment . . . unless and until” both the underlying policy and “Other Insurance” had exhausted their limits. “Other Insurance” was defined as “a valid and collectible policy of insurance providing coverage for damages covered in whole or in part by this policy.” Relying heavily on Carmel Development Co. v. RLI Ins. Co., 126 Cal.App.4th 502 (2005), the Court agreed with National Union that the Topa policy was a “specific” excess policy that attached once the Landmark policy exhausted and before the National Union “general” excess policy was triggered. Effectively, the Court ruled that vertical exhaustion applied to the Topa policy and that, because of that, National Union’s policy could not be triggered until the Topa policy exhausted.
This part of the Advent case provides a reminder that simply because a policy is written as an excess policy, it should not be assumed that horizontal exhaustion will apply. The specific language of the policies involved may determine whether horizontal or vertical exhaustion will apply.
Stephen L. Cope is a litigator with Musick, Peeler & Garrett in its Los Angeles office. His full bio and contact information can be found at:: http://www.musickpeeler.com/professional/Stephen_Cope/