California Further Restricts Use of “Other Insurance” Clauses in Policies

By Kevin Clonts

This week, the California Court of Appeal, Third Appellate Division, held that a primary insurer cannot rely on an “other insurance” clause to deny a defense, even if the “other insurance” provision is contained in both the insuring agreement and in the policy’s conditions. Certain Underwriters at Lloyds v. Arch Specialty Ins. Co., ___ Cal. App. 4th ___, 2016 Cal. App. LEXIS 275 (Apr. 11, 2016). This opinion builds upon California precedent holding that “other insurance” clauses are not enforceable when contained in a policy’s conditions and distinguishes a prior decision holding that such a provision might be enforceable if contained in the policy’s insuring agreement.

In Certain Underwriters, the insured construction contractor had successive insurance coverages provided by Lloyds and Arch Specialty. When the contractor was sued in multiple lawsuits, Lloyds provided a defense and Arch acknowledged indemnity coverage but denied defense based on the policy’s “other insurance” clauses. The Arch policy’s insuring agreement provided that Arch had a duty to defend the insured “provided that no other insurance affording a defense against such a suit is available to you,” and that it would “defend you if you are not being defended by any other insurer.” In addition, the policy contained a condition purporting to limit Arch’s defense duty if other insurance was available to cover the loss. The Lloyds’ policy also had an “other insurance” condition, but its insuring agreement did not contain such a provision.

Ultimately, both insurers settled the claims on a time on risk basis, and Lloyds brought a contribution action against Arch to recover defense costs. The trial court held that Arch was not liable for defense costs due to the insuring agreement’s “other insurance” provision.

The Court of Appeal reversed, holding that Arch could not avoid a defense duty by operation of an “other insurance” clause, no matter where in the policy it may be found. The court noted that the contract between the carrier and the insured (the insurance policy) cannot control the equitable rights as between primary insurers:

The reciprocal rights and duties of multiple insurers who cover the same event do not arise out of contract, for their agreements are not with each other. Their respective obligations flow from equitable principles designed to accomplish ultimate justice. Since these principles do not stem from agreement between the insurers, their application is not controlled by the language of their contracts with the respective policy holders.

Further, California courts view “other insurance” provisions as escape clauses, which “are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.”

In reaching this result, the court distinguished Chamberlain v. Smith, 72 Cal.App.3d 835 (1977), which it characterized as “predat[ing] the ‘modern trend’ extending the distrust of escape clauses to ‘other insurance’ clauses that attempt to shift the burden away from a primary insurer.”

Because an insurance policy cannot control the equitable rights between insurers and because “other insurance” clauses are viewed with suspicion, the court held that the “other insurance” clause was unenforceable and could not be used by the carrier to avoid its defense duty.

The full opinion can be found here;

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