The court denied National Union's motion to dismiss the insured's suit to compel a defense under the umbrella policies. San Diego Unified Port Dist. v. Nat'l Union Fire Ins. Co., 2016 U.S. Dist. LEXIS 88362 (S. D. Cal. July 6, 2016).
National Union sold the insured primary and umbrella policies, promising to defend and indemnify against certain property damage liability claims. National Union issued four primary policies, two of which were exhausted. National Union also sold to the insured the first layer of insurance directly above the unexhausted and exhausted policies in the form of four umbrella policies. Coverage under the umbrella policies was triggered once the primary policies were exhausted.
According the insured's First Amended Complaint (FAC), the insured tendered and National Union agreed to defend under the unexhausted primary policies certain claims against the insured. National Union, however, subsequently informed the insured that it unilaterally would be assigning payments for one of the insured's defense experts against the unexhausted primary policies' limits. National Union then tendered the asserted remaining policy limits to the insured and considered the unexhausted primary policies to be exhausted. Therefore, National Union would cease defending the insured.
In filing suit, the insured argued the unexhausted primary policies were not exhausted. Further, even if the unexhausted primary policies were exhausted, National Union was required to drop down under the umbrella policies to defend the insured.
After the original complaint was filed, National Union acknowledged it had a defense obligation under the umbrella policies. As a result of National Union's failure to defend, however, the insured incurred its own defense costs for which it sought reimbursement.
The insured's FAC sought a declaratory judgment that the unexhausted primary policies were not exhausted and National Union's duty to defend under these policies continued. A declaratory judgment was also sought to establish that National Union had a duty to defend under the umbrella policies. National Union moved to dismiss.
National Union argued the FAC's allegations regarding its duty to defend under the umbrella policies in the event of exhaustion of the primary layer of insurance was moot and did not present a controversy ripe for determination. If the primary policies were not exhausted, there was no dispute about the umbrella policies. If the primary policies were exhausted, then National Union had acknowledged that it would defend under the umbrella policies.
The court disagreed the dispute was moot. The pendency of a decision whether the unexhausted primary policies were exhausted did not moot the need for judicial relief. Whether the primary policies were already exhausted would be decided in this litigation.
National Union contended it had no duty to defend under the umbrella policies if the primary layer was exhausted because the umbrella policies only applied to suits, not claims. The insured argued, however, that the umbrella policies stated that "[t]his Insuring Agreement shall also apply to occurrences not covered by any underlying insurance due to exhaustion." And because the primary policies clearly covered claims, the reasonable interpretation of this provision was that the excess coverage included claims.
The court found the language ambiguous. The umbrella policies stated the insurer "shall defend any suit, but shall have the right to investigate, negotiate and settle any lawsuit." On the other hand, the policies stated the umbrella insurance applied "to occurrences covered under this policy but not covered by any underlying insurance . . . This policy shall also apply to occurrences not covered by any underlying insurance due to exhaustion." This second sentence conflicted with the language about the insurer's defense duty and created ambiguity that could not be resolved on a motion to dismiss.