Defense obligations under a policy containing umbrella and excess coverage were before the court in Legacy Vulcan Corp. v. The Superior Court, 184 Cal. App. 4th 285 (Cal. Ct. App. 2010).
Vulcan manufactured and sold perchloroethylene. The City of Modesto sued Vulcan, alleging that use of perchloroethylene by the dry cleaning industry had resulted in environmental contamination. Vulcan tendered its defense to Transport Insurance Company.
Transport denied coverage and filed suit for declaratory relief. The trial court concluded Transport's obligations were limited to those of an excess carrier and that the duty to defend did not arise until the exhaustion of a self-insured retention and all underlying insurance.
The Court of Appeals disagreed, determining that Transport's policy provided both excess and umbrella coverage. One clause granted coverage in excess of all underlying insurance, clearly providing excess coverage. A second clause provided for coverage of claims "not within the terms of the coverage of the underlying insurance listed in Schedule A." Under this clause, if the underlying insurance listed in Schedule A provided no coverage for a particular claim (as distinguished from coverage that had been exhausted), and the claim was within the scope of the Transport policy, the Transport policy covered the claim. Accordingly, this second clause provided coverage for claims where the underlying policies specified in the schedule provided no coverage. As a result, it provided umbrella coverage, which constituted primary coverage. Consequently, there was a duty to defend under the umbrella clause.
Further, the reference to "underlying insurance" in the first, excess clause was ambiguous. The phrase could reasonably be interpreted to mean either the insurance listed in Schedule A only or all underlying insurance held by Vulcan. Resolving this ambiguity in favor of the insured, the term "underlying insurance" as used in the first clause encompassed only the policies listed in Schedule A.
Finally, the court considered whether the self-insured retention had to be exhausted before Transport's duty to defend arose. The Court noted that the impact of an SIR on the duty to defend depended on the particular policy language. In the absence of clear policy language, to require the exhaustion of an SIR before an insurer had the duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage. Transport's policy stated that the duty to indemnify was limited to amounts in excess of the $100,000 retained limit, but did not state that the duty to defend such claims was limited by the retained limit in any manner. Therefore, the duty to defend was not limited by the policy's SIR.
Thanks to my Damon Key colleague and fellow blogger (inversecondemnation.com), Robert Thomas, for flagging this case.
