The Specialty Lines Overlap:When Coverage Worlds Collide

The Specialty Lines Overlap: When Coverage Worlds Collide

Paul S. White

Wilson Elser, LLP

555 South Flower Street Los Angeles, CA 90071 (213) 330-8818 (213) 443-5101 [fax] [email protected] Paul S. White is a partner is the Los Angeles office of Wilson Elser. Paul focuses his practice on advising and defending insurers in complex insurance coverage disputes and representing insurers and insurance agents and brokers in professional liability matters involving the procurement of insurance policies. Paul’s insurance coverage practice includes advising and representing insurers in bad faith litigation, declaratory relief actions, and insurance policy disputes—including first-party property policies, general liability coverage, errors and omissions insurance, cyber- liability, and media liability insurance. He also advises and represents insurers in subrogation actions on property losses. In addition, Paul has litigated and arbitrated disputes throughout the United States involving domestic and foreign insurance agents and brokers in all lines of coverage. He has broad experience in the business practices of all types of insurance intermediaries, including brokers at every level in the broking process, from producers to managing general agents to London Market brokers. Thank you to Linda T. Hoshide and David Simantob for their contributions. The Specialty Lines Overlap: When Coverage Worlds Collide

Table of Contents I. Introduction...... 5 II. Overview...... 5 III. Does Coverage Overlap?...... 7 IV. Self-Insured Retentions...... 8 A. Who Can Satisfy the SIR?...... 8 B. Policyholder Obligations Under the SIR...... 9 C. When Is the Duty to Defend Triggered Under a Policy with an SIR?...... 10 V. “Other Insurance” Clauses...... 12 A. Pro Rata Clauses: By Limit or Equal Shares...... 12 B. Excess Clauses...... 13 C. Escape Clauses / Super Escape Clauses...... 13 D. Excess Escape Clauses...... 13 E. Professional Liability / Claims Made Clauses...... 13 VI. Reconciling “Other Insurance” Clauses...... 14 A. Identical or Similar “Other Insurance” Clauses...... 14 B. Conflicting “Other Insurance” Clauses...... 15 C. Equitable Apportionment...... 18 D. Statutory Apportionment...... 19 VII. Targeted Tenders...... 20 VIII. Duty to Settle...... 21 IX. Conclusion...... 27

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 3

The Specialty Lines Overlap: When Coverage Worlds Collide

I. Introduction Risk management is a key component for any business model. Depending on the nature of the business, a policyholder may buy multiple lines of insurance protection against fortuitous liabilities. Such risk management may further expand into requirements that a principal entity’s business partners or affiliates maintain their own liability protection via insurance coverage product lines that provide the principal entity with additional insured protection through the business partner’s insurance. A principal insured also may elect to maintain a self-insured retention as part of its risk management. As insurers compete for business, it is becoming more common for many forms of insurance and self-insurance to be associated with the risks arising in an insured’s business. Irrespective of an insured’s business, however, numerous product lines may come into play in response to a loss or liability claim. For example, • Commercial General Liability (CGL), insuring against third-party claims involving bodily injury, property damage, advertising injury, and personal injury • First-Party Property, insuring personal and commercial property against loss • Automobile, insuring against liability and property damage claims involving vehicles • Professional Liability/Errors & Omissions (E&O) and Directors & Officers (D&O), insuring against third-party claims involving an insured’s “professional services” or status as the director or officer of a company • Builders’ Risk, insuring the parties’ interests in a physical construction project during the course of construction • Workers’ Compensation, insuring the risk of injuries to employees • Environmental Impairment Liability, insuring against pollution-related losses and liabilities. Theoretically, insurance product lines are designed to provide unique coverage for a specific type of loss. However, a claim can overlap multiple insurance product lines, thus creating questions about whether one policy has priority over another, the scope of the insured’s and insurer’s rights and obligations to each other, and the competing interests of the insurers with respect to each other. This article will focus on the issues that arise when there is an overlap between product lines or self-insurance and how insurance policies and courts address those issues.

II. Overview Insurance coverage overlaps when two or more insurance policies provide coverage for the same insured, for the same insurable interest, and on the same risk. Various scenarios can lead to overlap, for example: • An insured has purchased two responsive policies—for example, general liability and professional liability. Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Dis- putes, §11.01 at 697 (11th ed. 2002) [Ostrager & Newman]. See also Bay Cities Paving & Grading, Inc. v. LMIC, 5 Cal.4th 854 (1993) (addressing “related” claims).

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 5 • There is a continuous loss triggering coverage under multiple insurance policies and/or multiple types of insurance. Armstrong World Indus. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 43, 52 Cal. App. 2d 690 (1996). • An insured has a self-insured retention on one policy that is responsive to a claim that overlaps with another policy. Vons Cos. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (2000). • There is a policy period overlap, usually arising from a policy renewal or a change of insurers that leaves one policy period shortened but overlapping with new coverage (a “stub” policy). OneBeacon Inc. Co. v. Georgia Pacific Corp., 474 F.3d 6 (1st Cir. 2007) (In evaluating a “stub” policy, where the premium was modified to reflect a shortened policy period, the First Circuit held that the contract was silent as to modifying the aggregate limit and whether there is a proration of the aggregate limit upon cancellation. Accordingly, while the premium was returned on a prorated basis, the aggregate limit would not be prorated.). • An insured and another party procure insurance for the same risk, e.g., landlord and tenant; general contractor and subcontractor; writer, movie studio, production company; manufacturer and advertising company; etc. American Country Ins. Co. v. Hanover Ins. Co., 293 Ill.App.3d 1025, 689 N.E.2d 186 (Ill. App. 1998). • Umbrella or excess policy coverage overlaps with primary coverage. Emscor Mfg, Inc. v. Alliance Ins. Group, 879 S.W.2d 894 (Tex. App. 1994, writ denied) (court determined that primary and excess policies did not cover the same risk). As a general rule, insureds are precluded from obtaining a double recovery. For example, under Cali- fornia law, an insured “is entitled to only a single full defense.” San Gabriel Valley Water Co. v. Hartford Acc. & Indem. Co., 82 Cal.App.4th 1230, 1241 (2000) (citing Horace Mann Ins. Co. v. Barbara B., 61 Cal.App.4th 158, 164 (1998); M.B.L., Inc. v. Federal Ins. Co., Case No. 14-56107 (January 13, 2017) (“when multiple insurers… are obligated to provide independent counsel for the insured,” section 2860(c) provides a “single rate limitation”) (quoting San Gabriel Valley); Housing Group v. Gerling America Ins. Co., Inc., 107 F.Supp.2d 1185, 1190, fn. 5 (N.D. Cal. 2000) (“the fact that two policies cover the same risk, however, does not entitle the insured to recover an amount in excess of its actual loss”). Similarly, courts have concluded that no one “shall profit more from the breach of an obligation than from its full performance.” Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506, 511 (1967) (“The collateral source rule is punitive; contractual damages are compensatory. The collateral source rule, if applied to an action based on breach of contract, would violate the contractual damage rule that no one shall profit more from the breach of an obligation than from its full performance. An application of the collateral source rule is particularly indefensible in a situation in which the injured party potentially could make a treble recovery: one from his insurer, one from a defendant who has undertaken contractual liability for the loss, and one from the wrongdoer…We conclude that the collateral source rule would be inapplicable in an action brought by Patent for its own benefit after Patent had been paid by the insurers.”) (Emphasis added.); Patent Scaffolding, supra, 256 Cal.App.2d at 511; see also, Plut v. Fireman’s Fund Ins. Co., 85 Cal.App.4th 98, 107-109 (2000) (“overwhelming weight of authority in California and other jurisdictions has rejected the extension of the collateral source rule to breach of contract.”) (Emphasis added.); Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017 (2002); Ringler Assoc., Inc. v. Maryland Cas. Co., 80 Cal. App.4th 1165, 1187-1188 (2000) (insured suffered no damages for breach of duty to defend where all defense costs paid by another insurer: “Thus, even were we to agree with Ringler’s contention that respondents breached a duty to defend, respondents would still not be liable to Ringler for damages arising from breach of that duty as a matter of law. Ringler was adequately protected by other insurers, and respondents’ with-

6 ■ Insurance Coverage and Claims ■ April 2017 drawal from its defense did not enhance its defense liability or increase the costs it incurred in defense of the underlying lawsuits.”) (Emphasis added.); Prichard v. Liberty Mutual Ins. Co., 84 Cal.App.4th 890, 909 (2000) (“It is nothing less than silly that several insurers should each be required to pay the whole of an attor- ney’s bill…”) (Emphasis added.); Fireman’s Fund Ins. Co. 65 Cal.App.4th at 1295 fn. 5; Housing Group v. Gerling America Ins. Co., Inc. 107 F.Supp.2d 1185, 1190, fn. 5 (N.D. Cal. 2000) (“the fact that two policies cover the same risk, however, does not entitle the insured to recover an amount in excess of its actual loss”); Barbara B. v. Horace Mann Ins. Co., 61 Cal.App.4th 158 (1998) (“the failure of one insurer to defend is of no consequence to an insured whose representation is provided by another insurer”). Consequently, where coverage overlaps, defense and indemnity obligations are typically appor- tioned among responsive insurance policies and insurers in accord with the law of the relevant jurisdiction. In instances where one or more insurers exhaust their obligations to the insured while other insurers remain non-responsive or deny coverage, contributing insurers may elect to seek equitable contribution from any other insurer on the risk in accordance with applicable allocation principles.

III. Does Coverage Overlap? The initial step in assessing whether there is overlapping coverage begins with the examination of the insured’s policies. As a matter of “best practices,” an insurer’s acknowledgement and reservation of rights letters to the policyholder should request any other policies the insured has that could be responsive to the loss or claim. While the request may be general, specific requests also are warranted, especially in instances where facts suggest that multiple policies could be responsive. Once insurance policies are gathered, they should be reviewed to determine whether they are all responsive and the scope and limitations of any overlapping coverage. Questions to consider include: • Do the policies name the same insured as either a named or additional insured? • Do the policies cover the same subject matter (e.g., liability for property damage)? • Do the policies cover the same peril (e.g., a general liability policy may provide coverage for property damage but exclude coverage for property damage arising from performance of “professional services”)? • Do the policies cover the same time period? • Do policy conditions or exclusions preclude or limit coverage? • Do the policies include self-insured retentions that could excuse or otherwise limit an insurer’s obligations? • Do the policies contain any provisions that could excuse or exclude insurer contribution? • Comparing the policies to the liability allegations against an insured, are there policy provisions that limit coverage to specific causes of action (e.g., in a suit alleging malpractice and defamation, a general liability policy may only respond to a cause of action for defamation under the personal injury coverage whereas an E&O policy may only respond to negligence in performance of professional services)? • Do the policies provide both defense and indemnity (e.g., many D&O policies do not obligate the insurer to defend but rather obligate the insurer to reimburse defense costs)? • Where umbrella or excess policies are responsive, do they condition coverage on exhaustion of primary coverage?

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 7 IV. Self-Insured Retentions Insureds often elect to purchase liability policies with large self-insured retentions (SIR) or high deductibles. Such options often allow insureds to better manage the commercial risks they face, reduce premiums, increase profits, or control defense and indemnity exposures in a manner with which they are com- fortable. The overlap between SIRs and the insurance coverage an insured purchased can lead to a number of questions about competing interests between the insured and its insurer(s). For a comprehensive analysis of this issue, refer to Hoshide, Linda T., “(I Can’t Get No) Satisfaction…of My Self-Insured Retention,” DRI Insur- ance Coverage & Practice Symposium (2014), pp. 215-238. (http://dri.org/docs/default-source/dri-online/ course-materials/2014/insurance-coverage-and-practice/2014-insurance-coverage-and-practice---13-i-can’t- get-no-satisfaction-of-my-self-insured-retention.pdf?sfvrsn=4) Key factors discussed at length in the Hoshide paper should be considered in comparing rights and obligations between an insured’s SIR and overlapping insurance are discussed here.

A. Who Can Satisfy the SIR? One issue that often arises is whether the named insured, “you” in the policy, must satisfy the SIR, or whether the SIR may be satisfied by other insurers, additional insureds or other co-defendants. Some policies are express and require the named insured to satisfy the SIR. Some courts, however, have confronted circumstances where an additional insured, rather than a named insured, tenders the defense of claims, leaving the question of who is required to satisfy the SIR. Courts are not uniform on who may satisfy the SIR and the issue is evolving. Historically, the named insured was the party intended to satisfy SIRs. However, in response to case law allowing satisfaction of an SIR by someone other than the named insured, some insurers are modifying their SIR language to directly specify who has to satisfy the SIR. For example, in Vons Cos. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (2000), a California Court of Appeal held that an insurer should expressly state who must satisfy the SIR. The Court concluded that the most reasonable construction of the SIR provision and its being “subject to” the terms of the U.S. Fire policy is that it permitted the payment of the SIR amount through other valid and collectible insurance. Id. at 62. The court also held that the SIR could be ambiguous on this point, explaining: Nowhere does the SIR expressly state that Vons itself, not other insurers, must pay the SIR amount. Because the SIR was subject to the other insurance provisions, which also made the Vons policy excess if there were another policy covering the accident, Vons as a reasonable insured could read the policy as permitting the use of other insurance proceeds to cover the SIR amount. In Travelers Indem. v. Arena Group 2000, L.P., No. 05-cv-1435W (CAB), 2007 WL 935611, 2007 U.S. Dist. LEXIS 17931 (S.D. Cal. Mar. 8, 2007), the court was presented with two issues regarding (1) whether Arena Group 2000, L.P., as an additional insured under Crum & Forster’s policy, was responsible for a $500,000 SIR and (2) if Arena Group were responsible, whether payments made by Arena Group’s other insurers satisfied the SIR. Id. at 1. The underlying action involved personal injuries suffered by two individu- als when a two-ton marquee sign fell on them. Id. at 2. The policy stated that “The Insured shall pay from its own account all amounts within the Retained Amount” and “The Retained Amount is the responsibility of the Insured and is to be paid from the Insured’s own account.” Id. at 3. The court concluded that (1) the policy required the Insured to pay the Retained Amount itself and (2) payments made by Arena Group’s other insurers to the injured parties did not satisfy the SIR. Id. at 5. Reading the contract as a whole, the court rea-

8 ■ Insurance Coverage and Claims ■ April 2017 soned that part of the definition of “Retained Amount” included a sentence that (1) states that the “Retained Amount is shown in the Declarations” and (2) clarifies that whether the Retained Amount is “the amount retained by the Insured” or “the amount of underlying insurance” depends on what is identified in the Dec- larations. Here, the court found that the Declarations listed $500,000 as the Retained Amount, and did not list any underlying policies. Accordingly, under the policy, the Retained Amount consisted of “the amount retained by the Insured” – i.e., $500,000 – and not the amount of underlying insurance. Id. Therefore, the Insured was responsible for the Retained Amount. Only the “Named Insured” Can Satisfy the SIR: Some courts have held that an SIR is a condition precedent in the policy and, consequently, where specified as an obligation of the “named insured,” only the named insured must satisfy the SIR prior to the coverage of an underlying suit. In Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4th 1466 (2010), the court held that the insurer did not have an obligation to defend additional insured Forecast Homes since the named insured had not satisfied the SIR to trigger Stead- fast’s defense obligation. “You” Is Not Limited to the “Insured” in the SIR Provision: In contrast to Forecast, in National Fire Ins. Co. of Hartford v. Federal Ins. Co., 843 F. Supp. 2d 1011 (N.D. Cal. 2012), a California federal district court, interpreting California law, held that the named insured did not have to satisfy the SIR to trigger coverage. In reaching its conclusion, the court distinguished Forecast on the basis that the policy at issue in Fore- cast included additional language that was not present in the Federal policy: “Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” Id.(citing Forecast Homes, 181 Cal. App. 4th at 1472). A Contractual Indemnitor May Satisfy an SIR: The Florida Supreme Court recently opined on whether only the named insured can satisfy the SIR, or whether it can be satisfied by a contractual indemnitor, in Intervest Construction of Jax, Inc. v. General Fid. Ins. Co., 133 So. 3d 494 (Fla. 2014). The SIR endorsement stated as follows: 3. We have no duty to defend or indemnify unless and until the amount of the “Retained Limit” is exhausted by payment of settlements, judgments, or “Claims Expense” by you.… 6. The “Retained Limit” will only be reduced by payments made by the insured.… The payment of the “Retained limits” by the insured is a condition precedent for our obligation to pay any sums either in defense or indemnity and we shall not pay any such sums until and unless the insured has satisfied its “Retained limits.” The Florida Supreme Court held that the policy language allowed the SIR to be satisfied by the indemnity payment made by the contractual indemnitor. Id. at 503.

B. Policyholder Obligations Under the SIR Another issue that often arises in circumstances involving overlapping coverage is whether the policyholder with an SIR obligation has the same obligations to overlapping insurers that another insurer has. Some cases of note are noted here. Adequate Defense: In State Nat’l Ins. Co. v. County of Camden, No. 08-5128 (MH)(AMD), 2012 WL 6652819, 2012 U.S. Dist. LEXIS 179892 (D.N.J. Dec. 19, 2012), the New Jersey District Court concluded that the policy’s SIR endorsement had the “essential character” of a condition precedent, meaning that the insured County bore the burden of proving that it provided itself with an “adequate defense” (Id. at 12), an issue disposi- tive as to whether the State National policy was implicated. If the County could not satisfy that burden, then it could not recover under the policy. Id. (Notably, the court did not define what an “adequate” defense means.)

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 9 Duty to Settle: Insurers are often found to have a duty to settle, even in circumstances where actual coverage may be limited or does not exist (discussed further, infra). In Commercial Union Assurance Co. v. Safeway Stores, 26 Cal. 3d 912 (1980), the court found that even though an insured may have had an opportunity to settle within its SIR, the language in the policy did not support any expectation by the insurer that its insured would settle a claim for less than the amount necessary to trigger coverage of the policy in excess of the SIR. Accordingly, the Court held that a policy providing for excess insurance coverage imposes no implied duty on the insured to accept a settlement offer that would avoid exposing the insurer to liability. Id. at 921. Further, the court held that such a duty cannot be predicated on an insured’s implied covenant of good faith and fair dealing. Id. The court said that if an excess carrier wishes to insulate itself from liability for an insured’s failure to accept what it deems to be a reasonable settlement offer, it may do so by appropriate language in the policy. However, the court hesitated to read into the policy obligations that were neither sought nor contemplated by the parties. Id. See also, International Ins. Co. v. Dresser Industries, Inc., 841 S.W.2d 437 (Tex. App. 1992) (finding the policy provided the insured with absolute and complete management and control of its defense of claims and lawsuits made or brought against it and imposed no duty upon the insured to accept a settlement offer that would avoid exposing the excess insurer to liability.”) Id. at 445; Employers Mut. Casualty Co. v. Key Pharmaceuticals, 871 F. Supp. 657, 665 (S.D.N.Y. 1994). (The court, applying New Jersey law, noted the “differing circumstances” of self-insured policyholders and primary carriers and hesitated to assume that New Jersey would create “novel tort duties” on behalf of excess insurance companies as against their policyholders. Accordingly, under New Jersey law, the court declined to recognize a common-law duty giving rise to a cause of action by an excess insurer against its insured for failure to settle a lawsuit below the threshold of the excess policy.)

C. When Is the Duty to Defend Triggered Under a Policy with an SIR? As a general rule, an excess insurer overlying an SIR has no duty to defend until the SIR is satisfied because SIRs are typically upheld as “conditions precedent to coverage.” General Star Nat’l Ins. Co. v. World Oil Co., 973 F. Supp. 943 (C.D. Cal. 1997). Therefore, there is typically no obligation to defend or indemnify until the SIR is satisfied. There are, however, other factors to be noted. Other Insurance May Satisfy Conditions Precedent: In World Oil, General Star renewed a policy issued to World Oil that had a “per accident” limit of $1.2 million, a “per accident” deductible of $100,000, and an “annual aggregate” deductible of $150,000. Id. at 945. The Claims Agreement provided that World Oil would defend all claims that fell within the $100,000 “per accident” deductible. General Star retained the right, but not the duty, to “associate in the handling” or “take complete control at any time of the handling” of such claims. At the time of renewal, World Oil purchased a second policy from Hartford Fire Insurance Com- pany with no deductible and a limit of coverage of $250,000, an amount equal to the maximum deductible that could result from a single accident under the General Star policy. General Star argued that a “deductible buy-back” policy violated its risk-sharing principle and that its policy required World Oil to pay the deductible itself. The court disagreed, finding that if General Star intended the language and the requirements of its policy to prohibit the insured from obtaining separate coverage to satisfy the deductible, General Star failed to state this intention in “unambiguous terms.” Id. Other Exceptions: Courts have found exceptions to the rule that insurers have no duty to defend or indemnify until the SIR is exhausted. In Am. Safety Cas. Ins. Co. v. City of Waukegan, 678 F.3d 475 (7th Cir. 2012) (Illinois law), the Seventh Circuit held that an insurer had a duty to defend even though an SIR was not exhausted. The policy provided, “We shall have the right and duty to select counsel and defend any claims to which [this policy] applies. Our

10 ■ Insurance Coverage and Claims ■ April 2017 right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments and settlements.” Id. at 482. The court observed that this language sets an end (at the policy limit) on the duty to defend. It did not postpone the beginning of the duty until Waukegan had paid $100,000 from its own pocket. Id. Therefore, the court refused to add a condition that was not found in the policy. Similarly, in Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4th 677 (2010), the court considered the nature of an insurer’s defense obligations under a liability policy that provided both “excess” and “umbrella” coverage. Id. at 681. The court held that the umbrella coverage was primary coverage and that the duty to defend did not depend on the exhaustion of any underlying insurance. Id. at 682. The court found that the “underlying insurance,” as used in the provision establishing a duty to defend with respect to umbrella coverage, was ambiguous. Id. Furthermore, the court also addressed the scope and extent of an insurer’s duty to defend in spite of a “retained limit” on the insurer’s duty to indemnify. Id. at 681. The court concluded that an SIR provision in the policy providing primary coverage relieved the insurer of the duty to provide an immediate, “first dollar” defense only if the policy expressly so provided. Id. at 682. Therefore, the court concluded that the insured need not have incurred a liability in excess of the SIR before the insurer’s duty to defend could arise. In other words, the duty to defend was not a condition precedent to the policy’s coverage. Id. Also, unless a policy “expressly relieves” an insurer of its duty to defend before an SIR is satisfied, the insuring clause in a primary policy imposes a duty to defend. Standing on the Sidelines: Some insurers may have a legitimate basis to defer participation in the defense of an insured with an SIR or large deductible, but waiting on the sidelines until an SIR is satisfied may create larger exposure to insurers. For example, a California court was asked to determine whether money must be paid for “covered damages” in order to satisfy exhaustion of an SIR. In Axis Surplus Ins. Co. v. Glencoe Ins., 204 Cal. App. 4th 1214 (2012), Axis Surplus Insurance Company and Glencoe Insurance Ltd. provided general liability insurance for Pacifica Pointe L.P. Pacifica was sued in a construction defect suit and tendered the claims to both Axis and Glencoe. While Axis agreed to defend Pacifica subject to a reservation of rights, Glencoe declined the tender until the $250,000 SIR was satisfied under the Glencoe policy. Id. at 1217. The underlying plaintiff made a $1 million demand. Pacifica agreed to contribute $250,000 and Axis asked Glen- coe to split the remaining $750,000. Id. Glencoe knew about the $1 million demand, but declined to partici- pate in the settlement. Id. at 1219. Glencoe claimed it had no information that the $250,000 being paid by Pacifica was for “covered” damages. Id. The case settled and Axis paid $750,000 and Pacifica paid $250,000. Id. Axis then sued Glencoe for contribution. Id. The court held in favor of Axis and found Glencoe had an obligation to reimburse Axis for 60 percent (not 50 percent) of the settlement. The court found that Glencoe was correct that its duty to defend was triggered only after the SIR was paid, but the court noted that “Glencoe appears to have been hiding behind the SIR requirement in its policy, gambling that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit.” Id. at 1228. Accordingly, the court created a limited exception to the normal rules of a “50-50” allocation because equity weighed in favor of Axis, the participating insurer: In short, the unique facts of this case warrant that we create a limited exception to the rule enun- ciated in Safeco, supra, 140 Cal. App. 4th at page 879 and American Continental, supra, 86 Cal. App. 4th at page 938 regarding the timing of an insurer’s legal obligation to provide coverage. When the insured has tendered a claim to the nonparticipating insurer, the nonparticipating insurer’s duty to defend is subject to the insured satisfying an SIR, and the insured satisfies the SIR as payment of a settlement of which the nonparticipating insurer was aware, the timing of the insured’s payment of the SIR does not prevent the settling insurer from establishing the nonparticipating insurer’s legal obligation to cover the underlying claim. To apply a more rigid rule

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 11 in this matter would undermine the equity inherent in an equitable contribution action. Id. at 1229. Stipulated Judgments. In Lasorte v. Those Certain Underwriters at Lloyd’s, 995 F. Supp. 2d 1134 (D. Mont. Feb. 5, 2014), a district court, applying New York law, held that a $25,000 SIR was exhausted when an insured entered into a stipulated judgment in excess of $25,000. Prior to executing the stipulated judgment, counsel for the employer gave the insurer the opportunity to exercise its right to defend and assume defense of the claim, but the insurer chose not to defend. Id. “Under New York law, an insurer must defend and indemnify an insolvent insured even if the insured has not exhausted any Self Insured Retention.” Id. at 8. The district court denied the insurer’s motion for summary judgment because the policy language required the insurer to indemnify once the SIR was exhausted and the SIR was exhausted by the underlying judgments. Id. at 8-9. “Under New York law, the term ‘exhausted’ – as used in policies analogous to the Policy here – is ambiguous and is therefore construed against the insurer to include settlement by compromise.” Id. at 9. Here, the court found that the $25,000 SIR in the policy at issue was exhausted when the plaintiff agreed to the underlying judgment of $210,000 after first tendering the right to defend and control the disposition of the case to the defendants. Id. Volunteering to Defend Within SIR May Be a Waiver. In Rosalind Franklin Univ. of Med. & Sci. v. Lexington Ins. Co., 8 N.E.2d 20 (Ill. App. Ct. 2014), the insured medical school claimed coverage for the settlement it paid in an underlying suit filed by former patients seeking compensation for the school’s decision to discontinue an experimental cancer vaccine program. Id. at 25. Lexington argued it owed no duty to pay for the school’s defense and settlement costs under its primary policy and excess policy, as its policies covered liability resulting from medical incidents arising out of professional services. Id. at 27-28. Further, Landmark, which had issued a directors and officers liability policy, argued it owed no duty to indemnify the school for settlement, as its policy contained specific exclusion for medical malpractice damages. Id. at 29. Lexington contended that its duty to defend was not triggered because it was not aware of the potential exhaustion of the $100,000 self-insured retention in the primary policy. Id. at 61. However, the court held that Lexington waived any argument on this point by voluntarily undertaking the defense of and appointing counsel to defend the underlying suit. Id. at 61-62. Further, the court found that Lexington provided no case law in support of the proposition that an insurer who appoints counsel for its insured may later avoid coverage because it did not know of the exhaustion of a self-insured retention. Id. at 62. Therefore, if an insurer chooses to defend within an SIR, that insurer must be prepared to waive any exhaustion argument regarding the SIR.

V. “Other Insurance” Clauses Most insurance policies include “other insurance” clauses designed to preclude or limit an insurer’s obligation to defend, indemnify, or contribute toward coverage where other insurance policies cover the same risk. While policy language can vary, the following are examples:

A. Pro Rata Clauses: By Limit or Equal Shares If the insured has other insurance against liability or loss covered by this policy, the company shall not be liable for a greater proportion of such liability or loss than the applicable limit of liability bears to the total applicable limit of liability of all collectible insurance against such liability or loss. Or:

12 ■ Insurance Coverage and Claims ■ April 2017 When more than one policy applies to loss on same basis, policy will pay equal shares if all policies so provide;

B. Excess Clauses “Excess clauses” provide that in the event of overlapping coverage, the subject policy provides excess coverage only. A typical “excess clause” would provide: If there is other insurance against a loss covered under this policy, the insurance provided under this policy shall be excess insurance over any other valid and collectible insurance. Or: Excess Insurance This insurance is excess over: 1) Any of the other insurance, whether primary, excess, contingent or on any other basis: a) Fire insurance for premises rented to you…

C. Escape Clauses / Super Escape Clauses An “escape clause” eliminates coverage where the loss is covered by any other insurance. A typical “escape clause” would provide: If any person...other than the insured...is also covered by other valid and collectable insurance, such other person...shall not be indemnified under this policy. Or: If there is other insurance that applies to a loss, this insurance shall not apply. And, of course, there is the Super Escape clause: This insurance does not apply...to any liability for such loss as is covered on a primary, contribu- tory, excess or any other basis by insurance in another insurance company.

D. Excess Escape Clauses An “excess escape clause” provides coverage that is excess to all other insurance. The policy contain- ing the excess escape clause responds, up to that policy’s coverage limit, where the loss exceeds the limits of liability of all other available policies. A typical excess escape clause from a public liability policy provides: If other valid insurance exists protecting the insured from liability for such bodily injury...this policy shall be null and void with respect to such specific hazard otherwise covered, whether the insured is specifically named in such other policy or not; provided, however, that if the applicable limit of liability of this policy exceeds the applicable limit of liability of such other valid insurance, then this policy shall apply as excess insurance against such hazard in an amount equal to the applicable limit of liability of this policy minus the applicable limit of liability of such other valid insurance.

E. Professional Liability / Claims Made Clauses Claims made policies are designed to limit exposures. In addition to requiring that claims be first made or first made and reported during a specific policy period, claims made policies also include an “other

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 13 insurance” clause in the policy. Often, these follow the form of the “other insurance” clauses found in other policies identified above. However, some claims made policies have specific “other insurance” clauses written to work with the claims made coverage: If the insured has other insurance against a loss covered by this policy, the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability stated in the Declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss; provided however, with respect to acts or omissions which occur prior to the inception date of the policy, the insurance hereunder shall apply only as excess insurance over any other valid and collectible insurance and shall then apply only in the amount by which the applicable limits of liability of this policy exceed the sum of the applicable limits of liability of all such other insurance.

VI. Reconciling “Other Insurance” Clauses Significantly, an insurance policy is a contract between the policyholder and its insurer. Thus, irrespective of what “other insurance” clause may exist in a policy it is not contractually binding on other insurers. Insurers’ rights among each other arise in equity rather than in contract. Moreover, when insurers issue coverage they are generally unaware of what, if any, overlapping coverage will exist or the terms of those policies. Consequently, the only certainty with regard to “other insurance” clauses is that in the event of overlapping coverage conflicts among “other insurance” clauses will arise. A determination of how—or if—”other insurance” clauses will apply is often jurisdiction-specific. Even within jurisdictions, courts may disagree or distinguish facts, policy language, or case law in a given case. Insurers confronting “other insurance” disputes are encouraged to consult the law of the relevant jurisdiction. The following, however, will highlight several of the unique issues that confront insurers in reconciling conflicting “other insurance” clauses and the approaches that courts throughout the United States have taken.

A. Identical or Similar “Other Insurance” Clauses Many jurisdictions seek to apply “other insurance” clauses, particularly when overlapping insurers use identical or similar language. For example, allocating among overlapping policies is often honored when courts address (a) pro rata clause vs. pro rata clause, (b) excess clause vs. excess clause, and (c) escape clause vs. escape clause. Pro Rata vs. Pro Rata: The more traditional approach is for each overlapping insurer to contribute in proportion, comparing its limits with the total amount of valid and collectible insurance, i.e., all available limits. See, e.g., Tarolli v. Continental Cas. Co., 181 A.D.2d 1021, 581 N.Y.S.2d 510 (1992). However, the more contemporary “other insurance” language requires insurers to contribute by “equal shares” where all other policies so provide. Generally, when applied, courts will apply the “equal shares” allocation, even in instances where the overlapping insurers have different liability limits. See, e.g., Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., 78 Cal.App. 4th 847 (Cal. 1st Dist. 2000); Holyoke Mut. Ins. Co. v. Cherokee Ins. Co., 386 S.E.2d 524 (Ga.Ct.App. 1989). Some courts have even applied the “equal shares” allocation to defense obligations even though the “other insurance” language does not address defense costs. U.S. Fidelity & Guar. Co. v. Execu- tive Ins. Co., 893 F.2d 517 (2nd Cir. 1990). Excess vs. Excess: By their terms, the excess clauses cancel each other out. The net impact is that many courts consider such a conflict as irreconcilable and treat the clauses as mutually repugnant. Finding

14 ■ Insurance Coverage and Claims ■ April 2017 the clauses mutually repugnant, courts are split on how to allocate among overlapping policies when all policies contain excess clauses. See, e.g., Nat’l Sur. Corp. v. Ranger Ins. Co., 260 F.3d 881 (8th Cir. 2001); Highlands Ins. Co. v. Continental Ins. Co., 64 F.3d 514 (9th Cir. 1995); CSE Ins. Group v. Northbrook Prop. and Cas. Co., 23 Cal.App.4th 1839, 29 Cal. Rptr.2d 120 (1994). In allocating such overlap, courts generally apply a pro rata approach, often according to limits or equally among overlapping insurers depending on the law of the jurisdiction. See Indiana Ins. Co. v. Mission Nat’l. Ins. Co., 874 F.2d 631 (9th Cir. 1989) (allocating by limits); Taco Bell Corp. v. Cont’l Cas. Co., 388 F.3d 1069 (7th Cir. 2004) (allocating in equal shares). Escape vs. Escape: Conflicting escape clauses are frequently treated as being mutually repugnant since they cancel out each other. Depending on the jurisdiction, the two most common methods of allocating such competing clauses is pro rata according to limits (e.g., Nippon Fire & Marine Ins. Co., Ltd. v. Great Am. Ins. Co., 103 F.3d 139 (9th Cir. 1996)) or in equal shares (Glacier Assurance Co. v. Continental Cas., 605 F.Supp. 126 (D.D.C. 1985)). However, an alternative view exists that allocates in proportion to the premiums received. Carlino v. Lumbermens Mut. Cas. Co., 74 N.Y.2d 350, 546 N.E.2d 909 (1989). But see Continental Cas. Co. v. Aetna Cas. and Sur. Co., 823 F.2d 708, 712 (2nd Cir. 1987) (rejecting allocation based on premiums).

B. Conflicting “Other Insurance” Clauses There are myriad scenarios where overlapping policies have dissimilar “other insurance” clauses. In jurisdictions that do not view such conflicts as presenting mutually repugnant clauses meriting pro rata allocation (discussed below), there are myriad analyses and conclusions that take into account and evaluate the competing policy language. As a general rule, courts begin the analysis of conflicting “other insurance” clauses by trying to give effect to the intent of the parties, including whether primary or excess coverage was intended and whether the overall insurance program provides guidance. Allstate Ins. Co. v. Employers Liab. Assurance Corp., 445 F.2d 1278 (5th Cir. 1971). The analysis in Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622 (1975), which addressed conflicting clauses in policies where the insured was the policyholder and a Named Insured and/or an Additional Insured on policies with competing “other insurance” clauses, is instructive of courts deciphering this intent. In Rossmoor, a sewage facility contractor had entered into an agreement with the owner of real property, agreeing to indemnify and hold the owner harmless for all claims for property damage or personal injury. The owner was held liable for the personal injuries and death of employees from a cave-in of an unshored trench. The owner and its insurer sought indemnity from the contractor and its liability insurer. The contractor’s insurer cross-complained against the owner’s insurer seeking apportionment of sums paid under the “other insurance” clauses of the policies. 13 Cal.3d at 625-627. The California Supreme Court held that the owner’s insurance coverage, provided by a direct insurer, was excess over coverage provided by an additional insured provision in the contractor’s policy. Rossmoor, 13 Cal.3d at 633-635. The California Supreme Court denied apportionment between the insurers, despite their respective “other insurance” clauses, reasoning that to “apportion the loss in this case pursuant to the other insurance clauses would effectively negate the indemnity agreement and impose liability on [the owner’s insurer] when [the owner] bargained with [the contractor] to avoid that very result as part of the consideration for the construction agreement. We therefore conclude that the rights of indemnity and subrogation must control, and are persuaded the trial court was correct in finding that because the [contractor’s insurance policy naming the owner as an additional insured] was part of the consideration for the construction job, it must be viewed as primary insurance under the facts of this case and that [the owner’s direct insurer] was subrogated to the rights of [the owner].” Id. at 634-635.

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 15 Another court, however, found that Rossmoor’s reasoning does not apply to excess vs. primary policy even if there is an indemnity agreement. Reliance National Indemnity Co. v. General Star Indemnity Co., 72 Cal.App.4th 1063 (1999). And, yet another court disagreed with Reliance. Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583, 591 (8th Cir. 2002) (Reliance is “in conflict with” and the Court does not think “its result fully accords with” Rossmoor). There are other scenarios where competing clauses generate case law that provides some guidance. Pro Rata vs. Excess: Where there is an overlap between pro rata and excess “other insurance” clauses, courts will apply liability to the excess clause only after the policy with the pro rata clause has exhausted. United States Fid. & Guar. Co. v. Ins. Co. of North America, 149 F.3d 1184 (6th Cir. 1998); IBM Corp. v. Lib- erty Mut, Fire Ins. Co., 303 F.3d 419 (2nd Cir. 2002); State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc., 613 F. Supp. 2d 945, 963 (W.D. Mich. 2009). As discussed below, however, some jurisdictions find such conflicts to present mutually repugnant conflicts and apportion according to pro rata guidelines of the jurisdiction. Century Sur. Co. v. United Pacific Ins, Co., 109 Cal. App. 4th 1246 (2003), petition for rev. denied, No. S117884 (Cal. Sept. 17, 2003); Rockwood Ins. Co. v. Ill. State Medical Interinsurance Exch., 646 F. Supp. 1185, 1191 (N.D. Ind. 1986). Other courts have looked to the insured for its perspective. In Royal Ins. Co. of America v. Hartford Underwriters Ins. Co., 391 F.3d 639 (5th Cir. 2004) (applying Tex. law). Pro Rata vs. Escape: In circumstances where the conflict involves a pro rata clause vs. an escape clause, courts willing to apply apportionment analysis (as opposed to finding the clauses mutually repugnant) have generally recognized and given effect to the escape clause, finding it is excess and the pro rata policy is primary. See, e.g., Aetna Cas. & Sur. Co. v. Continental Cas. Co., 413 Mass. 730, 604 N.E.2d 30, 32 (1992); Am. Int’l Specialty Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254 (5th Cir. 2003) (applying Louisiana law); but see St. Paul Mercury Ins. Co. v. Lexington Ins. Co, 78 F.3d 202, 210 (5th Cir. 1996) (applying Texas law). Excess vs. Escape: In circumstances where courts have confronted excess vs. escape “other insurance” clauses, the escape clause is frequently found to be primary and is required to exhaust before the policy with the excess clause is triggered. See, e.g., Kipper v. Universal Underwriters Group, 304 A.D.2d 62, 65, 756 N.Y.S.2d 682 (2003) (escape clause labeled a “no liability clause”). Another approach, however, is that such a conflict is irreconcilable and, consequently, a pro rata apportionment applies. Fremont Indem. Co. v. New Eng- land Reins. Co., 815 P.2d 403 (Ariz. 1991) (finding the excess vs. escape conflict to be mutually repugnant and applying Arizona’s pro rata apportionment). Super Excess / Super Escape / Excess Escape: In response to the ever-increasing number of “other insurance” clauses designed to trump overlapping coverages, insurers have issued increasingly broader clauses intended to preclude recovery under the policy if other policies have overlapping coverage. Aramark Lei- sure Servs. v. Kendrick (In re Aramark Leisure Servs.), 523 F.3d 1169 (10th Cir. Utah 2008), citing Utah Power & Light Co. v. Fed. Ins. Co., 983 F.2d 1549 (10th Cir. 1993). For example, the excess escape clause is intended to provide coverage in excess of all other insurance, i.e., that portion of liability that exceeds the limits of all other policies. See Universal Underwriters Ins. Group v. Griffin, 287 Ill.App.3d 61, 677 N.E.2d 1321, 1331 (1997). Courts have shown a willingness to allow insurers with the super escape or excess escape clauses to avoid contribution where liability does not exceed other insurers’ limits. Horace Mann Ins. Co. v. Continen- tal Cas. Co., 54 N.C.App. 551, 284 S.E.2d 211 (1981); Hodgen v. Forest Oil Corp., 862 F. Supp. 1567 (W.D. La. 1994). Others, however, prorate the liability between the insurers based on the reasoning that the excess and escape provisions are mutually repugnant. See, e.g., Farm Bureau Mut. Ins. Co. v. Horace Mann Ins. Co., 345 N.W.2d 655, 657 (Mich. App. 1983). Still other courts have found that in comparing a super escape clause with an excess clause, the super escape clause will be designated primary. Insurance Company of North America v. Continental Cas. Co., 575 F.2d 1070 (3d Cir.1978); see also Riley v. State Farm Mut. Auto. Ins. Co., No. 92-J-47,

16 ■ Insurance Coverage and Claims ■ April 2017 1994 Ohio App. LEXIS 2230 (Ohio Ct. App. May 20, 1994). Such differences highlight the need to determine the law in each jurisdiction where “other insurance” clauses conflict. Professional Liability / Claims Made Policies: Professional liability policies, such as Directors & Officers and Errors & Omissions, typically provide coverage on the condition that claims be first made or first made and reported during the relevant policy period. This contrasts with general liability policies, which typically provide coverage for “occurrences” happening during the policy period, even if claims arising from such occurrences are not made until after the policy expires. As a general rule, “other insurance” clauses in claims made policies are treated no differently than any other circumstance in which there are competing or conflicting “other insurance” clauses. White & Neumeier, “Errors & Omissions Insurance,” New Appleman on Insur- ance, Ch. 25 (LexisNexis 2010). (For a detailed analysis of allocation of long-tail claims between claims made and occurrence policies, see “Allocation Between Claims-Made and Occurrence Policies,” ALI-ABA Course of Study, Insurance Coverage in the New Millennium (October 11-12, 2001)). It is worth noting that there is often overlap between E&O and D&O policies, albeit limited. However, there is almost no case law addressing the interaction of “other insurance” clauses in such circumstances. See, e.g., “A Tale of Two Towers: When Pro- fessional Liability and D&O Coverage Both Are Implicated,” ABA Section of Litigation 2012 Insurance Cover- age Litigation Committee CLE Seminar, for a discussion on substantive coverage issues and overlaps involving D&O and E&O policies. As with occurrence policies, some courts construing claims-made other insurance clauses generally follow the language of the “other insurance” clause when there is some combination of “pro rata,” “excess,” “escape,” or “excess escape” clauses. Fieldston Property Owners Association Inc. v. Hermitage Insurance Co. Inc., 2011 WL 649812 (N.Y.), 2011 N.Y. Slip. Op. 01361 (2011) (GL insurer required to defend insured against all claims in the underlying lawsuit, even where many claims in the suit were potentially covered under D&O policy and only one claim was potentially covered by GL policy; court found the D&O insurer’s excess “Other Insurance” clause decisive, reversing the lower court’s ruling that would have required the D&O insurer to contribute to the defense and settling a split among New York courts over whether “other insurance” clauses would apply to defense. In this respect, it is also worth noting that many D&O policies do not contain a duty to defend, but rather obligate the insurer to indemnify defense costs incurred by the policyholder. But see, Trinity Universal Ins. Co. v. Employers Mut. Cas. Co., 592 F.3d 687, 695 (5th Cir. Tex. 2010) (“‘other insurance’ clause applies only to the duty to indemnify, not the duty to defend”); Utica Mut. Ins. Co. v. Miller, 130 Md. App. 373, 394 (Md. Ct. Spec. App. 2000) (‘“Excess’ or ‘other’ insurance clauses have been recognized as not applying to the duty to defend”). Other courts have made determinations regarding primary and excess from policy language other than “other insurance” clauses. See National Union Fire Ins. Co. v.. Lawyers’ Nita. Ins. Co., 885 F. Supp. 202, 297 (S.D. Cal. 1995) (after determining that National Union policy was excess and the Lawyers Mutual policy was primary “it is unnecessary to examine the “other insurance clauses of the policies to determine if they would affect the relative duties and obligations of the Parties.”) However, other courts confronting conflicting combinations of “other insurance” clauses have found such clauses are mutually repugnant and must be disregarded and/or opt to use judicial rules to resolve disputes between other insurance clauses. Redeemer Covenant Church of Brooklyn Park v. Church Mut. Ins. Co., 567 N.W.2d 71, 79 (Minn. Ct. App. 1997) (“In Minnesota, this court does not simply look at the type of ‘other insurance’ clauses, involved…the better approach…[is] to allocate respective policy coverages in light of the total policy insuring intent, as determined by the primary risk upon which each policy’s premiums…[are] based and as determined by the primary function of each policy’”). See also St. Paul Fire & Marine Ins. Co. v. American Home Assur. Co., 444 Mich. 560, 514 N.W.2d 113, 116 (1994) (defendant in legal malpractice action was covered under both an occurrence policy and a claims made policy; the court, in comparing the occur-

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 17 rence policy’s pro rata clause with the claims made policy’s excess clause followed Michigan law and held that the claims made policy was not required to respond until the occurrence policy limits had exhausted).

C. Equitable Apportionment Several jurisdictions when confronted with competing and conflicting “other insurance” clauses have declined to apply them. Instead, finding that the rights of insurers against each other arise in equity, courts have adopted allocation approaches that are equitable rather than contractual. Pro Rata by Limits or Equal Shares: As referenced above, some courts in California—under specific circumstances—have been willing to apportion liability pursuant to other insurance clauses. The more recent trend, however, finds that courts in California have concluded in conflicting “other insurance” scenarios that the clauses are mutually repugnant. For example, when one “other insurance” clause provides for pro rata coverage while the other purports to be excess only, courts generally favor proration, because the prevail- ing judicial view is that imposing the entire liability for a loss on the former “would annul that policy’s language, and create the anomaly that courts will…enforce proration between policies [only] when they [both] have conflicting ‘excess other insurance’ language barring proration.” Fireman’s Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 1306 (1998); Century Surety Co. v. United Pacific Ins. Co., 109 Cal.App.4th 1246, 1258 (2003). “Giving ‘excess other insurance’ clauses priority over policies providing for pro rata apportionment of liability among policies is completely unrelated to the original historical purpose of such ‘other insurance’ clauses, which was to prevent multiple recoveries by insureds in cases of overlapping insurance policies providing coverage for the same loss. For these reasons, among others,…‘[t]he general rule, when multiple polices share the same risk but have inconsistent “other insurance” clauses, is to prorate according to the policy limits.’ [Citation.]” Fireman’s Fund Ins. Co. v. Maryland Cas. Co., supra, 65 Cal.App.4th at p. 1306; accord, Century Surety Co. v. United Pacific Ins. Co., supra, 109 Cal.App.4th at 1258. Courts also have used this approach for defense fees even though defense fees are not mentioned in other insurance clauses. For example, the Utah Supreme Court has ruled that defense costs should be appor- tioned between insurers on the basis of their respective years of coverage rather than on the basis of “other insurance” clauses. Having previously adopted a “time on the risk” approach to allocation of indemnity, the Utah Supreme Court ruled in The Ohio Cas. Ins. Co. v. Unigard Ins. Co., 2012 UT 1 (Utah January 6, 2012) that similar principles apply to the division of defense costs among successive carriers with respect to intellectual property claims triggering Coverage B. One of the seminal cases to abandon an “other insurance” analysis was Lamb-Weston, Inc. v. Ore- gon Auto. Ins. Co., 219 Or. 110, 341 P.2d 110 (1959) modified and rehearing denied, 219 Or. 129, 346 P.2d 643 (1959). In Lamb-Weston the court stated: “In our opinion, whether one policy uses one clause or another, when any come in conflict with the ‘other insurance’ clause of another insurer, regardless of the nature of the clause, they are in fact repugnant and each should be rejected in toto.” Lamb-Weston, 341 P.2d at 119. Courts that adopt this approach generally apportion liability among the insurers on a pro rata basis in proportion to the combined policy limits represented by the limits of each insurer’s policy or, in sharing of defense fees, pro rata based on equal shares. In doing so, they reason that the duty to defend is incumbent on each insurer irrespective of limits. Other courts have similarly adopted an equitable pro rata approach, but have elected to apportion liability in equal shares for indemnity where liability is less than policy limits. See, e.g., Insurance Co. of North America v. Protection Mut. Ins. Co., 939 F.Supp. 79 (D.Mass. 1996); Mission Ins. Co. v. Allendale Mut. Co., supra; Glacier Assurance Co. v. Continental Cas., 605 F.Supp. 126 (D.D.C. 1985); Ruan Transport Corp. v. Truck Rent-

18 ■ Insurance Coverage and Claims ■ April 2017 als, Inc., 278 F.Supp. 692 (D.Colo. 1968); United States Fid. & Guar. v. United States Fire Ins. Co., 90 Md.App. 327, 600 A.2d 1178 (1992); Liberty Mut. Ins. Co. v. Pacific Indemnity Co., 557 F.Supp. 986 (W.D.Pa. 1983). Same Level of Risk: Notwithstanding “mutually repugnant” rules precluding “other insurance” analysis, when two policies insure the same risk at the same level of coverage, California (and other jurisdictions) may be willing to engage in an “other insurance” analysis to determine whether the “other insurance” clauses conflicted and thus required equitable proration. See Reliance Nat. Indem. Co. v. General Star Indem. Co. (1999) 72 Cal.App.4th 1063, 1077 [“other insurance” clauses become relevant only when several insurers insure the same risk at the same level of coverage]; see also Commerce & Industry Ins. Co. v. Chubb Custom Ins. Co. (1999) 75 Cal.App.4th 739, 745 [predicate for prorating policies with conflicting “other insurance” provisions is that they operate on the same level of coverage]; accord, Century Surety Co. v. United Pacific Ins. Co., supra,109 Cal.App.4th at p.1256.); Carmel Development Co. v. RLI Ins. Co., 126 Cal.App.4th 502 (2005) (“Only if the two policies were insuring the same risk at the same level of coverage will we proceed to determine whether the “other insurance” clauses conflicted and thus required equitable proration”). Contractual terms of insurance coverage are enforced whenever possible, “‘even in situations where to do so will be inconsistent with proration provisions in other policies.’” Reliance Nat. Indemnity Co. v. General Star Indemnity Co., supra, 72 Cal.App.4th at p. 1076.) See also Fire Ins. Exch. v. American States Ins. Co., 39 Cal.App.4th 653 (1995); Golden Eagle Ins. Co. v. Crusader Ins. Co., (2008) (No equitable contribution claim where insurers cannot demonstrate a common policyholder; whether insurers had same policyholder was in dispute and the court held there could be no equitable contribution in the absence of proof that there was a mutually liable policyholder.); Cabral v. State Compensation Ins. Fund, 13 Cal. App. 3d 508 (1971) (If one insurer does not cover the loss, the other has no right to contribution but has to seek indemnity or subrogation.); Couch on Ins. 2d §§62:152-153. Premiums: Another equitable approach is to allocate liability in accordance with the premiums each insurer received. Ins. Co. of Texas v. Employers Liability Assur. Corp., 163 F.Supp. 143, 147 (S.D.Cal. 1958); Ins. Co. of Tex. v. Employers Liability Assur. Corp. (1958) 163 F.Supp. 143, 147. However, it is worth noting that this approach is a minority position that has been criticized and rejected by other courts. Continental Cas. Co. v. Aetna Cas. and Sur. Co., 823 F.2d 708, 712 (2nd Cir. 1987; Reliance Ins. Co. v. St. Paul Surplus Lines Ins. Co., 753 F.2d 1288,1291 (4th Cir. 1985)). Indemnity Agreements: If two policies each have identical “other insurance” provisions, the indemnity agreement may be viewed as expressing the intent that indemnitor’s policy be primary. Walmart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002). However, in some instances where a subcontractor’s policy is only required to indemnify a general contractor’s with respect to liability arising out of the subcontractor’s work, courts have found that it is not the same loss and that insurers are not entitled to equitable contribution or equitable subrogation. Schal Bovis Inc. v. Casualty Ins. Co., 732 N.E. 2d 1179 (2000) (cannot obtain equitable contribution); Home Ins. Co. v. Cincinnati Ins. Co., 801 N.E. 2d 997 (2003) (cannot sue under equitable subrogation). See also Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622 (1975), discussed supra.

D. Statutory Apportionment It should be noted that some jurisdictions preempt “other insurance” clauses with statutes that dic- tate which policy of insurance is primary. For example, several jurisdictions require that injuries or property damage arising from an automobile accident require the automobile liability policy to act as the primary coverage. As a matter of best practices, state-specific Auto and Insurance Codes should be consulted in any evaluation of overlapping coverage involving an automobile policy. Other jurisdictions, such as Canada, have adopted statutes that impose a proportional liability rule in the event that there is overlapping fire insurance

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 19 coverage or provide that insurance on identified articles of property shall be primary and not subject to contribution. Again, this highlights that the laws of the relevant jurisdiction should always be consulted.

VII. Targeted Tenders Some jurisdictions—most prominently Illinois—allow policyholders covered by multiple policies to choose the specific policy it wants to defend and indemnify a given liability. Understanding the origins of this doctrine is relevant to an evaluation of its impact on apportionment of overlapping coverage. The Illinois Supreme Court’s decision in Institute of London Underwriters v. Hartford Fire Insurance Co., 234 Ill. App. 3d 70 (1st Dist. 1992) is generally recognized as the genesis of the targeted tender rule. Great Lakes Towing Company contracted with Thatcher Engineering Corporation to perform repairs and required Thatcher to add Great Lakes as an additional insured on Thatcher’s policy with Institute. Hartford insured Great Lakes Towing Company. In response to a suit for a Thatcher employee’s death, Great Lakes requested that Institute defend and indemnify it exclusively. Great Lakes did not want Hartford to respond. In addressing the subsequent insurer dispute, the Illinois high court held that because Great Lakes had not tendered the suit to Hartford, Hart- ford’s policy was not triggered and the issue of Hartford’s pro rata “other insurance” clause was inapplicable. Id. at 75-77. The court further held that Great Lakes should have the right not to seek Hartford’s participation because Great Lakes contracted for Thatcher to provide coverage. In addition, the court found it relevant that Great Lakes had concluded it was not responsible for the alleged accident and may have concerns that Hart- ford would respond to the tender with either higher premiums or a policy cancellation. Consequently, the court found that Institute could not seek contribution from Hartford. Id. at 78-79. The Illinois Supreme Court subsequently cited Institute in Cincinnati Cos. v. West American Insurance Co., 183 Ill. 2d 317, 323-26 (1998) when it held that an insured could elect to forego an insurer’s assistance. In addition, intermediate appellate courts recognized that additional insureds could target a specific policy or withdraw a tender to its own insurer. Alcan United, Inc. v. West Bend Mutual Insurance Co., 303 Ill. App. 3d 72 (1st Dist. 1999); Bituminous Casualty Corp. v. Royal Insurance Co. of America, 301 Ill. App. 3d 720 (3d Dist. 1998). Thereafter, the Illinois Supreme Court adopted the doctrine in John Burns Construction Co. v. Indi- ana Insurance Co., 189 Ill. 2d 570 (2000), holding that in the event of an insured instructing its insurer not to defend it, that insurer’s policy is not “available” when determining apportionment under the targeted policy’s “other insurance” clause. Illinois’s Targeted Tender doctrine has been subject to criticism with some limitations imposed. For example, in American National Fire Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., 343 Ill. App. 3d 93, 106-09 (1st Dist. 2003), the court expressed concern that the doctrine made it harder for insurers to determine the extent of insured risks. One justice recommended that it be limited to actions where the parties were additional insureds under concurrent primary policies, as is often found in construction litigation. Subsequent opinions have relied on this analysis in imposing limitations on the rule. For example, in Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 227 Ill. 2d 102 (2007), the Illinois Supreme Court reconciled targeted tender with horizontal exhaustion and held that a general contractor may target a subcontractor’s primary policy on which it was an additional insured, but that the general contractor’s own primary insurer had to indemnify its insured before the subcontractor’s excess policy applied. Another court has held that the right to a targeted tender is exclusive to the insured and cannot be assigned because such an assignment would defeat the policyholder’s purpose in shifting the loss to a specific insurer. AMCO Insurance Co. v. Cincinnati Insurance Co., 2014 IL App (1st) 122856.

20 ■ Insurance Coverage and Claims ■ April 2017 Illinois also has declined to apply the rule to auto policies. Pekin Insurance Co. v. Fidelity & Guaranty Insurance Co., 357 Ill. App. 3d 891, 901-02 (4th Dist. 2005) (citing 625 ILCS 5/12-606(d)); Coca-Cola Enter- prises, Inc. v. ATS Enterprises, Inc., 670 F.3d 771 (7th Cir. 2012). California also has recognized a policyholder’s right to select a specific policy known as an “Armstrong election,” but in contrast to Illinois continues to allow the selected insurer to seek contribution from other overlapping policies. Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 43, 52 Cal. App. 2d 690 (1996) (“[A] policyholder may obtain full…defense from one insurer, leaving the targeted insurer to seek contribution from the other insurers covering the same loss.”). See also, Stonelight Tile, Inc. v. Cal. Ins. Guar. Ass’n., 150 Cal.App.4th 19, 37 (2007) (“When a continuous loss is covered by multiple policies, the insured may elect to seek indemnity under a single policy with adequate policy limits. If that policy covers ‘all sums’ for which the insured is liable, as most CGL policies do, that insurer may be held liable for the entire loss.”). Insurers, however, are not allowed to prorate their own defense obligations based on a unilateral apportionment. Haskel, Inc. v. Superior Court, 33 Cal. App. 4th 963, 976, 39 Cal. Rptr. 2d 520 (1995) (“[W]e will treat [a carrier’s] acceptance of a [percentage] share of the defense burden as the equivalent of a defense denial. Such a unilateral limitation of its responsibility is not justified. If it owes any defense burden it must be fully borne…”). Targeted tenders continue to evolve in a number of jurisdictions. The key issues, as highlighted by Illinois and California is whether an insurer that is the subject of such a tender has the right to seek contribution from other available insurance and whether the nature of the claim imposes any limitation on the tender.

VIII. Duty to Settle Insurers may have overlapping coverage that obligates multiple insurers to defend a claim but otherwise have limited or no actual indemnity coverage under the policy. In such instances, an insurer may seek to be excused from an indemnity obligation or otherwise limit its indemnity obligation. In that event, insurers and policyholders are wise to evaluate the scope and limitations of the duty to settle in their particular jurisdiction. While the scope and limitations of the duty to settle can vary dramatically, the evolution of this doctrine highlights issues that insurers and policyholders confront in evaluating circumstances in which insurers may be asked to jointly contribute toward settlement, even when coverage for one or more insurers is ques- tionable. California courts have described the insurer’s duty to settle as the duty to settle the entire action for reasonable offers within policy limits. Johansen v. Cal. State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d 9, 12 (1975); Crisci v. Security Ins. Co., 66 Cal. 2d 425, 429 (1967); PPG Industries, Inc. v. Transamerica Insurance Co., 20 Cal. 4th 310 (1999); Marie Y. v. General Star Indem. Co., 110 Cal. App. 4th 928, 958 (2003). Having picked up the defense, under California law, an insurer may face the argument that it has an obligation to settle the claims against its insureds. Cal Ins. Code §790.03(h)(5); Beckham v. Safeco Ins. Co. of America, 691 F.2d 898 (9th Cir. 1983). However, so long as the insurer continues to defend, it has the right to decide whether to settle. Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th 782 (1999). Further, the insurer controls settlement so long as it is limited to monetary issues. Fiege v. Cooke, 125 Cal. App. 4th 1350 (2005) (citing Robertson v. Chen, 44 Cal. App. 4th 1290, 1293-96 (1996)); Commercial Union Ass. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 919 (1980) (“...where the insured is fully covered by primary insurance, the primary insurer is entitled to take control of the settlement negotiations and the insured is precluded from inter- fering therewith.”); Shapero v. Allstate Ins. Co., 14 Cal. App. 3d 433, 438 (1971); Ivy v. Pacific Auto. Ins. Co., 156 Cal. App. 2d 652, 660 (1958); Meritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 870 (1973); Brown v. Guaran- tee Ins. Co., 155 Cal. App. 2d 679, 684 (1957). This is true even if the insurer has reserved its rights such that

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 21 it triggered a right to independent defense counsel under California law. Western Polymer Technology, Inc. v. Reliance Ins. Co., 32 Cal. App. 4th 14, 24 (1995) (“In general, the insurer is entitled to control settlement negotiations without interference from the insured.”). For example, in Hamilton v. Maryland Casualty Co., 27 Cal.4th 718 (2002), a liability insurer agreed to defend its insured in a personal injury action. After the insurer refused a settlement demand within its policy limits, the third-party claimant and the insured, without the insurer’s participation or consent, entered into a settlement agreement resulting in a stipulated judgment in excess of the policy limits. Pursuant to the terms of the settlement, the claimant agreed not to execute the judgment against the insured, and the insured assigned to the claimant its cause of action for breach of the insurer’s duty to accept a reasonable settlement demand. Id. at 721-722. The settlement was approved as made in good faith under Code of Civil Procedure, section 877.6. In a subsequent action by the claimant against the insurer for breach of contract, the California Supreme Court held that a defending insurer cannot be bound by a settlement to which it had not agreed and in which it had not participated, even when the settlement has been approved under section 877.6. Hamilton, at 730-731. The California Supreme Court further concluded that in such circumstances, the stipulated judgment is insufficient to prove that the insured suffered any damages from the insurer’s breach of its settlement duty. Id. at 722, 726. The Court in Hamilton noted that it did not reach the question whether the action was also barred by the policy’s no-action clause, given its conclusion that the claimant’s action for breach of the duty of reasonable settlement could not be maintained. Id. at 734. Nor is the insurer obligated to consider whether the insured has compelling non-monetary reasons to have a case settled, e.g., the risk of the litigation to the insured’s business reputation. Western Polymer Technology, Inc. v. Reliance Ins. Co., 32 Cal. App. 4th 14, 24 (1995) (independent counsel’s control of insured’s defense does not preclude insurer from settling the matter as it “deems expedient” over independent counsel’s objections; injury to insured’s business reputation is not protected by implied covenant). Of course, while a defending insurer controls settlement, it faces certain limits. For example, in reaching a settlement, the insurer must settle the entire action against the insured. It cannot simply settle the covered claims against the insured and then stop its defense. Novak v. Low, Ball & Lynch, 77 Cal. App. 4th 278 (1999). Nor can an insurer accept a settlement on behalf of one insured if the settlement leaves the remaining co-insureds exposed to a judgment that may exceed the policy limits. Strauss v. Farmers Ins. Exch., 26 Cal. App. 4th 1017 (1993) In Comunale v. Traders & General Ins. Co., 50 Cal.2d 654 (1958), the California Supreme Court stated that the implied covenant of good faith and fair dealing also creates an independent obligation on the part of an insurer to accept a reasonable settlement demand on its insured’s behalf. The court explained the separate duty to settle as follows: It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. (Citations omitted.) Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. Comunale, supra, at 659. (Emphasis added.) Several California cases have considered what constitutes an unreasonable refusal to accept a settlement offer on the insured’s behalf, and whether an insurer facing a settlement demand can consider the existence of coverage in evaluating whether the settlement demand is reasonable. Insureds have long argued that the California Supreme Court’s decisions in Comunale v. Traders & General Ins. Co., 50 Cal.2d 654 (1958), and Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d

22 ■ Insurance Coverage and Claims ■ April 2017 9 (1975), suggest that the existence of coverage should not be taken into consideration by the insurer in evaluating whether a settlement demand is reasonable. In Comunale, the California Supreme Court stated that the implied covenant of good faith and fair dealing also creates an independent obligation on the part of an insurer to accept a reasonable settlement demand on its insured’s behalf. The court explained the separate duty to settle as follows: It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. (Citations omitted.) Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. Comunale at 659 (Emphasis added.); see also Johansen v. Cali- fornia State Auto. Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 16-19 (1975) (“[A]n insurer’s ‘good faith,’ though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer’s refusal to accept a reasonable settlement offer....We have held that whenever it is likely that the judgment against the insured will exceed policy limits ‘so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer to settle the claim.’…Thus, the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as the limits imposed by the policy,…or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.”) (Emphasis added.). However, subsequent to Communale, and Johansen, one California Court of Appeal, relying on the California Supreme Court’s decision in Hamilton, supra, held that a settlement demand’s reasonableness may be evaluated with respect to covered damages only, and that non-covered damages need not be considered: It follows that General Star never had an obligation to accept any of Marie Y.’s offers to settle. “From the covenant of good faith and fair dealing implied by law in all contracts, and from the liability insurer’s duty to defend and indemnify covered claims, California courts have derived an implied duty on the part of the insurer to accept reasonable settlement demands on such claims within the policy limits. [Citation.]” Hamilton v. Maryland Casualty Co. (2002) 27 Cal. 4th 718, 724. As this passage from Hamilton indicates, the insurer has a duty to accept a reasonable settlement offer only with respect to a covered claim. It is true that an insurer who refused a reasonable settlement offer, on the ground of “no coverage,” does so at its own risk, so that the insurer has no defense that its refusal was in good faith if coverage is, in fact, found. Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal. 3d 9, 16, 19. However, where the kind of claim asserted is not covered by the insurance contract (and not simply the amount of the claim), an insurer has no obligation to pay money in settlement of a noncovered claim, because, “The insurer does not…insure the entire range of an insured’s well-being, outside the scope of and unrelated to the insurance policy, with respect to paying third party claims. It is an insurer, not a guardian angel.” Camelot by the Bay Condo. Owners’ Ass’n v. Scotts- dale Ins. Co. (1994) 27 Cal. App. 4th 33, 52. Here, because there was no coverage for the kind of claims asserted by Marie Y., General Star had no obligation to accept any of Marie Y.’s offers to settle those claims. (Id. at 53.) Therefore, to the extent the trial court, in its summary adjudica- tion order, ruled that General Star’s refusal to accept Marie Y.’s settlement offers rendered Gen-

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 23 eral Star liable for the entire judgment against Phipps, the trial court erred. Marie Y. v. General Star Indem. Co., 110 Cal. App. 4th 928, 958-59 (2003) (Emphasis added.). Other courts construing California law are in agreement. See, e.g., Camelot by the Bay Condominium Owners’ Ass’n v. Scottsdale Ins. Co., 27 Cal. App. 4th 33, 52 (1994) (“The insurer does not...insure the entire range of an insured’s well being, outside the scope of and unrelated to the insurance policy. ... It is an insurer, not a guardian angel.”); Native Sun Investment Group v. Ticor Title Ins. Co., 189 Cal. App. 3d 1265, 1278 (1987) (quoting McCormick v. Sentinel Life Ins. Co., 153 Cal. App. 3d 1030, 1043 (1984)) (the insurer is not required “to indemnify a loss for which it is not liable—even if payment would be in the best interest of its insured. ... ‘[T]he duty of good faith and fair dealing does not require an insurer to honor ‘every claim presented to it.’ [Citation.] Nor does it require an insurer to pay ‘meritless claims.’”); Sentex Sys. Inc. v. Hartford Accident & Indem. Co., 882 F. Supp. 930, 947 (C.D. Cal. 1995), aff ’d 93 F.3d 578 (9th Cir. 1996) (The court found that the insured, “may only be able to recover that part of the settlement which represents compensation for ‘damages,’ as provided for under the Hartford policies.”); Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674 (9th Cir. 1993) (Allowing allocation of a settlement between covered and uncovered damages.); Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170 (N.D. Cal. 1994) (Court held that the burden was on the insured to allocate the settlement between the two groups of defendants.) Similarly, courts construing California law have also held that an insurer need not consider possible punitive damage awards in evaluating settlement demands against insureds. Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1346 (9th Cir. 1983) (“The proposition that an insurer must settle, at any figure demanded within the policy limits, an action in which punitive damages are sought is nothing short of absurd. The practical effect of such a rule would be to pass on to the insurer the burden of punitive damages in clear violation of California statutes and public policy.”); see also PPG Industries, Inc. v. Transamerica Ins. Co., 20 Cal. 4th 310 (1999); J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co., 59 Cal. App. 4th 6, 16 (1997) (“In any event, we do not think [the insurance company] was obligated to increase its settlement offer, beyond its evaluation of compensatory damage exposure, to pay [plaintiffs] additional moneys to relinquish their punitive damages claims. [Insured] has not cited a case requiring this. The rule is…that an insurer is not obligated to indemnify against punitive damages. The same public policy which forbids an insurer from paying punitive damages in a judgment should likewise bar payment of such damages, or some part thereof, in a settlement.”). However, more recently, three California Court of Appeal decisions have again relied on the decisions in Comunale and Johansen and have held that an insurer cannot rely on its coverage defenses to determine the reasonableness of a settlement demand: The covenant of good faith and fair dealing implied in every insurance policy obligates the insurer, among other things, to accept a reasonable offer to settle a lawsuit by a third party against the insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits. Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal. 4th 390, 401; Comunale v. Traders & General Ins. Co. (1958) 50 Cal. 2d 654, 658-659. The insurer must evaluate the reasonableness of an offer to settle a lawsuit against the insured by considering the probable liability of the insured and the amount of that liability, without regard to any coverage defenses. Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal. 3d 9, 16. An insurer that fails to accept a reasonable settlement offer within policy limits will be held liable in tort for the entire judgment against the insured, even if that amount exceeds the policy limits. Hamilton v. Maryland Casualty Co. (2002) 27 Cal. 4th 718, 725; Comunale, supra, at 661. An insurer’s duty to accept a reasonable settlement offer in these circumstances “is implied in law

24 ■ Insurance Coverage and Claims ■ April 2017 to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble-on which only the insured might lose. [Citation.]” Murphy v. Allstate Ins. Co. (1976) 17 Cal. 3d 937, 941. Rappaport-Scott v. Interinsurance Exch. of the Auto. Club, 146 Cal. App. 4th 831, 836 (2007) (Empha- sis added.); see also, Archdale v. American Int’l Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 464-65 (2007) (“The existence of a coverage dispute, however meritorious the insurer’s position, is simply not a proper consideration in deciding whether to accept an offer to settle the claim against the insured.”). Thus, insureds may now argue that the reasonable settlement value of a claim is not limited to the reasonable settlement value of covered claims but of all claims against the insured, as an insurer’s “good faith” belief in non-coverage will afford no defense to liability flowing from its refusal to accept a reasonable settlement offer. Archdale, 154 Cal. App. 4th at 465. Soon thereafter, in Howard v. American National Fire Ins. Co., 187 Cal.App.4th 498 (2010), while not specifically discussing the issue of whether a carrier can consider its coverage defenses when assessing the reasonableness of a settlement demand, the court quoted, as support, the following passage from the Johansen line of cases discussed above: “Thus, the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as the limits imposed by the policy…or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.” Howard, 187 Cal. App. 4th at 525 (quoting Johansen v. California State Auto. Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 16 (1975)). Most recently, however, another California Court of Appeal after discussing most of the cases mentioned above, held that “Case law has established that an ‘insurer has a duty to accept a reasonable settlement offer only with respect to a covered claim’ (i.e., a claim for which the insurer owes the insured a duty of indemnity).” Dewitt v. Monterey Ins. Co., 204 Cal.App.4th 233, 250 (2012). During this back-and-forth discussion, insurers have argued that the Johansen and Rappaport line of cases can be distinguished from the Camelot by the Bay and Marie Y. line of cases because cases such as Rap- paport dealt with situations where the entire claim was either covered or not covered, whereas Camelot by the Bay and Marie Y. concerned situations where each case involved mixed claims, with some claims being covered and other claims not being covered. As such, insurers have argued that they should be allowed to consider coverage issues when evaluating the reasonableness of settlement demands in mixed-claim situations: It must be noted that neither Johansen nor this case involved, and therefore we do not address, a situation where some claims asserted against the insured are arguably covered and some are indisputably not. Archdale, supra, 154 Cal.App.4th at 464, fn. 14. At least one treatise has accepted this distinction: A coverage dispute has no bearing on the victim’s injuries or the insured’s liability for those injuries, and therefore is not a proper consideration for an insurer in deciding whether to settle a claim against the insured… Compare covered vs. noncovered claims: A distinction may exist, however, where some claims are covered and others are indisputably not covered… *** A settlement demand’s “reasonableness” is normally appraised with respect to covered damages only. Noncovered damages—those outside the policy’s insuring clause or specifically excluded— re not considered: “The insurer does not …insure the entire range of an insured’s well-being,

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 25 outside the scope of and unrelated to the insurance policy…It is an insurer, not a guardian ange l .” Rationale: Essentially, there are two separate coverage questions: coverage within the monetary limits of the policy (vertical coverage) and substantive coverage of the policy (horizontal coverage). If the insurer offers the reasonable settlement value of the covered portion, it need not concern itself with the risk of excess liability arising from the third party’s noncovered claims. Any excess liability in such cases arises from the lack of coverage, not from the insurer’s “unreasonable” refusal to settle covered claims. Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2006) ¶¶ 12:241, 12:338-39. However, to date, no case has actually attempted to definitively reconcile these two line of cases. Archdale, supra, 154 Cal.App.4th at 464, fn. 14 (“We leave to another case the consideration of the viability and impact of Camelot by the Bay’s suggested limitations on the broad principles articulated in Comunale and Johansen.”) Though as noted above, the Dewitt case discusses decisions from both lines of cases before con- cluding that insurers can rely on coverage defenses in evaluating the reasonableness of settlement demands. The significance of these two competing lines of cases became more evident when recently in Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012), the Ninth Circuit initially held that a liability insurer’s obligation to act on behalf of its policyholder to settle claims within policy limits is proactive and is not dependent on the insurer’s receipt of a demand within limits: “an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” Upon issuance of this decision, policyholder’s counsel began to argue that not only did an insurer have to initiate settlement discussions when the insured’s liability became reasonably clear but that the insurer could not rely on its coverage defenses in evaluating the reasonableness of the settlement. The Ninth Circuit then amended its decision such that the decision no longer addresses the issue of whether an insurer has any proactive duty to initiate settlement discussions. While insurers view the amendment to the decision as removing any requirement that they initiate settlement, the policyholder bar continues to argue that such a duty remains based on prior decisions construing California law. See Garner v. American Mut. Liab. Ins. Co., 31 Cal. App. 3d 843, 848 (1973) (“If in fail- ing to consider, accept, or make a reasonable settlement offer there has been actual bad faith on the part of the insurer, there is an obvious breach of duty to the insured.”) (Emphasis added.); Boicourt v. Amex Assurance Co., 78 Cal. App. 4th 1390, 1400 (2000) (“we do not explore the degree to which the implied covenant of good faith and fair dealing imposes on a liability insurer a duty to be “proactive” in settling cases, except to say that an insurer’s blanket rule against contacting the policyholder to see if the policyholder wants the policy limits dis- closed can be a basis for bad faith.”) (Some emphasis added.); see also, Gibbs v. State Farm Mut. Ins. Co., 544 F.2d 423, 427 (9th Cir. 1976) (“State Farm also had a reasonable opportunity to accept a settlement. On numerous occasions, Mr. Gibbs told Fey and Louwaert that he wanted coverage only to the limits of the insurance policy. Fey and Louwaert wrote letters to State Farm apprising it of Gibbs’s desire. Though no formal, written offer existed, the jury could find that Gibbs’s statements gave State Farm a reasonable opportunity to settle the claim within the policy limits. Instead, State Farm failed to conduct any negotiations with Gibbs, neglecting its good faith duty to take affirmative action in settling the claim.”). In any event, regardless of these most recent California cases, a defending insurer can always seek to protect itself by accepting a settlement demand under a reservation of rights to seek reimbursement of payments for noncovered claims. Indeed, the insurer can make settlement payments over the objections of the

26 ■ Insurance Coverage and Claims ■ April 2017 insured, and later seek reimbursement when it is determined that the underlying claim was not covered under the policy. Blue Ridge Insurance Co. v. Jacobsen, 25 Cal. 4th 489 (2001). In discussing the insurer’s unilateral right to reserve and seek such reimbursements, the California Supreme Court reasoned that if an insurer could not unilaterally reserve its right to later assert non-coverage of a settled claim, it would have no practical avenue of recourse other than to settle and forgo reimbursement, which “would violate basic notions of fairness.” Id. at 502. To seek reimbursement for noncovered claims in a reasonable settlement payment made under objection by the insured, the insurer must meet a series of requisites: (1) a timely and express reservation of rights, (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer, and (3) an express offer to the insureds that they could assume their own defense when the insurer and insureds disagreed on whether to accept the proposed settlement. Id. at 502. Blue Ridge applied the reasoning in Buss v. Superior Court regarding reimbursement of defense costs to the payment of reasonable settlement costs. Buss v. Superior Court, 16 Cal. 4th 35 (1997). An insurer only has a duty to indemnify the insured for covered claims, and no duty to pay for noncovered claims because the insured did not pay premiums for such coverage. Id. at 50-51. As to the claims that are not even potentially covered, the insurer “has a right of reimbursement that is implied in law as quasi-contractual, whether or not it has one that is implied in fact in the policy as contractual.” Id. at 51. Hence, if the insurer satisfies the pre- requisites noted above, it should be deemed to have an implied-in-law right of reimbursement to avoid the insured’s unjust enrichment. Such a settlement pursuant to a reservation of rights to seek reimbursement would protect the insurer from any potential claims should the suit against the insured go to trial and result in an excess judgment. However, while the insurer is protected against a claim for an excess judgment, it faces the cost of filing suit to seek reimbursement along with the risk that the insured may not be able to reimburse the insurer for the settlement amounts that the insurer paid pursuant to a reservation of rights.

IX. Conclusion Insurance risk management programs are designed to harmonize different insurance products so they work together. While there may be overlaps, insurers and policyholders generally identify and issue coverage that is complimentary rather than duplicative or overlapping. A business wants general liability coverage and might need professional liability coverage for its professional services. Theoretically, such policies work in harmony with each other through conditions or exclusions designed to preclude redundant or duplicative coverage. Nevertheless, overlap will exist. In such circumstances, insurers, policyholders and their brokers, and courts will continue to grapple with determining the best way to cover and share risk in a manner that honors contractual language and is equitable to all involved.

The Specialty Lines Overlap: When Coverage Worlds Collide ■ White ■ 27