Coverage Alert: Deer & Company v. Allstate Ins. Co. – High layer excess policy did not follow form as to limits of liability or the self-insured retention so once aggregate limits of underlying policies exhausted, insured didn’t have to pay additional self-insured retention before excess coverage applied.
Deere & Company v. Allstate Ins. Co. (1st Dist. Ct. App. 2119) ___ Cal. App. 5th ___, 2019 DJDAR 1520, Case No. A145170.
An insurance coverage dispute arose from claims filed in multiple jurisdictions against Deere for personal injuries arising from exposure to asbestos. Deere had numerous primary, umbrella and excess policies covering the time period from 1958 to 1986. The primary policies did not cover products liability claims. However, such coverage was provided by a series of first layer umbrella policies subject to self-insured retentions ranging from $50,000 to $1.5 million. Deere also maintained several layers of excess coverage over the first-layer umbrella polices. Deere filed an action for declaratory relief, compensatory damages and breach of contract with respect to over 100 umbrella and excess insurance policies. As relates to the present appeal, two issues were raised: (1) whether high layer excess policies were triggered once the first layer excess polices were exhausted without the insured first being responsible for paying an additional self-insured retention, and (2) whether the insurers’ indemnity obligations extended to defense costs incurred by Deere as to claims that had been dismissed. The trial court ruled in favor of the insurers on both issues. Deere appealed.
APPELLATE COURT’S RULING
The court began its discussion of the SIR issue by explaining the difference between an SIR and a deductible. SIR’s are similar to deductibles but apply to both defense costs and damages, while deductibles generally apply only to damages. Furthermore, SIR’s do not reduce the available limits. The court explained that “a deductible represents a portion of a covered loss lying within the terms of the policy (Citation.) Whereas, a retention is the initial portion of a loss that lies outside the policy. (Citation.) It represents the risk the insured has agreed to retain for itself before coverage is triggered. (Citation.) The position of a primary insurer over a self-insured retained limit can be analogized to the position of an excess insurer over a primary policy. (Citation.)” The court went on to explain that “a self-insured retention does not constitute insurance. (Citation.) Rather, the primary insurer’s obligations are triggered once the SIR is exhausted, just like an excess insurer’s obligations are triggered once the primary limits are exhausted. (Citation.) And, an excess insurer’s obligations are triggered once both the primary limits and the self-insured retention are exhausted. (Citation.) In other words, ‘excess insurance is not reached until the underlying primary insurance is exhausted, and the primary insurance is not even triggered until the self-insured retention is exhausted.’ (Citation)”
The excess policies issued to Deere above the first layer umbrella policies were follow form, incorporating by reference the underlying umbrella policy coverages, “except for the premium; the liability limits; and as otherwise provided therein.” These policies provided that the only precondition to liability was that the underlying umbrella insurers had paid or been held liable to pay the full amount of their ultimate net loss liability per occurrence/aggregate. Nothing in the language of the high level excess policies indicated that the insured would have to pay an additional SIR before coverage under these policies would attach.
The insurers argued that the following form provision in the maintenance of underlying umbrella insurance clause in their policies dictated that an additional SIR would be owed before the excess policies were triggered. However, as the appellate court noted, “that provision explicitly excludes terms relating to ‘the amount and limits of liability.’” As such, the high level excess policies did not “follow form” with respect to the limits of liability, including the SIR. The court found that the policy language was clear and unambiguous and that the first layer umbrella policies were triggered upon Deere’s payment of the SIR and the higher layer policies were triggered once the underlying limits, of which the SIR’s were a part, were exhausted. In the present case, Deere had paid its self-insured retentions under the first layer umbrella policies. Those policies were subsequently exhausted, thus triggering the coverage under the higher layer excess policy without payment of any further SIR by Deere.
The appellate court next addressed the issue of whether the higher level excess carriers had an obligation to indemnify Deere for defense fees and costs related to underlying cases upon which Deere had prevailed. The policies covered “ultimate net loss” defined as “the total sum” Deere becomes “obligated to pay by reason of personal injury…claims, either through adjudication or compromise and shall also include…all sums paid as…expenses for … lawyers…and other persons, and for all litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of any occurrence covered hereunder…” The insurers argued that the phrase “any occurrence covered hereunder” means an occurrence that results in indemnity, a claim actually covered. First, the appellate court noted that Deere was not contending that the insurers owed a duty to defend, but instead that they must reimburse Deere’s fees and expenses even when associated with claims upon which Deere ultimately prevailed. The court disagreed with the excess insurers’ position that claims upon which Deere ultimately prevailed would not trigger coverage for defense fees and costs. The appellate court also noted that the policy provisions distinguished between damages and expenses and that the “ultimate net loss” provision addressed both damages, which arose through adjudication and compromise, and expenses, which were to be paid in connection with litigation of claims and suits. This provision contained no requirement of an adjudication or compromise before payment of expenses.
The appellate court further noted that the lawsuits filed against Deere fell squarely within the coverage of the excess policies and that “nothing in the plain language of the excess policies requires a coverage determination regarding Deere’s actual liability, before the insurers are obligated to pay the litigation expenses associated in Deere’s defense of the underlying actions.” The court also found support for this conclusion in the policies’ “notice of occurrence” provision which required that Deere provide notice to the insurers whenever it had information from which it “may reasonably conclude that an occurrence covered hereunder involves injuries or damages which, in the event that [Deere] should be held liable, is likely to involve this policy…” The appellate court determined that in both the notice provision and the “ultimate net loss” provision, the phrase “an occurrence covered hereunder” was an occurrence of the type covered by the policy “irrespective of whether Deere is actually liable to pay damages in the underlying action.”
Finally, the appellate court distinguished the decision in FMC Corp. v. Plaisted & Companies (1998) 61 Cal. App. 4th 1132 wherein it was held that the determination of whether an occurrence was “covered hereunder,” “cannot be made until the claim against the insured has been resolved by adjudication or settlement…” In finding that this decision was inapposite to the resolution of the issues in the present case, the appellate court stated “missing from FMC is any discussion of the meaning of ‘cover[age]’, which we find is the sine qua non for interpreting the policies in this case.”
Finally, the appellate court noted that even assuming that “ultimate net loss” required an adjudication or compromise before defense fees and costs would be owed, which position the appellate court rejected, nothing in the policy required that such determination be adverse to the insured. Furthermore, settlements often occur with no admission of liability. As such, the appellate court found the “adjudication or compromise” language to be ambiguous and that it was objectively reasonable for Deere to expect it would be reimbursed for defense costs regardless of whether it was successful in the underlying litigation.
Based on the foregoing, the appellate court reversed the trial court judgment in favor of the insurers.
EFFECTS OF THE COURT’S RULING
The appellate court found in this case that (1) the insured did not have to pay any additional SIR before the high level excess carriers’ coverage was triggered because the excess policies, which followed form of the underlying umbrella policies in most respects, did not follow form as to limits of liability or the SIR, and (2) the excess policies did not require a determination of liability on the part of the insured before coverage for defense expenses was owed. The first issue is quite straightforward and well-reasoned. Nothing in the standard excess policy language would indicate that an insured, who has satisfied its SIR thereby triggering coverage under its first layer umbrella policy and after exhausting that policy, is required to again pay its SIR before the next layer of excess coverage is triggered. However, the appellate court’s second holding is significant as it appears to disagree with the holding in the FMC Corp. case to the effect that defense expenses need only be paid when an occurrence is “covered hereunder” which determination cannot be made until the claim is resolved by adjudication or settlement. The appellate court in the present case appeared to believe that the FMC Corp. court failed to adequately explain its holding, noting that it came to its conclusion “without any analysis…. ” Upon review of the policy language and the extensive reasoning behind the present appellate court’s decision, it is likely that a court faced with this issue and presented with the prior authority of the present case and the FMC Corp. case, would likely find the present decision more compelling. Therefore, excess insurers should consider this case law before electing to refuse to pay defense expenses before a final adjudication or compromise where the underlying action is one that falls squarely within the policy’s coverage.