Commerce & Industry Ins. Co. v. Chubb Custom Ins. Co., A082611

• Citation: 75 Cal. App.4th 739,89 Cal.Rptr.2d 415
• Decision Date: 07 October 1999
• Docket Number: No. A082611,A082611
• Court: California Court of Appeals
• Parties: 99 Cal. Daily Op. Serv. 8291, 1999 Daily Journal D.A.R. 10,547 COMMERCE & INDUSTRY INSURANCE COMPANY, Plaintiff and Appellant, v. CHUBB CUSTOM INSURANCE COMPANY, Defendant and Respondent.

Page 415

89 Cal.Rptr.2d 415

99 Cal. Daily Op. Serv. 8291,

1999 Daily Journal D.A.R. 10,547

COMMERCE & INDUSTRY INSURANCE COMPANY, Plaintiff and Appellant, v. CHUBB CUSTOM INSURANCE COMPANY, Defendant and Respondent.

No. A082611.

Court of Appeal, First District, Division 4, California.

Oct. 7, 1999.

James L. Wraith, Michael K. Johnson, Matthew G. Dudley, Burnham & Brown, Oakland, for Plaintiff and Appellant.

Stephen L. Newton, Lenell Topol-McCallum, Newton, Kastner & Remmel, Santa Clara, for Defendant and Respondent.

POCHE, Acting P.J.

On March 21, 1996, fire destroyed a New Orleans warehouse causing millions of dollars of damage. The sums involved are large but the issue here is simple--whether that loss is to be borne by one insurer or allocated between two insurers whose policies have competing "other insurance" provisions. We hold that the amount of loss must be prorated between the insurers.

BACKGROUND

New Orleans municipal authorities leased a plot of unimproved land to West Coast Liquidators, Inc. (West Coast). Sometime after West Coast built the warehouse and went into possession, it sold and assigned all of its "right, title and interest" under the master lease with the municipal authorities to TriNet Corporate Realty Trust, Inc. (TriNet). Simultaneously TriNet leased the premises back to West Coast. At the time of the fire West Coast was covered by a policy of insurance issued by Commerce and Industry Insurance Company (Commerce), while TriNet had a policy from Chubb Custom Insurance Company (Chubb). On behalf of West Coast Commerce paid $57.5 million to the municipal authorities.

The Commerce policy included a liability limit of $60 million and was effective for the year commencing October 1, 1995. The policy included this provision: "OTHER INSURANCE--The Company shall not be liable for loss, if, at the time of loss there is any other insurance which would attach if this insurance had not been effected, except that this insurance shall apply only as excess and in no event as contributing insurance, and then only after all other insurance has been exhausted in the payment of ... [a covered] loss."

The Chubb policy had a maximum liability limit of $41,215,000 for the warehouse property for the calendar year 1996. It included a similar provision: "OTHER INSURANCE--If you have other insurance against a loss covered by this policy, we shall not be liable for a greater proportion of the loss than the applicable Limit of Insurance under this policy bears to the total applicable Limit of Insurance of all insurance against the loss." The policy also had this provision: "CONTINGENT COVERAGE--This insurance covers only in the absence of any other collectible insurance. At the time of loss, if there is any other insurance covering the property insured hereunder which in the absence of this insurance would cover the loss or damage hereunder covered, then the company shall not be liable."

The master lease with the New Orleans municipal authorities obligated West Coast to maintain a policy of property insurance. It also provided that the leasehold interest could be assigned, but the municipal authorities would have to approve in writing and the assignee would have to "comply with all terms and conditions of this Lease" and the lessee would still "remain primarily liable for all of the obligations contained in this Lease."

Taking the position that these provisions made both West Coast and TriNet responsible for securing insurance for the warehouse and that therefore Chubb was in effect a joint insurer, Commerce initiated this action for equitable contribution, equitable

indemnity, and declaratory relief. The gist of the complaint was that Chubb had paid nothing when in fact it was equitably obligated by reason of the respective policies' liability limits to shoulder 40.7 percent of the total loss, or approximately $23.4 million. Both parties moved for summary judgment. The trial court granted Chubb's motion and denied that of Commerce. Commerce perfected this timely appeal from the judgment entered in due course.

REVIEW

I

The policy provisions quoted above straddle three categories. Insurance policies commonly include "other insurance" provisions which "attempt to limit the insurer's liability to the extent that other insurance covers the same risk." (Croskey et al., Cal. Practice Guide: Insurance Litigation (Rutter 1997) § 8:10, rev. # 1 1998, p. 8-2.) One subcategory is known as "pro rata" provisions, which look to limit the insurer's liability to "the total proportion that its policy limits bear to the total coverage available to the insured." (Id., §§ 8:15-8:16, p. 8-4.) There is another subcategory known as "excess only" clauses, which require the exhaustion of other insurance; in effect, this insurer does not provide primary coverage but only acts as an excess insurer. (Id., § 8:19, p. 8-5.) A final subcategory of "escape" clauses extinguishes the insurer's liability if the loss is covered by other insurance. (Id., § 8:20, p. 8-5; see generally Olympic Ins. Co. v. Employers Surplus Lines Ins. Co. (1981) 126 Cal.App.3d 593, 598, 178 Cal.Rptr. 908.)

The provisions of both policies have an element of the pure escape clause. Beyond this generality, Commerce's "other insurance" provision starts off sounding like an escape clause but then declares itself to be an excess only clause; its "in no event as contributing insurance" language appears to exclude characterization as a pro rata clause. Chubb's provisions are very different. Its "other insurance" provision is clearly a pro rata clause. ¹

"Escape" clauses came to be so named because they permit an insurer to make a seemingly ironclad guarantee of coverage, only to withdraw that coverage (and thus escape liability) in the presence of other insurance. (See, e.g., CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th 1839, 1845, 29 Cal.Rptr.2d 120 and decisions cited.) When "excess only" clauses are found in primary liability policies, they are treated the same way as escape clauses. (E.g., Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1305, 77 Cal.Rptr.2d 296; Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., supra, 126 Cal.App.3d 593, 599, 178 Cal.Rptr. 908.) Because these types of provisions are disfavored, courts have developed a method of overriding them--"When two or more applicable policies contain such clauses, both liability and the costs of defense should ordinarily be prorated according to the amount of coverage afforded." (Argonaut Ins. Co. v. Transport Indem. Co. (1972) 6 Cal.3d 496, 507-508, 99 Cal.Rptr. 617, 492 P.2d 673 [escape clauses]; see Fire Ins. Exchange v. American States Ins. Co. (1995) 39 Cal.App.4th 653, 659, 46 Cal.Rptr.2d 135 [excess only clauses].) The reason for this rule is that the conflicting provisions are deemed essentially irreconcilable; if given effect competing clauses would strand an insured between insurers disclaiming coverage in a manner reminiscent of Alphonse and Gaston. (See Employers Reinsurance Corp. v. Phoenix Ins. Co. (1986) 186 Cal.App.3d 545, 557, 230 Cal.Rptr. 792 ["If we were to give effect to all ... clauses in this instance they would cancel each other out and afford the insured no coverage whatsoever. We would travel full circle with no place to say 'the buck stops here.' "]; Continental Casualty Co. v. Pacific Indemnity Co., supra, 134 Cal.App.3d 389, 397, 184 Cal.Rptr. 583.) Courts have found for the pro rata solution when confronted by a variety of conflicts between differing types of "other insurance" provisions. (See Croskey et al., op. cit. supra, §§ 8:26-8:38, pp. 8-6--8-9; see generally 8A Appleman on Insurance (1981 rev.) §§ 4906-4910; 16 Couch on Insurance (2d ed.1983) §§ 62:30, 62:71-62:83.)

A predicate for prorating policies with conflicting "other insurance" provisions is that the policies operate on the same level of coverage, that is to say, two or more policies apply to the same damage or loss suffered by the same party. (See, e.g., Fireman's Fund Ins. Co. v. Maryland Casualty Co., supra, 65 Cal.App.4th 1279, 1304, 77 Cal.Rptr.2d 296; Pines of La Jolla Homeowners Assn. v. Industrial Indemnity (1992) 5 Cal.App.4th 714, 723, 7 Cal.Rptr.2d 53.) Put another way, "[a]n 'other insurance' dispute can only arise between carriers on the same level, it cannot arise between excess and primary insurers." (North River Ins. Co. v. American Home Assurance Co. (1989) 210 Cal.App.3d 108, 114, 257 Cal.Rptr. 129.)

II

This was the approach taken by Chubb to avoid any responsibility for the loss. It sought summary judgment on the ground that its policy provided "contingent coverage and was not intended to be primary insurance on the property." The "contingent coverage" provision of its policy was not a true "other insurance" clause but merely a modification of "the extent of coverage" of the policy. To support this construction Chubb submitted declarations by two of its underwriters and TriNet's insurance manager. The gist of these declarations was that Chubb and TriNet intended that the Chubb policy was not intended to provide primary coverage but only "contingent" (i.e., excess) coverage. These materials persuaded the trial court: "The facts demonstrate that Commerce ... and Chubb are not co-insurers of the same loss. The Court finds that the ... [policies] ... have different insureds, different risks, different premiums and are different types of insurance policies."

We are not persuaded. Such extrinsic evidence as was produced by Chubb may be relevant to insurer-insured disputes about ambiguous policy language, but it cannot be used to substantiate unexpressed intention and thereby vary clear and explicit contract provisions. (E.g., Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265, 10 Cal.Rptr.2d 538, 833 P.2d 545; Shaw v. Regents of University of California (1997) 58 Cal.App.4th 44, 55, 67 Cal.Rptr.2d 850; ...