International Surplus Lines Ins. Co. v. Devonshire Coverage Corp.

• Decision Date: 30 May 1979
• Citation: 93 Cal.App.3d 601,155 Cal.Rptr. 870
• Parties: INTERNATIONAL SURPLUS LINES INS. CO., a corporation, Plaintiff, Respondent and Appellant, v. DEVONSHIRE COVERAGE CORP., a corporation, and Hartford Fire Ins. Co., a corporation, Defendants, Appellants and Respondents. HARTFORD FIRE INS. CO., a corporation, Cross-Complainant, Appellant and Respondent, v. DEVONSHIRE COVERAGE CORP., a corporation, Cross-Defendant, Appellant and Respondent. DEVONSHIRE COVERAGE CORP., a corporation, Cross-Complainant, Appellant and Respondent, v. HARTFORD FIRE INS. CO., a corporation, and International Surplus Lines Ins. Co., a corporation, Cross-Defendants, Appellants and Respondents. Civ. 53360.
• Court: California Court of Appeals Court of Appeals

Page 870

155 Cal.Rptr. 870

93 Cal.App.3d 601

INTERNATIONAL SURPLUS LINES INS. CO., a corporation, Plaintiff, Respondent and Appellant, v. DEVONSHIRE COVERAGE CORP., a corporation, and Hartford Fire Ins. Co., a corporation, Defendants, Appellants and Respondents.

HARTFORD FIRE INS. CO., a corporation, Cross-Complainant, Appellant and Respondent, v. DEVONSHIRE COVERAGE CORP., a corporation, Cross-Defendant, Appellant and Respondent.

DEVONSHIRE COVERAGE CORP., a corporation, Cross-Complainant, Appellant and Respondent, v. HARTFORD FIRE INS. CO., a corporation, and International Surplus Lines Ins. Co., a corporation, Cross-Defendants, Appellants and Respondents.

Civ. 53360.

Court of Appeal, Second District, Division 2, California.

May 30, 1979.

Rehearing Denied June 21, 1979.

Hearing Denied Aug. 1, 1979.

Karon, Morrison & Savikas, Ltd., John W. Morrison, Chicago, Ill., Lillick, McHose & Charles, Kenneth R. Chiate, Los Angeles, for plaintiff-appellant Intern. Surplus Lines Ins. Co.

Walter S. Weiss, Richard B. Wolfe and Irene M. Boyd, Long & Levit; Greenberg & Glusker, Los Angeles, for Devonshire Coverage Corp.

Bogert, Ehrmann & Halpern, David C. Bogert, Los Angeles, for Hartford Fire Ins. Co.

COMPTON, Associate Justice.

Two insurance carriers, International Surplus Lines Insurance Company (ISLIC) and Hartford Fire Insurance Company (Hartford) both provided insurance coverage for Devonshire Coverage Corporation (Devonshire). The latter, itself, does business as a general insurance agent.

The instant action basically involves a dispute between the two carriers as to which of them is required to cover a particular loss suffered by Devonshire. Also involved is a claim by Devonshire against Hartford for damages based on breach of contract and unfair insurance practices.

The trial court judgment, in essence, provided that both carriers should share equally in the coverage and the cost of defending Devonshire in an action brought against it in the Federal District Court of Nebraska. Further, the trial court ruled against Devonshire in its claim against Hartford.

A chronology of key events is as follows:

Effective October 25, 1972, Hartford issued to Devonshire a policy of insurance which had two components (1) coverage for property loss due to fire and other perils, and (2) coverage for liability for personal injury and property damage. It is the liability coverage which is at issue here.

On December 31, 1972, Devonshire acting as agent for yet another insurance carrier, Central National Insurance Company of Omaha (Central), which carrier is not a party to this action, issued a policy of fire insurance on a clubhouse in Pennsylvania known as the Drexelbrook.

Under its agency contract with Central, Devonshire was limited to issuing policies not to exceed $500,000. The contract provided that as to risks exceeding that amount Devonshire would either obtain "reinsurance" or indemnify Central for the excess. Devonshire failed to obtain reinsurance.

On March 9, 1973, some three months after the Drexelbrook policy was issued, ISLIC issued to Devonshire an "Errors and Omissions" policy covering acts of negligence occurring in the course of Devonshire's business. That policy covered Claims made after the issuance of the policy, but excluded claims based on "acts, errors and omissions committed or alleged to have been committed prior to the effective day (of the policy) for which other insurance exists . . . ."

On October 27, 1973, the Drexelbrook Club was destroyed by fire resulting in a loss in excess of one million dollars. Central, by virtue of its fire policy, paid claims totalling $1,127,318.10 and faced additional claims of $177,698.00 contingent on proof of additional expenditures for repairs.

When Devonshire refused Central's demand for reimbursement of the amount in excess of $500,000, the latter initiated an action in the Federal District Court of Nebraska and obtained a judgment against Devonshire for $806,473.54.

Although Devonshire now admits that its liability to Central was "clear," it first tendered the defense of the Nebraska action to ISLIC. After reviewing the exclusion in the ISLIC policy, counsel for ISLIC suggested that the defense be tendered to Hartford. Hartford denied coverage and declined the tender. ISLIC then agreed to defend pursuant to a reservation of rights agreement.

The instant proceedings were commenced in California when ISLIC filed an action for declaratory relief against Devonshire and Hartford. Devonshire and Hartford each cross-complained against the other parties seeking declaratory relief. Devonshire, as noted, additionally sought damages from Hartford.

ISLIC concedes in its briefs that, but for the coverage afforded by Hartford, it would be liable to defend and indemnify Devonshire. It does claim, however, that Hartford's coverage is exclusive and the trial court erred in requiring ISLIC to share in the coverage. Thus it appears that Hartford's coverage is the pivotal issue in the case.

On this appeal, ISLIC is the primary party urging that the Hartford policy provided coverage. Devonshire's position is that regardless of the ultimate resolution of that issue, it is entitled to damages from Hartford for the latter's failure to provide a defense and participate in settlement negotiations.

The Nebraska judgment against Devonshire was based on findings that the "triggering event" giving rise to liability was the failure of Devonshire to obtain reinsurance on December 31, 1972, when it issued the fire policy on behalf of Central and that Central was entitled to recover from Devonshire in the same amount that it could have recovered from a "reinsurer" had there been one. Said another way, Devonshire itself became a "reinsurer" and stepped into the shoes of Central vis-a-vis Drexelbrook.

ISLIC contends that the trial court in the present action was bound by those findings. (Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co., 51 Cal.2d 558, 334 P.2d 881; Kapelus v. United Title Guaranty Co., 15 Cal.App.3d 648, 93 Cal.Rptr. 278.) The result would be that Devonshire's "Error and Omission" occurred prior to the effective date of the ISLIC policy.

The trial court, however, simply alluded to the Nebraska court's findings and, in holding that ISLIC was bound to provide coverage, found that, even though Hartford's policy also provided coverage, the "triggering event" was Devonshire's Continuous failure to provide reinsurance during the period December 31, 1972 up to the date of the Drexelbrook fire. The effect of this finding, then, was to fix the date of Devonshire's omission at a time subsequent to the issuance of the ISLIC policy.

We need not decide the issue of which finding is controlling because either finding is, in our opinion, fatal to ISLIC's position on the issue of Hartford's coverage. Under either finding the "triggering event" of liability was the failure to obtain reinsurance. Such failure was an "error and omission" which would invoke the ISLIC coverage but it was not, as we shall discuss, a "triggering event" under the Hartford policy.

The Hartford policy's liability provision contained the usual phrase which states in pertinent part:

"The Company will pay on behalf of the insured all sums which the insured shall become Legally obligated to pay as damages because of. . . property damage . . . caused by an occurrence . . ." (Emphasis added.) Specifically excluded was . . . liability assumed by the insured under any contract (other than) an incidental contract ¹ . . . ."

The exclusion, however, was later negated by special endorsement which extended coverage to "contractual liability assumed by (the insured) under a contract designated in the schedule of this insurance . . . ." The premium for the endorsement is shown to be "$5.00 minimum."

Contracts designated in the Schedule are described as "That part of all written agreements, . . . in which the insured assumed liability of others."

The parties agree that the effect of this endorsement was to provide liability coverage to Devonshire in situations where Devonshire had by written contract assumed the liability of a third party. They disagree as to what Type of assumed liability was covered.

Hartford contends that while coverage extended to liability of third parties assumed by contract, the type of liability intended to be covered was the same as that covered by the direct liability provisions of the main policy, to wit, tort liability.

ISLIC concedes that the basic policy covering the direct liability of Devonshire is limited to tort liability. It contends, however, that the endorsement is a separate and self-contained policy of insurance which is not so limited.

Our task is to interpret the contract of insurance so as to give effect to the intent of the parties at the time of contracting. (Civ.Code, §§ 1636, 1648.) In so doing we look to the entire contract and are governed by the language used where that language is clear. (Civ.Code, §§ 1638, 1641.)

The attempt by ISLIC to isolate the endorsement is unavailing. It was executed simultaneously with the basic policy. Several contracts relating to the same matter and which are part of one transaction are to be read together (Civ.Code, § 1642) and the circumstances under which a contract is made may be considered in interpreting it. (Civ.Code, § 1647.)

Various key phrases and definitions in the endorsement are identical to those used in the basic policy. Even if we examine the endorsement in isolation it cannot reasonably be interpreted to provide the coverage for which Devonshire and ISLIC contend.

The policy defines "occurrence" as "an accident, including injurious exposure to conditions, which results . . . in bodily injury or property damage" and "property damage" as "injury to or destruction of tangible property."

When the various relevant clauses are placed in proper juxtaposition, the liability provisions of the policy and the...