Transport Insurance Company v. Superior Court of Los Angeles County
Court of Appeal, Second Appellate District (January 13, 2014)
Ambiguities in an insurance policy are normally resolved “in favor of the objectively reasonable expectations of the insured.” This case considered ambiguities in an excess policy and how these were to be resolved when dealing with an additional insured, rather than the named insured.
Vulcan Materials Company (“Vulcan”) and R.R. Street & Co., Inc. (“Street”) were named as defendants in actions involving redevelopment in the City of Modesto. In various underlying actions, it was alleged that Vulcan manufactured, distributed, and sold Perchloroethylene (“PCE”), a solvent used in the dry cleaning industry, and that Street distributed or sold, or both distributed and sold PCE manufactured by Vulcan to dry cleaners in Modesto. The plaintiffs in those actions further alleged that PCE was released into the soil and groundwater and plaintiffs sought recovery for, inter alia, property damage caused by the resulting environmental contamination.
Transport Insurance Company (“Transport”) issued to Vulcan a commercial excess and umbrella liability insurance policy. Endorsement No. 40 to the Transport Policy named Street as an additional insured with respect to its distribution or sale of PCE. The insuring provision of the excess policy provided that Transport would indemnify the insured “for ultimate net loss” with respect to claims not within the terms of the coverage of “the underlying insurance” but within the terms of the excess policy, or if the limits of liability of “the underlying insurance” were exhausted. The Transport policy’s schedule of underlying insurance, Schedule A, identified nine policies issued to Vulcan. However, Street was only named as an additional insured on the Transport excess policy, not on any of the underlying policies identified in Schedule A.
Transport brought a declaratory relief action, seeking a determination that it did not owe any duties to Vulcan under the excess policy. The parties submitted to the trial court three legal questions concerning the scope of the duty to defend. One of the questions was the meaning of the phrase “underlying insurance” as used in the insuring provision that established a duty to defend with respect to umbrella coverage under the policy. The trial court ruled that because the Transport policy did not expressly define the term “underlying insurance” to include only those policies listed in Schedule A, that term should be interpreted to include all primary policies in effect at any time during the period of continuous loss.
Vulcan appealed, arguing that the term “underlying insurance” included only the policies listed in Schedule A, rather than all primary policies available to Vulcan. The Court of Appeal reversed, holding that the term “underlying insurance” was ambiguous as used in the policy. This ambiguity had to be resolved in favor of “the objectively reasonable expectations” of the insured, and absent extrinsic evidence to the contrary, the ambiguous term had to be interpreted in Vulcan’s favor to encompass only the underlying policies described in Schedule A.
Thereafter, Transport brought a declaratory relief action against Street, seeking a declaration that Transport did not have a duty to defend Street in the underlying actions. Street brought a motion for summary adjudication, claiming that that the decision in the action involving Vulcan collaterally estopped Transport from arguing that the phrase “underlying insurance” in the policy was not ambiguous, and that it had to be determined to apply only to those policies listed in Schedule A. Since none of them provided coverage to Street, it argued that this meant that the umbrella policy provided primary coverage for Street. The trial court granted the motion, holding that based on the ruling in the Vulcan declaratory relief action, Transport was collaterally estopped from arguing that “underlying insurance” only applied to those policies in Schedule A. Transport appealed.
The Court of Appeal reversed. The Court held that the trial court was correct that it had previously been determined that the phrase “underlying insurance” as used in the Transport policy was ambiguous, and that this ambiguity had to be resolved in favor of the objectively reasonable expectations of the insured. However, the trial court was wrong to rely on Vulcan’s objectively reasonable expectations of coverage, rather than Street’s objectively reasonable expectations, because it was Street’s coverage under the policy that was at issue. The Court of Appeal confirmed that when the party claiming coverage is an additional insured, it is the additional insured’s reasonable expectations of coverage that are relevant. Arguably, Street would not reasonably expect the Transport excess policy to move into primary coverage ahead of Street’s own policies. Because Street’s reasonable expectations were not decided in the Vulcan declaratory relief action, Transport was not estopped from arguing as to Street’s reasonable expectations of coverage as an additional insured.
Summary adjudication in favor of street was thus vacated.
Although ambiguities in insurance policies must be construed in favor of the insured’s reasonable expectations, those expectations may differ between an insured and an additional insured. The reasonable expectation of each must be considered when determining coverage.
For a copy of the complete decision see: