A California Court of Appeal held in Transport Ins. Co. v. Superior Ct. (R.R. Street & Co.) that a named insured’s reasonable expectations of coverage can be different from those of an additional insured’s. This ruling leaves open the possibility that the same policy language can be interpreted differently in the same lawsuit, depending upon whether the named insured or an additional insured is seeking coverage.

Transport issued an excess and umbrella commercial general liability policy to Legacy Vulcan Corp. R.R. Street & Co. was named as an additional insured by endorsement. These two companies were named as defendants in lawsuits alleging that they distributed and sold dry cleaning products that caused environmental contamination. 

A dispute arose between Transport and Legacy about the duty to defend. The dispute turned on whether the term “underlying insurance” included only the specifically scheduled policies identified in the Transport or all potentially applicable primary policies. 

In a previously published opinion, the Court of Appeal held that the term “underlying insurance” was ambiguous in the context of the Transport policy and should be construed in accordance with Legacy’s objectively reasonable expectations.

The court ultimately concluded that the umbrella coverage would drop down and act as primary insurance if it provided broader coverage than the specifically scheduled policies – meaning umbrella coverage could be triggered even if other unscheduled primary policies applied to the risk.  See Legacy Vulcan Corp. v. Sup. Ct., 185 Cal. App. 4th 677 (2010). 

In subsequent proceedings, the additional insured Street sought a declaration that it also was entitled to a defense under the Transport policy. The Court of Appeal held that the result could be different for Street. 

When dealing with an allegedly ambiguous term and the entity seeking coverage is an additional insured,

it is the additional insured’s objectively reasonable expectations of coverage that are relevant, and not the objectively reasonable expectations of the named insured.” 

An additional insured’s expectations, in turn, may vary depending upon the contract requiring the named insured to request coverage for the additional insured. It is arguable that Street would not reasonably expect the Transport policy to move into “first position” before Street’s own commercial general liability policies.

Transport highlights two important issues. First, application of the reasonable expectations doctrine will not always result in broader coverage for the insured. In some instances, the doctrine will limit coverage or eliminate it altogether. Second, whether an insured’s expectations are reasonable must be analyzed in context and under the particular circumstances applying to that insured.