In Transport Insurance Company v. Superior Court (B249470, filed 1/13/14), a California appeals court held that when a liability policy is deemed ambiguous, the reasonable expectations of the named insured and an additional insured are evaluated separately for purposes of determining the insurer’s respective defense obligations.
Transport issued a policy with both excess and umbrella coverage to named insured Vulcan Materials Corp. Vulcan was in the business of manufacturing the dry cleaning fluid perchloroethylene (PCE). A PCE distributor, R.R. Street & Co., was named as an additional insured by endorsement. Both were sued in various actions alleging property damage as a result of the release of PCE into groundwater.
In an earlier decision, Legacy Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677, the court resolved a dispute between named insured Vulcan and Transport regarding whether the term “underlying insurance” applied only to policies specifically scheduled as underlying to the Transport policy or to all collectible primary insurance available to Vulcan. The Legacy Vulcan court held that the term was ambiguous because it was used inconsistently in the excess and umbrella parts of the Transport policy. Therefore, the Legacy Vulcan court gave effect to the reasonable expectations of Vulcan, which had argued that Transport’s duty to defend Vulcan hinged solely upon the specifically scheduled primary policies.
In the current action, additional insured R.R. Street brought a summary adjudication motion arguing that Transport’s duty to defend Street had likewise been determined by way of the earlier Legacy Vulcan decision. That is, Street argued that Transport was collaterally estopped to deny a defense to Street because the earlier Legacy Vulcan decision found that “underlying insurance” was limited to the specifically scheduled primary policies as a result of Vulcan’s reasonable expectations. Street argued that because it was not an insured and therefore not covered under any of the specifically scheduled underlying insurance issued to Vulcan, but was an additional insured under the Transport policy, it must necessarily be entitled to a defense under the umbrella part of the Transport policy.
The trial court agreed that Transport was collaterally estopped to deny that the reasonable expectation of all insureds was that “underlying insurance” referred solely to the specifically scheduled primary policies and ruled in favor of Street. Accordingly, the appeals court reversed, saying that “[w]hen the party claiming 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.”
The Transport court said that the named insured’s intent to benefit the additional insured may be relevant for cases involving unnamed additional insureds, who would qualify as third party beneficiaries to the agreement between the contracting parties. However, where the additional insured is named in the policy, it is presumed to be made for his benefit and any contractual agreement between the named and additional insureds actually provides evidence of intentions and purposes outside the named insured’s agreement with the insurer.
Significantly, the Transport court said that evidence of the insureds’ intent may be found in the separate agreement between the named insured and the additional insured: “[t]he intent of the insureds is reflected by the language of, and the circumstances surrounding, the agreement to procure. Despite the fact that the additional named insured is not a party to the insurance contract, his intent is relevant to the construction of that contract because the intent of the named insured in requesting the added coverage is directly dependent on the bargain that the additional named insured made with the named insured.”
In reversing the order for summary adjudication in favor of Street, the Transport court stated that “[i]t is arguable that Street would not expect the Transport excess and umbrella policy to move into first position ahead of Street’s own commercial liability policies. . . . Thus, the trial court erred when it failed to consider Street’s objectively reasonable expectations of coverage and, instead, relied on Vulcan’s objectively reasonable expectations of coverage.” The case was returned to the trial court for a determination of Street’s objectively reasonable expectation.
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