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A Named Insured and An Additional Insured May Not Contractually Alter The Horizontal Exhaustion Rule Under California Law

January 22, 2012

I.Justine Grubb, Esq.

Applying California law, the Eastern District rejected an attempt to contract around the application of primary and excess policies in Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co. In that case, the insurer for the named insured paid the entire settlement for its named and additional insured in a wrongful death action due to a forklift accident.  The settlement of $3.5M was reached by exhausting the primary layer of insurance and $2.5M from the excess layer.  After the primary insurer for the additional insured refused to contribute, the insurer for the named insured brought an action for contribution.  On summary judgment, the Eastern District of California held a named insured and an additional insured could not contractually alter the horizontal exhaustion rule.

Tasq Technology, Inc. (“Tasq”) owned a warehouse in Roseville, California.  Tasq contracted with West Coast Conveyor and Equipment (“West Coast”) for the installation of shelving at its warehouse.  Tasq also leased a forklift from manufacturer, Crown Equipment Corporation (“Crown”) to accomplish the installation.  The lease agreement between Crown and Tasq required Tasq to name Crown as an additional insured for any bodily injury arising out of the possession, use or operation of the forklift.  Tasq procured a policy per the lease agreement through Continental Casualty Company (“Continental”).  In accordance with the lease, Tasq named Crown as an additional insured.  Crown also maintained its own primary liability-only policy of insurance through St. Paul Surplus Lines Insurance Company (“St. Paul”).  The St. Paul policy had a self-insured retention of $250,000.

While operating the forklift in the Tasq warehouse, an employee of West Coast was killed.  The employee’s family brought a wrongful death action against Tasq and Crown.  On behalf of Tasq and Crown, Continental settled the wrongful death action.  In settlement, Continental paid its primary policy limits of $1,000,000.  In addition, Continental paid the excess limits of $2,500,000 for a total settlement of $3,500,000.  Continental then brought an action for declaratory relief against St. Paul, seeking contribution.

On cross-motions for summary judgment, the Court held that the Continental excess policy was not triggered until and unless the primary policies (including the St. Paul primary policy issued to Crown) were exhausted.  The Court also was not persuaded by St. Paul’s argument that its insured could contract to apply a primary policy as an excess policy.  In declining to interpret the policy to be excess, the Court advised that such a provision would amount to an escape clause, unenforceable under California law.

Emphasizing the different risks that primary and excess insurers agree to underwrite, the Court held the contractual indemnity provisions between an insured (Tasq) and an additional insured (Crown) could not modify the priority of how insurance policies must be applied.  Accordingly, the excess coverage provided by Continental was not triggered until and unless the St. Paul primary policy was exhausted.

Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co. (E.D.C.A. March 22, 2011) 2011 WL 1103345

By: I. Justine Grubb, Esq.

Cochran, Davis & Associates, P.C.

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