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“OTHER INSURANCE” PROVISIONS

Nautilus Ins. Co. v. Lexington Ins. Co.

132 Haw. 283, 321 P.3d 634 (2014)

Commercial General Liability Policy (CGL)

Covers the insured against suits

filed by third parties.

• Duty to Defend

• Duty to Indemnify

CGL POLICY:

Nautilus Ins. Co. v. Lexington Ins. Co.

132 Haw. 283, 321 P.3d 634 (2014)

• Owner/Developer (VP & PK) insured by Lexington

• Subcontractor (Kila Kila) insured by Nautilus

• VP & PK is additional insured under Nautilus policy

BACKGROUND FOR NAUTILUS CASE

LEXINGTON POLICY

• Other Insurance Clause:  “This insurance is excess over . . .  any other primary insurance available to you . . . for which you have been added as an additional insured  . . .”

NAUTILUS POLICY• Other Insurance Clause:  “This

insurance is excess over . . . any other primary insurance available to you . . . for which you have been added as an additional insured . . .”

• Who Is An Insured: [VP&PK] is an insured “but only for liability arising out of your [Kila Kila’s] negligence...”

• Different “other insurance” clauses.

• Pro Rata Clauses: If there is other applicable liability insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits.

• Excess Clauses: This insurance is excess over other valid and collectible insurance except insurance written specifically to cover as excess over the limits of liability that apply in this policy.

• Escape Clauses: Provided that where the insured is, irrespective of this insurance, covered or protected against any loss or claim which would otherwise have been paid by the underwriters under this policy, there shall be no contribution or participation by the underwriters on the basis of excess, contributing, deficiency, concurrent, or double insurance or otherwise.

• VP & PK and Kila Kila sued by homeowners for damages resulting from construction

• Underlying allegations implicate both policies

• Nautilus defends both Kila Kila and VP & PK

• Lexington maintains it is excess

• Only VP & PK is found liable

•  Judgment entered for $232,700

• Lexington satisfies the Judgment against VP & PK

• But, Lexington refuses to contribute to Nautilus for defense costs

• Nautilus sues Lexington in federal court

• Ninth Circuit certifies four questions to Hawaii Supreme Court

CERTIFIED QUESTION #1

Whether an insurer may look to another insurer's

policy in order to disclaim the duty to defend, where

the complaint in the underlying lawsuit alleges

facts within coverage.

CERTIFIED QUESTION #1

• Hawaii Supreme Court begins its analysis by examining the holding of Dairy Road Partners v. Island Ins. Co., 92 Hawaii 398, 992 P.2d 93 (2000).

• Dairy Road’s Three Main Lessons:1. Duty to Defend Broader than Duty to Indemnify.

2. All doubts whether duty to defend exists resolved against the insurer and in favor of the insured.

3. DTD rests on the possibility that coverage exists.

NAUTILUS’ ARGUMENT• Dairy Road excludes the possibility for an

insurer to look to any extrinsic evidence beyond the allegations in the complaint in determining whether it has a duty to defend.

• The fact that VP & PK was named as an additional insured under the Nautilus policy cannot be considered by Lexington in disclaiming the duty to defend.

LEXINGTON’S ARGUMENT• Adoption of Nautilus’ position would render

“other insurance” clauses meaningless, because if insurers cannot consider other policies covering their insured, insurers would be deprived of information they use in determining whether they have a duty to defend.

• Case law holds that contract provisions should not be interpreted such that they are rendered meaningless. Stanford Carr Dev. Corp. v. Unity House, Inc., 111 Hawaii 286, 141 P.3d 459 (2006).

COURT DISTINGUISHES DAIRY ROAD

“The extrinsic evidence considered in Dairy Road Partners included factual matters relevant to the outcome of the underlying litigation. Here, in contrast, the question is whether an insurer may take into account the operation of its policy in conjunction with other insurance policies, to determine if it must defend a particular suit.”

“While the insurance company in Dairy Road Partners conducted independent investigative research into the circumstances of the underlying occurrence, here, in contrast, the “research” contemplated would be identifying and interpreting the policies of other companies that had potentially applicable insurance. Therefore, extrinsic “facts” may be distinguished analytically from extrinsic “policies”, and Dairy Road Partners does not mandate a specific answer to the first certified question.”

COURT DISTINGUISHES DAIRY ROAD

COURT ANALYZES “OTHER INSURANCE” CLAUSES

IN BOTH POLICIES• Nautilus’ policy included VP & PK as

an additional insured but only for liability arising out of Kila Kila’s negligence.

• Lexington’s “other insurance” clause, however, only applies if VP & PK has other insurance, and so in order for Lexington's “other insurance” clause to become operable, the “additional insured” endorsement in Nautilus's policy must be triggered.

LEXINGTON’S POSITION RE “OTHER INSURANCE”

It does not matter whether the Additional Insured Endorsement in the Nautilus policy was conditioned on Kila Kila's negligence, because there were allegations in the underlying action that Kila Kila had been negligent, and Nautilus had a duty to defend based on those allegations. Just because it was later determined that Kila Kila was not negligent, does not negate Nautilus' duty to defend.

NAUTILUS’ REPLY• Lexington misinterpreted Nautilus'

Additional Insured Endorsement to be contingent on “alleged negligence” when in actuality it is contingent on “actual negligence.” If Lexington's interpretation of the Additional Insured Endorsement were accurate, then Nautilus would have had to pay the judgment against VP & PK so long as the complaint alleged negligence against Kila Kila, regardless of whether the jury found Kila Kila to actually be negligent.

COURT’S CONCLUSIONS AS TO QUESTION #1

“Any ambiguities in an insurance contract regarding coverage are resolved in favor of the insured as against the insurer.” Tri-S Corp. v. W. World Ins. Co., 110 Hawaii 473, 489, 135 P.3d. 82, 98 (2006).

COURT’S CONCLUSIONS AS TO QUESTION #1

• “[A]n otherwise primary insurer may not disclaim its duty to defend on the basis of a general “other insurance” provision,” but…

• Footnote 7:“Where one insurance policy explicitly contemplates the operation of another specifically named policy by reference, the insurer will not be looking outside its own policy, and therefore may look to that named policy in disclaiming its duty to defend.”

COURT’S REASONING AS TO QUESTION #1

“Where an insured has contracted for primary insurance, an insurer should not be able to refuse to defend and place the risk on the insured, of the insurer's erroneous understanding of another insurance policy that is not part of the original contract. Instead, all primary carriers should be involved in the initial proceedings where the complaint alleges facts within the scope of coverage.”

CERTIFIED QUESTION #2

Whether an “other insurance” clause that purports to release an otherwise primary insurer of

the duty to defend if the insurer becomes excess as to

liability is enforceable.

NAUTILUS’ POSITION

• Lexington's “Other Insurance Clause” is contingent on the outcome at trial, and since Kila Kila was found not to be negligent, Nautilus was not responsible for any loss and therefore VP & PK had no “other valid and collectible insurance.”

LEXINGTON’S POSITION

• There is no public policy against enforcement of “other insurance” provisions, and the ICA has recognized the utility of excess “other insurance” clauses in the context of uninsured motorist insurance.

• Liberty Mut. Ins. Co. v. Sentinel Ins. Co., 120 Hawaii 329, 205 P.3d 594 (App. 2009).

COURT DISTINGUISHES LIBERTY MUTUAL

“This case presents a different question, however, in that Liberty Mutual Ins. Co. considered an excess “other insurance” clause in the context of the duty to indemnify—and here we consider the validity of that type of provision when it allows the insurer to escape or become excess as to the duty to defend where the insurer is excess as to liability.”

COURT’S HOLDING AS TO QUESTION #2

• An “other insurance” clause purporting to release an otherwise primary insurer of the duty to defend if the insurer becomes excess as to liability is enforceable, but only as between two or more insurers seeking to allocate or recover defense costs.

• Result is consistent with the expectations of the insured, specifically that where the insured is paying for primary insurance, it will be defended where there is a possibility of coverage.

CERTIFIED QUESTION #3

Whether the irreconcilability of “other insurance” provisions

in otherwise primary insurance policies should be determined before or after the operation

of the “other insurance” provisions is determined.

COMPETING VIEWS ON TIMING

• Nautilus’ View: Determine whether there is a conflict between “other insurance” provisions first, then determine the operation of those provisions.

• Lexington’s View: First determine if the “other insurance” provisions are relevant; if so, then determine whether they conflict.

COURT’S ANALYSIS• The majority view is that “other insurance”

policies that are irreconcilable, or “mutually repugnant” will negate each other, and neither will be enforced.

• However, the Court decides to sidestep the “mutually repugnant” discussion and focuses on the relevancy of “other insurance” provisions instead.

• “Only Lexington's “other insurance” provision could potentially take effect in this case, because VP & PK was added as an “additional insured” onto Nautilus' policy. By contrast, the “other insurance” provision in Nautilus' policy would not have taken effect because Kila Kila was not an “additional insured” on Lexington's policy.”

COURT’S ANALYSIS• “Where it is possible to avoid a finding

of “mutual repugnance” altogether, therefore, it should be determined from the face of the two policies, and the allegations in the complaint, whether such allegedly “mutually repugnant” clauses are actually relevant before both clauses are deemed inoperable.”

• “Lexington's clause is relevant and Nautilus' is not. Based on this preliminary determination, there would be no need to consider irreconcilability or mutual repugnance.”

COURT’S HOLDING AS TO QUESTION #3

• The relevance of the “other insurance” provisions should be determined from the face of the policies and the allegations in the complaint first, and then it can be decided whether the relevant “other insurance” provisions are irreconcilable or mutually repugnant.

• The complete operation of the “other insurance” clauses may be resolved thereafter.

CERTIFIED QUESTION #4

Does an otherwise primary insurer who becomes an

excess insurer by the “other insurance” clause owe the duty to defend

from the time the defense is tendered.

Primary insurers who could become excess insurers under the “other insurance” clause cannot look to other policies when determining their duty to defend.

Primary insurer can only rely on “other insurance” provision to argue it is excess when seeking contribution from another insurer.

All carriers should be encouraged to participate in initial proceedings; therefore, otherwise primary insurers must defend and avoid uncertainty as to who will provide the insured’s defense.

MAHALO.