In Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, the court considered the indemnity obligations of primary and excess insurers in the context of a complex construction defect case.
The insured was a developer who filled a redevelopment area on which it constructed residential housing developments. The fills and building pads were defectively designed and engineered, causing excessive subsidence and damage to the developments between 1977 and 1986. (Id. at pp. 333-334.)
Between 1982 and 1986, the developer had purchased primary insurance policies from United Pacific Insurance Company and State Farm Fire and Casualty Insurance Company, each worth $1 million; for policy year 1985 through 1986, it had also purchased a $5 million excess policy from Scottsdale Insurance Company. The excess policy provided that Scottsdale would be liable for the developer's ultimate net loss in excess of its "underlying limit," defined as an amount "'equal to the Limits of Liability indicated beside the underlying insurance listed in the Schedule of Underlying Insurance ... plus the applicable limits of any other underlying insurance collectible by the Insured.'" (Id. at p. 335.)
In litigation between the insurers, the primary insurers contended that Scottsdale was obligated by the terms of its policy to provide coverage once the 1985 through 1986 primary policy was exhausted. Scottsdale contended that it need not provide coverage until the primary policies for all years were exhausted. (Community Redevelopment, supra, 50 Cal.App.4th at p. 336.)
The Court of Appeal held that Scottsdale's policy was excess to all primary policies, and thus that Scottsdale need not indemnify the developer until all primary policies had been exhausted. (Community Redevelopment, supra, 50 Cal.App.4th at pp. 337-342.)
"There is no dispute that Scottsdale's $5 million coverage was purchased as excess to the $1 million primary policy issued by State Farm. However, the express provisions of the policy further provide that Scottsdale's liability was also excess to 'the applicable limits of any other underlying insurance collectible by the insured parties.'... The policy also provided that the insurance afforded by the policy 'shall be excess insurance over any other valid and collectible insurance available to the insured parties whether or not described in the Schedule of Underlying Insurance' (which schedule listed State Farm's $1 million policy)." (Id. at p. 338.) This policy language, the court said, "could hardly be more clear" that Scottsdale's exposure was excess to all other primary coverage available to the insured. (Id. at pp. 338-339.)
Its conclusion, the court said, was consistent with the principle of "horizontal exhaustion"--the notion that "all primary insurance must be exhausted before a secondary insurer will have exposure ... ." (Community Redevelopment, supra, 50 Cal.App.4th at p. 339.)
In Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) the insured obtained two comprehensive general liability policies, one of which was issued by State Farm Fire and Casualty Insurance Company (the State Farm Policy).
The insured also purchased a policy issued by Scottsdale Insurance Company (Scottsdale), "which was specifically (but not exclusively) excess to the State Farm Policy." ( Community Redevelopment, supra, 50 Cal.App.4th at p. 334.)
The State Farm policy had been exhausted in 1988. The "precise question" in Community Redevelopment was "whether an excess insurer, under policy provisions such as those presented in that case, has any obligation, in a continuing loss case, to 'drop down' and provide a defense to a common insured before the liability limits of all primary insurers on the risk have been exhausted." ( Id. at p. 332.)
The Community Redevelopment court answered that question, "no." In so answering, the court stated, " Unless the provisions of an excess policy provide otherwise, an excess insurer has no obligation to provide a defense to its insured before the primary coverage is exhausted." ( Id. at p. 338.)
Because the present policy provisions "provide otherwise," we answer the question, "yes."
In Community Redevelopment, the portion of the policy dealing with Scottsdale's duty to defend provided that " 'the company shall have the right and duty to defend any suit against the INSURED seeking damages which are payable under the above insuring Agreement ... provided, however, that no other insurance affording a defense or indemnity against such a suit is available to the INSURED.' " ( Community Redevelopment, supra, 50 Cal.App.4th at p. 335.)
Thus, the Scottsdale policy specifically provided that it would provide a defense only if there was no other insurance affording a defense.