and $ 750,000 in the aggregate. The $ 10,000 deductible remained. It is acknowledged by Lawyers Mutual that its policy provided primary insurance coverage to Seltzer, Caplan.
The underlying case was eventually settled for $ 200,000. Because this settlement in the end exhausted the Lawyers' Mutual policy limits, National Union contributed $ 88,009.37 toward the settlement amount. The complaint alleges three causes of action: (1) for declaratory relief of relative rights and obligations under the relative policies; (2) for indemnity and contribution; and (3) for equitable subrogation.
The crux of National Union's complaint is that Lawyers' Mutual unnecessarily and unreasonably expanded the scope of the litigation running up attorneys' fees, such that the $ 250,000 limits were exhausted. In addition, there are allegations that Seltzer, Caplan requested that Lawyers Mutual settle the case within its policy limits, an amount of settlement which was apparently at one time demanded by plaintiff in the underlying case, which Lawyers Mutual refused to do.
National Union claims in this case that the $ 250,000 self-insured retention makes its policy of insurance excess to the Lawyers' Mutual policy, as that policy has limits of $ 250,000. Counsel for Lawyer's Mutual argues, in contrast, that the National Union policy is not excess but rather is a co-primary policy with a $ 250,000 deductible. As such, Lawyers' Mutual argues that National Union was obligated to participate in an contribute to the defense of the underlying case and that they have no right now to come back and criticize how Lawyers' Mutual handled the defense.
A. Is the National Union Policy of Insurance an Excess Policy?
1. California Rules of Contract Construction
The construction of the National Union policy is governed by California law. Insurance policies, like other contracts, are to be construed so as to give effect to the mutual intention of the contracting parties. Bank of the West v. Superior Court, 2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 544-45, 833 P.2d 545 (Cal. App. 1992); Cal. Civ. Code § 1636. The first consideration in determining the proper construction of policy language is to the language of the policy itself. If that language is clear and explicit, it governs. Cal. Civ. Code § 1638. The language of the contract is to be construed as a whole, such that all portions are given meaning where possible. Cal. Civ. Code § 1649. The question for the court is whether the suggested construction of the policy language is consistent with the objectively reasonable expectations of the insured. Bank of the West, 10 Cal. Rptr. 2d at 545.
In ascertaining the mutual intention of parties to a contract, extrinsic evidence of a parties' intention in formation of the policy of insurance is admissible to aid the court in its construction of ambiguous terms. The test of admissibility of extrinsic evidence is not whether the contract provisions appear unambiguous on their face. Rather, "the test of admissibility of extrinsic evidence to explain the meaning of a written instrument is...whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G., 3 Cal. 3d 434, 91 Cal. Rptr. 6, 11, 476 P.2d 406 (Cal. 1970) (citations omitted); see also Garcia v. Truck Ins. Exchange, 36 Cal. 3d 426, 204 Cal. Rptr. 435, 682 P.2d 1100 (Cal. 1984)(holding that the parol evidence rule does not bar admission of extrinsic evidence of meaning of policy terms where such evidence is relevant to prove a meaning to which the language is susceptible).
Excess coverage provisions of insurance policies are generally enforced. This is especially true where there is no reasonable expectation on the part of the insured of primary coverage, and where the rights of neither the insureds nor innocent accident victims are affected. National American Ins. Co. v. Ins. Co. of North America, 74 Cal. App. 3d 565, 140 Cal. Rptr. 828, 835 (Cal. 1977).
2. California Insurance Law Principles
Both counsel agree that the best description of the differences between primary and excess coverage is found in Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal. App. 3d 593, 178 Cal. Rptr. 908 (Cal. App. 1981). According to the Olympic Ins. case,
Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability.... "Excess" or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.
178 Cal. Rptr. at 910 (citations omitted). Where a policy of secondary insurance identifies particular policies over which it is written, the policy is said to be "specific excess." Id.
A primary insurer generally has a duty to defend its insured. Id. In contrast, however, an excess insurer generally has no duty to participate in the insured's defense or contribute to a settlement on the insured's behalf until primary coverage has been exhausted. Nabisco, Inc. v. Transport Indemnity Co., 143 Cal. App. 3d 831, 192 Cal. Rptr. 207, 209 (Cal. App. 1983); Signal Companies, Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 165 Cal. Rptr. 799, 612 P.2d 889 (Cal. App. 1980); Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal. App. 3d 593, 178 Cal. Rptr. 908 (Cal. App. 1981).
It is clear that the duty to defend is the same under a policy written as excess over a self-insured retention. Nabisco, Inc., 192 Cal. Rptr. at 210; Aetna Cas. & Surety Co. v. Certain Underwriters, 56 Cal. App. 3d 791, 129 Cal. Rptr. 47 (Cal. App. 1976).
3. Application of these Principles to the Current Policy Dispute
a. Review of the Policy Language Itself
National Union's position that its policy is one of excess insurance stems primarily from Endorsement No. 1 of its policy. This endorsement states as follows:
Self Insured Retention
In consideration of the premium charged, it is hereby understood and agreed that Condition III "Deductible" is deleted in its entirety and replaced by the following: