ORIGINAL PROCEEDINGS in mandate. Carl J. West, Judge. Petition granted. (Los Angeles County Super. Ct. Nos. BC328022 & BC354664).
The opinion of the court was delivered by: Croskey, J.
CERTIFIED FOR PUBLICATION
In this case, we consider the nature of an insurer‟s defense obligations under a policy of liability insurance that provides both "excess" and "umbrella" coverage. In addition, we discuss the scope and extent of an insurer‟s duty to defend in spite of a "retained limit" on the insurer‟s duty to indemnify.
Legacy Vulcan Corp. (Vulcan) petitioned this court for a writ of mandate, challenging a pretrial order that decided three stipulated legal questions concerning the scope of the duty to defend under a liability insurance policy issued by Transport Insurance Company (Transport). The trial court concluded that the policy provided both excess and umbrella coverage, but that, for purposes of the duty to defend, Transport‟s obligations were limited to those of an excess insurer. Specifically, the trial court concluded that a duty to defend could arise under the terms of the policy only upon the exhaustion of all underlying insurance. It also held that a duty to defend could arise only upon a showing that the claims were "actually covered" under the policy.
We conclude that the umbrella coverage was primary coverage and that the existence of a duty to defend with respect to that coverage did not depend on the exhaustion of any underlying insurance. The term "underlying insurance," as used in the provision establishing a duty to defend with respect to the umbrella coverage, is ambiguous; it must be interpreted in Vulcan‟s favor to encompass only the underlying policies described in a schedule attached to the Transport policy, rather than all of the collectible primary insurance available to Vulcan. Moreover, Vulcan need not show that the claims were actually covered under the Transport policy in order to establish a duty to defend with respect to the primary coverage provided by the umbrella provision, but need only show a potential for coverage.
We also conclude that a "retained limit" or "self-insured retention" provision in a policy providing primary coverage relieves the insurer of the duty to provide an immediate, "first dollar" defense only if the policy expressly so provides. Thus, Vulcan need not have incurred a liability in excess of the "retained limit" described in the Transport policy before the insurer‟s duty to defend could arise. We therefore will grant the petition.
FACTUAL AND PROCEDURAL BACKGROUND
1. Insurance Policy Provisions*fn1
Vulcan manufactured and sold perchloroethylene. Transport issued liability insurance policies to Vulcan for several years, including an Excess Catastrophe Liability Policy effective from January 1, 1981, to January 1, 1982. Under the terms of that policy, Transport agreed to indemnify Vulcan for the "ultimate net loss in excess of the retained limit" that Vulcan became legally obligated to pay as damages because of personal injury, property damage or advertising injury. Transport also agreed to defend any lawsuit "seeking damages on account of such personal injury, property damage or advertising injury, even if any of the allegations of the suit are groundless," if certain conditions were satisfied.
The insuring agreement stated, in relevant part: "The Company will indemnify the Insured for ultimate net loss in excess of the retained limit hereinafter stated which the Insured shall become legally obligated to pay as damages because of
C. advertising injury to which this insurance applies, caused by an occurrence, and
(1) With respect to any personal injury, property damage or advertising injury not within the terms of the coverage of underlying insurance but within the terms of coverage of this insurance; or
(2) If limits of liability of the underlying insurance are exhausted because of personal injury, property damage or advertising injury during the period of this policy*fn2
(a) have the right and duty to defend any suit against the Insured seeking damages on account of such personal injury, property damage or advertising injury, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient; but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the Company‟s limit of liability has been exhausted by payment of judgments or settlements." (Italics added.)
The declarations stated that the retained limit was "Underlying Insurance" or: "ITEM 3. $100,000 because of personal injury, property damage or advertising injury arising out of any one occurrence not within the terms of coverage of underlying insurance but within the terms of the coverage of this insurance."
The policy stated further under the heading "RETAINED LIMIT-THE COMPANY‟S LIMIT OF LIABILITY" that Transport‟s limit of liability was the "ultimate net loss in excess of the Insured‟s retained limit defined as the greater of:
(a) an amount equal to the limits of liability indicated beside the underlying insurance listed in Schedule A hereof, plus the applicable limits of any other underlying insurance collectible by the Insured; or
(b) the amount specified in Item 3. of the Limits of Liability section of the declarations because of personal injury, property damage or advertising injury not within the terms of the coverage of the underlying insurance listed in Schedule A."*fn3 (Italics added.)
"Ultimate net loss" was defined in the policy, generally, as the amount actually paid or payable for Vulcan‟s liability, excluding "all loss expenses and legal expenses," such as attorney fees. The term "underlying insurance" was undefined. A policy endorsement, however, set forth a Schedule of Underlying Insurance (entitled Schedule A) listing several insurance policies and stating the limits of liability for each policy.
The policy stated under the heading "Other Insurance": "If collectible insurance with any insurer is available to the Insured covering a loss also covered hereunder, the insurance hereunder shall be in excess of, and not contribute with, such other insurance provided, however, this does not apply to insurance which is written as excess insurance over the Company‟s limit of liability provided in this policy. [¶] When both this insurance and other insurance apply to the loss on the same basis, whether primary, excess or contingent, the Company ...