2019 review of California insurance law decisions

In 2019, California courts issued a number of interesting decisions on insurance issues. Three stand out.

In Deere & Co. v. Allstate Insurance Co., 32 Cal. App. 5th 499 (2019), the court addressed a question about the interplay of primary and excess insurance policies and, in particular, whether an insured had to pay self-insured retention (SIR) at each level of insurance. Deere's liability insurance program, like those of many companies, featured multiple layers of insurance policies each year. As is often the case, the excess policies purported to "follow form" to an underlying policy. As the court explained, "the usual function of a 'follow form' clause in an excess policy is to provide coverage for the same acts or occurrences as the underlying policy." This means that the scope of coverage "is generally subject to the same conditions and limitations of the underlying primary policy, with the exception of the policy limits."

Deere's liability program had an SIR. "The first-layer policies are invoked only after the applicable SIR has been paid by Deere. And the higher-layer policies are triggered once both the underlying limits, of which the SIRs are a part, have been exhausted." The higher-level excess insurers contended that Deere had to pay multiple SIRs -- not just one under the policy to which they followed form, but a separate one between each layer of coverage. The court rejected this contention. It held: "[O]nce Deere has paid its self-insured retentions under its first-layer umbrella policies and once the first-layer umbrella policies are exhausted, Deere may seek coverage from the higher-layer excess policies. It will be Deere's exhaustion of its SIRs that will trigger coverage under its first-layer policies. And, the exhaustion of the first-layer policies is what will trigger coverage under the higher-layer policies." The court stressed, "Continually requiring Deere to pay SIRs for each successive layer would have the effect of affording Deere far less coverage than it had purchased."

The excess insurers also argued that they need not pay Deere's defense expenses unless there had been an "adjudication or compromise" of the underlying lawsuits against Deere. They said that while the policies obligated them to pay Deere's "Ultimate Net Loss," that loss was only the amount that Deere was obligated to pay "through adjudication or compromise," including defense costs. The court disagreed with this argument, too. It said: "Payment of expenses, unlike damages, does not require a determination of Deere's liability." It expressly rejected the notion that that "'adjudication or compromise' [is required] before defense costs are owed."

In Insurance Co. of the State of Pennsylvania v. American Safety Indemnity Co., 32 Cal. App. 5th 898 (2019), the court faced a situation in which an excess liability insurer for a developer that had obtained a final default judgment against a subcontractor sued the subcontractor's insurer. The court spent a fair amount of time discussing the nature of a default judgment. However, it also addressed two insurance issues of note.

First, it addressed what must happen in a policy period to trigger coverage. It reaffirmed that "the time of the relevant 'occurrence' or 'accident' is not when the wrongful act was committed but when the complaining party was actually damaged.'" It then pointed to the "settled rule" that "'an insurer on the risk when continuous or progressively deteriorating damage or injury first manifests itself remains obligated to indemnify the insured for the entirety of the ensuring damage or injury.'"

Next, the court addressed whether an insurer is excused from any defense duty when its insured has not satisfied a deductible. The policy contained a provision stating, "As a condition precedent to our obligations to provide ... indemnity, coverage or defense hereunder, the insured ... at our request, shall pay over and deposit ... the deductible amount." The insurer did not ask for the payment, but still argued it owed no indemnity because the insured had not paid the deductible.

The court disagreed. It held that this condition did not excuse the insurer from its duties because it had not actually asked its insured to pay the deductible. As the court put it, when "there is no evidence [the insurer] made a request for payment of the deductible, there is necessarily no merit to [its] claim it has no indemnity obligation."

In Pitzer College v. Indian Harbor Insurance Co., 8 Cal. 5th 93 (2019), the California Supreme Court issued a decision on two issues of critical importance in many insurance coverage disputes -- the enforceability of choice-of-law clauses and the impact of conditions stating that insurers only need pay for expenses and settlements to which they consent, even if they are not prejudiced by an insured's failure to obtain consent.

The policy at issue contained a choice-of-law clause stating that New York law applied. The court stated, "The crux of this case lies in the choice of law provision" and its enforceability." It noted that "the parties' choice of law generally governs unless (1) it conflicts with a state's fundamental public policy, and (2) that state has a materially greater interest in the determination of the issue than the contractually chosen state."

The court then turned to the consent condition. The court noted that under New York law, "policies issued and delivered outside New York ... are subject to a strict no-prejudice rule under New York common law, which denies coverage where timely notice is not provided." The court then discussed California's "notice-prejudice" rule. That rule holds that an insurer cannot rely on an insured's delay in notice to avoid its duties under a policy unless it proves that the delay actually and substantially prejudiced it. It stated, "Prejudice is a question of fact on which the insurer has the burden of proof." It also pointed out that an insured's "failure to obtain consent in the first party context is not inherently prejudicial." It further observed that "California's notice-prejudice rule is designed "to protect insurers from prejudice, ... not ... to shield them from their contractual obligations through a technical escape-hatch."

Therefore, the court concluded that "the notice-prejudice rule is a fundamental public policy of our state ... that applies to consent provisions in first party insurance policies." 