Transport Insurance Company v. Superior Court

(The Reasonable Expectations Of the Company Expressly Named As An Additional Insured Under An Umbrella Policy Must Be Considered In Connection With Determining Whether A Duty To Defend Is Owed Under Such Policy)

In Transport Ins. Co. v. Superior Court (Real Parties in Interest – R.R. Street & Co., Inc.), 222 Cal.App.4th 1216 (January 13, 2014), the California Second District Court of Appeal reversed the trial court’s order granting summary adjudication to National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and its named insured, R. R. Street & Company, Inc. (“Street”) regarding the duty to defend underlying environmental contamination lawsuits under an umbrella policy issued by Transport Insurance Company (“Transport”) to Vulcan Materials Company (“Vulcan”). The Transport policy included an endorsement naming Street as an additional insured. National Union insured Street under commercial general liability primary policies. National Union was defending Street in connection with several underlying environmental contamination lawsuits related to Perchloroethylene (“PCE”) produced by dry-cleaning businesses in Northern California. National Union and Street tendered the defense of the underlying actions to Transport based on the argument that the Court of Appeal had previously held that Transport was obligated to defend its named insured, Vulcan, with respect to such underlying actions as the scheduled underlying insurance for the Transport umbrella policy had been exhausted.

The Court of Appeal in Legacy Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677 had determined that the phrase “underlying insurance” used in the Transport policy was ambiguous relative to whether it only applied to the exhaustion of scheduled underlying insurance or all potentially applicable underlying insurance in connection with the defense of Transport’s named insured, Vulcan, in the underlying actions. The Court of Appeal considered the “objectively reasonable expectations” of coverage from the standpoint of Vulcan, the named insured under the Transport policy.

Based on the Court of Appeal’s decision in the Legacy Vulcan case, the trial court held that Transport was also obligated to defend Street against the underlying actions. The trial court held that Transport was collaterally estopped from arguing that the term “underlying insurance” in its policy applied to all underlying insurance (i.e., scheduled and unscheduled insurance). When opposing National Union’s and Street’s motion for summary adjudication, Transport argued that the court was required to consider the objectively reasonable expectations of Street, rather than Vulcan, in determining whether the phrase “underlying insurance” extended to both scheduled and unscheduled insurance. In particular, Transport argued that Street could not have had an objectively reasonable expectation of coverage under the Transport policy so long as it was receiving a defense from its own direct primary insurer, National Union.

In reversing the trial court’s decision in favor of National Union and Street, the Court of Appeal agreed with Transport and found that the trial court should have considered the objectively reasonable expectations of Street in connection with interpreting the phrase “underlying insurance.” Because the trial court failed to consider Street’s objectively reasonable expectations relative to such phrase, the Court of Appeal granted Transport’s request to vacate the trial court’s entry of summary adjudication and required the trial court to deny National Union’s and Street’s motion for summary adjudication.

The Court of Appeal reasoned as follows in connection with its decision:

Transport assumes for purposes of its writ petition, but does not concede, that the term "underlying insurance" is ambiguous as to Street. We resolve ambiguities in an insurance policy in a manner consistent with the objectively reasonable expectations of the "party claiming coverage." (St. Paul Fire & Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co. (2002) 101 Cal.App.4th 1038, 1058 (American Dynasty).) When the party claiming coverage is an additional insured, it is the additional insured's objectively reasonable expectations of coverage that are relevant, and not the objectively reasonable expectations of the named insured. (Ibid.; St. Paul Mercury Ins. Co. v. Frontier Pacific Ins. Co. (2003) 111 Cal.App.4th 1234, 1245, In. 5 (Frontier Pacific); see Pardee Construction. Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1361; see BP A.C. Corp. v. 1 One Beacon Ins. Group (2007) 840 N.Y.S.2d 302, 307; but see Merced County Mut. Fire ins. Co. v. State of California (1991) 233 Cal.App.3d 765, 775 (promisee). As such, the third party beneficiaries' rights are derivative. [Citation.]”].)
. . .

It is arguable that Street would not expect the Transport excess and umbrella policy to move into first position ahead of Street's own commercial liability policies. Transport in its petition does not, however, request that we determine Street's objectively reasonable expectations of coverage. Rather, it requests that we grant a writ of mandate compelling respondent trial court to set aside its order granting summary adjudication and to issue a new order denying summary adjudication.

Street and National Union's summary adjudication motion concerned Transport's duty to defend Street in the Underlying Actions as an additional insured under the Transport Policy. Street, an additional insured, and not Vulcan, a named insured, was the party claiming coverage. Thus, the trial court erred when it failed to consider Street's objectively reasonable expectations of coverage and, instead, relied on Vulcan's objectively reasonable expectations of coverage. (American Dynasty, supra, 101 Cal.App.4th at p. 1058; Frontier Pacific, supra, 111 Cal. App.4th at p. 1245, fn. 5.) Because the relevant inquiry in this case was Street's and not Vulcan's objectively reasonable expectations of coverage, a matter not litigated in Legacy Vulcan, supra, 185 Cal.App.4th 677, the trial court was not bound by collateral estoppel to rely on Vulcan's objectively reasonable expectations as found by the Court of Appeal in Legacy Vulcan. (Lucido v. Superior Court, 51 Cal.3d at p. 341.) Because the trial-court erred, the summary adjudication in favor of Street and National Union is vacated.