California Supreme Court To Consider Whether a Primary Insurer With An “Other Insurance” Clause Can Enforce It Against A Primary Insurer Without One, Or Enforce A Limits Reduction Clause
Migdal Ins. Co. Ltd. v. The Insurance Co. of the State of Penn., 656 Fed. Appx. 546 (2nd Cir. 2016), questions certified by, 2016 Cal. LEXIS 7805 (Cal., Sept. 14, 2016), restated by, 2016 Cal. LEXIS 8494 (Cal., Oct. 12, 2016)
Categories: Insurer-vs-Insurer Disputes – Equitable Contribution – Other Insurance Clause – Limits Reduction Clause
On October 12, 2016, having accepted the Second Circuit’s request that it decide questions of California law, the California Supreme Court restated the questions it has certified as follows:
Issue 1: When two primary liability insurers agree that their policies cover the same loss, may the primary insurer whose policy contains an “other insurance” clause (stating that its insurance is excess over any “other insurance or … self-insurance plan that covers a loss on the same basis”) enforce that clause in an action for equitable contribution brought by the primary insurer who defended and settled the insured’s claim and whose policy does not contain an other-insurance clause?
Issue 2: In the same equitable contribution action described in Issue 1, when the amount paid by the primary insurer that settled the claim exceeds the non-settling primary insurer’s liability policy limits, what is the effect, if any, of the non-settling insurer’s “limits reduction” clause (stating that “[a]ll payments made under any local policy issued to [the insured] by us or any other insurance company will reduce the Limits of Insurance of this policy”)?
The facts set forth in the Second Circuit’s request include the following.
Migdal Insurance Company, Ltd. (“Migdal”) issued a primary liability insurance policy to Kinetic Systems Israel Ltd. and Kinetic Process Piping Israel Ltd. (collectively, “Kinetics Israel”). The Migdal policy contains no “other insurance” clause.”
The Insurance Company of the State of Pennsylvania (“ICSOP”) issued a primary liability insurance policy to Kinetic Systems, Inc., covering its subsidiaries, including Kinetics Israel. The ICSOP policy contains the “other insurance” clause and “limits reduction” clause noted above.
Tower Semiconductor Ltd.’s (“Tower’s”) subrogee sued Kinetics Israel and others for damage to Tower’s property allegedly caused by Kinetics Israel. ICSOP refused to defend Kinetics Israel but Migdal defended and paid $1.75 million in full settlement of the Tower action.
Migdal later sued ICSOP for equitable contribution in the U.S. District Court for the Southern District of New York, which, applying California law, ruled in favor of Migdal and ordered ICSOP to pay one third of the Tower settlement. The district court reasoned that California considers a policy excess only if it says it is excess with respect to specifically identified policies, quoting Dart Industries, Inc. v. Commercial Union Insurance Co., 28 Cal. 4th 1059, 1080 (2002) for the proposition that “the modern trend is to require equitable contribution[] on a pro rata basis from all primary insurers regardless of the type of ‘other insurance’ clause in their policies.”
In presenting the first question to the California Supreme Court, the Second Circuit noted that ICSOP is arguing that California refuses to enforce an “other insurance” clause only if there is a conflict with such a clause in another insurer’s policy, and Migdal’s policy has no such clause. The Second Circuit identified a California Court of Appeal decision in which, relying on the same portion of Dart on which the district court relied here, equitable contribution was ordered against an insurer whose policy did not contain an “other insurance” clause (or any other clause that could be said to conflict with the defendant insurer’s policy). Edmondson Property Management v. Kwock, 156 Cal. App. 4th 197, 203 (Cal. App. 5th Dist. 2007). Yet, in Edmondson, the court stated the defendant insurer, “recognizing the unlikeliness that its ‘other insurance’ clause would be used to bar the contribution claim,” did not rest on that clause but on the indemnity clause of its policy, which, the court ruled, did not defeat the contribution claim.
In presenting the second question to the California Supreme Court, the Second Circuit stated it is uncertain whether California courts would enforce the reduction of limits clause in ICSOP’s policy. ICSOP calls the reduction of limits clause an “exhaustion provision” and argues that, “[b]ecause the amount Migdal paid to settle the [Tower] lawsuit was greater than the amount of the ICSOP policy’s applicable limit of insurance, Migdal’s payment exhausted the ICSOP policy.” Migdal, on the other hand, contends that, under ICSOP’s construction of the limits clause, it is an “escape clause” and that California courts would not enforce such a clause.
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