The California Court of Appeal has held that in a continuous injury case, an insured could not trigger a defense under an early excess policy as long as the insured had a later primary policy that applied to the loss—even though that primary policy was subject to a self-insured retention. ( Padilla Construction Co., Inc. v. Transportation Ins. Co. (2007) WL 1404322)
Facts
Padilla Construction Co., Inc. was a plastering subcontractor for a residential housing project. In 2002, various homeowners filed a construction defect lawsuit against the project’s developer alleging, among other things, continuous mold and decay damage caused by foundation vents which were blocked with stucco. The developer filed a cross-complaint against Padilla, the subcontractor allegedly responsible for the work.
During the initial years in which mold and decay damage allegedly occurred, Padilla had a primary liability policy through Transcontinental Insurance Company and an excess liability policy through Transportation Insurance Company. During the later years in which damage allegedly occurred, Padilla had a primary liability policy through Steadfast Insurance Company, but that policy was subject to a $25,000 self-insured retention.
Padilla’s early primary insurer (Transcontinental) defended Padilla for a short period of time but exhausted its policy on other claims. Padilla then asserted that it was entitled to a defense from its early excess insurer (Transportation) and that it did not want its subsequent primary insurer (Steadfast) to participate in the defense—apparently because the Steadfast primary policy was subject to a $25,000 SIR. Transportation as excess insurer declined to defend Padilla on the ground that Padilla still had primary coverage available through Steadfast.
Padilla later sued Transportation asserting that Transportation as excess insurer had been obligated to “drop down” and defend Padilla. The trial court ruled in favor of Transportation, holding that Transportation as excess insurer had no duty to defend Padilla because Padilla had other available primary insurance in the form of the primary policy issued by Steadfast.
Holding
The Court of Appeal affirmed.
The appellate court acknowledged that Padilla’s alleged liability in the underlying construction defect action was based on continuous property damage—some of which occurred during earlier years when the Transportation excess policy was in force, and some of which occurred during later years when the Steadfast primary policy was in force. However, Steadfast as primary insurer had a prophylactic duty to defend Padilla in the underlying action against all claims, whether covered or uncovered. And, under the terms of Transportation’s excess policy, Transportation had no duty to defend if there was any other available primary coverage, such as the primary policy issued by Steadfast.
Further, according to the appellate court, it made no difference that the Steadfast primary policy was subject to a $25,000 SIR. Although technically the $25,000 SIR was not “other insurance” within the meaning of the Transportation excess policy, the appellate court refused to treat the SIR as a period of “non-insurance” sufficient to trigger a defense obligation under the Transportation excess policy. Rather, at least for purposes of defense, Padilla would have to satisfy the $25,000 SIR and Steadfast would have to exhaust its primary policy before a defense could be triggered under the Transportation excess policy.
Comment
The appellate court in this case applied California’s “horizontal exhaustion” rule, which requires all primary insurance to be exhausted before an excess insurer must “drop down” to defend an insured. This case indicates that the horizontal exhaustion rule applies even when the underlying primary insurance is subject to an SIR which must be satisfied by the insured.