The Reasonable Expectations of the Covered Party, Even an Additional Insured, Determines the Interpretation of Ambiguous Policy Language

In California, courts have long held that where a policy provision is ambiguous because it is susceptible to multiple interpretations, the reasonable expectation of the covered party governs.  But which parties’ objectively reasonable expectations should govern where there are both a named insured and an additional named insured claiming coverage?  In its significant decision in Transport Insurance Company v. Superior Court of Los Angeles County, __ Cal. App. 4th __, 2014 Cal. App. LEXIS 28 (Jan. 13, 2014), the Court of Appeal of California held that it is the objectively reasonable expectation of each party seeking coverage that is applied in determining the meaning of language within an insurance contract as it applies to that party, even where it is an additional insured who is not a party to the contact.

In Transport, Vulcan Materials Company was issued a commercial excess and umbrella liability insurance policy by Transport Insurance Company (“Transports Policy”).  A provision of the Transport Policy named R.R. Street & Co. as an additional insured with respect to the distribution or sale of certain industrial products.  The Transport Policy provided that Transport would have a duty to defend any covered claim if it was not covered by the “underlying insurance” or if the “underlying insurance” were exhausted.  The Transport Policy’s schedule of underlying insurance policies identified nine contracts.

Claims were brought against both Vulcan and R.R. Street in several underlying pollution and environmental contamination actions.  National Union Insurance Company defended R.R. Street in these actions under a general liability insurance policy.  In Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4th 577 (2010), a prior coverage litigation before a different court of appeal, Transport brought a declaratory relief action concerning its duty to defend Vulcan under the Transport Policy.  A key issue before the court concerned the meaning of the phrase “underlying insurance” and whether it included only the scheduled insurance contracts in the Transport Policy or all primary insurance contracts in effect during the continued loss period.  Vulcan argued that the term should only encompass the insurance contracts identified in the Transport Policy in order to maximize the scope of Transport’s potential duty to defend.  The court of appeal in the case held that the term “underlying insurance” in the policy provision was ambiguous and that absent, any conflicting extrinsic evidence, the ambiguity should be reasonable based on the reasonable expectations of the named insured- Vulcan.  The trial court held in Vulcan’s favor in interpreting “underlying insurance” to include only the policies identified in the Transport Policy.

Subsequently, in Transport, an action was brought by Transport against R.R. Street, and its general liability insurer National Union, seeking a declaration that it did not have a duty to defend R.R. Street as an additional insured in the underlying claims against R.R. Street and Vulcan.  R.R. Street then brought a motion for summary adjudication arguing that Transport was collaterally estopped by the decision in Legacy Vulcan from arguing that “underlying insurance” meant anything other than the policies identified in the Transport Policy and as such, Transport had a primary defense obligation to R.R. Street because it was not an insured under any of those policies.  Thus, R.R. Street argued that the umbrella portion of the Transport Policy provided primary coverage for Street for the underlying actions and required Transport to provide a defense.

The trial court granted R.R. Street’s motion on the basis of collateral estoppel.  The Court of Appeal disagreed.  Based on the assumption that the term “underlying insurance” is ambiguous as to R.R. Street, the court found that it is the objectively reasonable expectation of the party claiming coverage, in this case R.R. Street, that must be applied in determining the meaning of ambiguous insurance provision.  The court reasoned that this is true even if the party claiming coverage is, like R.R. Street, not a party to the insurance contract because “the intent of the named insured in requesting the added coverage is directly dependent on the bargain that the additional named insured made with the named insured.”  In this case, the court asserted, R.R. Street’s intention may well differ from those of Vulcan because R.R. Street arguably would not expect coverage under the Transport Policy to take precedent over its own commercial liability policies.  The court found that, because the Legacy Vulcan case did not address R.R. Street’s objectively reasonable expectations, the trial court was not bound by Legacy Vulcan’s findings based on the named insured’s reasonable expectations.  As such, the Court of Appeal directed the trial court to vacate its order granting R.R. Street’s motion for summary adjudication and enter a new order denying the motion.

This decision is significant in that it clearly establishes that it is not only the reasonable expectations and intentions of the named insured that are relevant in interpreting ambiguous language and provisions in an insurance policy.  Where additional insureds are involved, even where they are not parties to the insurance contract, courts in California will analyze ambiguous policy language in light of the reasonable expectations of the party actually claiming coverage.

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