California Court Addresses Additional Insured’s Reasonable Expectations

In its recent decision in Transport Insurance Company v. Superior Court of Los Angeles County, No. B249470, slip op. (2nd Dist. Cal. Jan. 13, 2014), the California Court of Appeal for the Second District had occasion to consider whether the reasonable expectations of coverage of an insured under an excess or umbrella general liability policy is relevant to whether it is entitled to a defense.

Transport Insurance Company (“TIC”) issued a commercial excess and umbrella liability insurance policy to Vulcan Materials Company (“Vulcan”), under which R.R. Street & Co., Inc. (“Street”) was named as an additional insured.  The TIC policy agreed to defend the insured if “the limits of liability of the underlying insurance are exhausted … .” The underlying action alleged that Vulcan manufactured perchloroethylene (“PCE”) which was sold by Street to dry cleaners, and ultimately resulted environmental contamination.

TIC had previously sought a declaratory order in a related case, Legacy Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677, that “underlying insurance” referred to all primary policies issued to Vulcan as opposed to only those listed in the TIC policy’s Schedule of Underlying Insurance.  The court in that related case concluded that the term “underlying insurance” as used in the TIC policy was ambiguous, and therefore had to be interpreted to mean only those policies specifically identified in the Schedule.  Central to the court’s reasoning was Vulcan’s reasonable expectations to coverage. 

TIC subsequently brought suit against Street and Vulcan’s primary general liability insurer, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), seeking a declaration regarding its duty to defend Street, as an additional insured, in various underlying actions.  National Union and Street moved for summary judgment, arguing that TIC was collaterally estopped by the related decision from arguing that “underlying insurance” referred to anything other than the policies identified in the Schedule of Underlying Insurance. The trial court granted the summary judgment motion, and a petition for writ of mandate followed.

TIC argued that the trial court erred when it based its ruling on Vulcan’s “objectively reasonable expectations of coverage” and not those of Street, the party seeking coverage.  The Court of Appeals agreed, holding that since it was Street - the additional insured – ratherVulcan – the policy’s named insured – that was seeking coverage, Vulcan’s reasonable expectations were not relevant.  The appellate court agreed that since the issue of Street’s reasonable expectations were not addressed in the earlier decision, the earlier decision did not collaterally estop TIC from making its arguments concerning underlying insurance.