California Appellate Court Confirms Broad Defense Obligation

Commercial umbrella policies typically provide two types of liability coverage.  Like excess policies, umbrella policies provide additional coverage in the event that the limits of the underlying primary policy are exhausted.  What makes such policies unique, however, is that they also provide coverage for claims or suits that are not covered by primary insurance but are covered under the terms of the umbrella policies.  In those instances, an umbrella insurer is supposed to “drop down” to provide primary coverage to the insured.  

While primary insurers are obligated to provide a duty to defend against suits that are potentially covered by the policy, many umbrella liability policies contain language stating that their defense obligation is only triggered if the claim or suit is “covered” by the umbrella policy and not “covered” by the underlying primary insurance.  As a result, many umbrella carriers try to avoid providing a defense unless it is clear that the underlying claim is “actually covered” under the terms of the policy. 

In Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4^th 677 (June 11, 2010), the California Court of Appeal rejected this interpretation and confirmed that an insured does not have to show that a claim is actually covered under an umbrella policy to trigger the umbrella insurer’s duty to defend.  Instead, the umbrella insurer has a duty to defend if there is a potential for coverage under the policy.  The Legacy court confirmed that where umbrella coverage “drops down” and functions like primary insurance, “the ordinary rules regarding a duty to defend in connection with primary liability coverage apply.”  

The “ordinary rules” governing a primary insurer’s duty to defend are well-known.  A duty to defend arises if the facts alleged in the complaint, or other facts known to the insurer, potentially could give rise to coverage under the policy.  The facts need only “raise the possibility” that the insured will be held liable for covered damages.  Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 304 (1993).  “Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor.”  Id. at 299-300.  “If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.”  Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 655 (2005).  

Thus, it is now clear that under California law, umbrella policies that drop down to provide primary coverage must provide a defense if any of the claims are potentially covered by the umbrella policy and are not within the coverage of the underlying insurance.