Nautilus Insurance Company v. Lexington Insurance Company.

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Electronically Filed
Supreme Court
SCCQ-12-0000977
13-FEB-2014
10:17 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
NAUTILUS INSURANCE COMPANY,
Plaintiff-Appellant,
vs.
LEXINGTON INSURANCE COMPANY, DOE DEFENDANTS 1-10,
Defendants-Appellees.
SCCQ-12-0000977
ORIGINAL PROCEEDING
February 13, 2014
RECKTENWALD, C.J., NAKAYAMA, ACOBA, McKENNA, AND POLLACK, JJ.
OPINION OF THE COURT BY ACOBA, J.
The United States Court of Appeals for the Ninth
Circuit (Ninth Circuit) certified the following questions of law
to this court:
1. Whether an insurer may look to another insurer’s
policy in order to disclaim the duty to defend, where the
complaint in the underlying lawsuit alleges facts within
coverage.
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2. Whether an “other insurance” clause that purports to
release an otherwise primary insurer of the duty to defend
if the insurer becomes excess as to liability is
enforceable.
3. Whether the irreconcilability of “other insurance”
provisions in otherwise primary insurance policies should be
determined before or after the operation of the “other
insurance” provisions is determined.
4. Whether, and when, an excess insurer, or an otherwise
primary insurer who becomes an excess insurer by operation
of an “other insurance” clause, has a duty to defend.
I.
A.
VP & PK (ML) LLC (VP & PK) is the owner and developer
of a tract of land in the Maui Lani Project District. VP & PK
purchased a Commercial General Liability insurance policy1 for
its work on the Maui Lani site from Defendant-Appellee Lexington
Insurance Company (Lexington). The policy’s Occurrence Form
included the following “Other Insurance” provision:
4. Other Insurance
If other valid and collectible insurance is available
to the insured for a loss we cover under Coverages A
or B of this Policy, our obligations are limited as
follows:
a. Primary Insurance
This insurance is primary except when b. Excess Insurance,
below, applies. If this insurance is primary, our
obligations are not affected unless any of the other
insurance is also primary. Then, we will share with all
that other insurance by the method described in c. Method of
Sharing, below.
1
“Liability insurance” is defined as “[a]n agreement to cover a
loss resulting from the insured’s liability to a third party, such as a loss
incurred by a driver who injures a pedestrian.” Black’s Law Dictionary 873
(9th ed. 2009). “The insured’s claim under the policy arises once the
insured’s liability to a third party has been asserted.” Id.
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b. Excess Insurance
This insurance is excess over:
. . . .
(2) Any other primary insurance
available to you covering
liability for damages arising
out of the premises or
operations of the “products-
completed operations” hazard
for which you have been added
as an additional insured by
attachment of an endorsement.
When this insurance is excess, we will have no
duty under Coverages A or B to defend the
insured against any “suit” if any other insurer
has a duty to defend the insured against that
“suit”. If no other insurer defends, we will
undertake to do so, but we will be entitled to
the insured’s rights against all those other
insurers.
. . . .
c. Method of sharing
If all of the other insurance permits contribution by
equal shares, we will follow this method also. Under
this approach each insurer contributes an equal amount
until it has paid its applicable limit of insurance or
none of the loss remains, whichever comes first.
If any of the other insurance does not permit
contribution by equal shares, we will contribute by
limits. Under this method, each insurer’s share is
based on the ratio of its applicable limit of
insurance to the total applicable limits of insurance
of all insurers.
(Emphases added.) Lexington did not include Kila Kila
Construction (Kila Kila) as an additional insured.
Kila Kila was one of VP & PK’s subcontractors for the
Maui Lani development. Kila Kila purchased a Commercial General
Liability Coverage insurance policy for its work on the Maui Lani
site from Plaintiff-Appellant Nautilus Insurance Company
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(Nautilus). The Commercial General Liability Coverage form
contained an “Other Insurance” provision, which stated as
follows:
4. Other Insurance
If other valid and collectible insurance is available
to the insured for a loss we cover under Coverages A
or B of this Coverage Part, our obligations are
limited as follows:
a. Primary Insurance
This insurance is primary except when b. below
applies. If this insurance is primary, our
obligations are not affected unless any of the
other insurance is also primary. Then, we will
share with all that other insurance by the
method described in c. below.
b. Excess Insurance
This insurance is excess over:
. . . .
(2) Any other primary insurance
available to you covering liability
arising out of the premises or
operations for which you have been
added as an additional insured by
attachment of an endorsement.
(Emphases added.) Nautilus’s policy also contained an
“Additional Insured Endorsement” modifying the Commercial General
Liability Coverage and adding VP & PK as an additional insured:
SECTION II - WHO IS AN INSURED is amended to include as an
insured the person or organization shown in the Schedule
below, but only for liability arising out of your negligence
and only for occurrences or coverage not otherwise excluded
in the policy to which this endorsement applies.
SCHEDULE
Name of Person or Organization:
VP & PK (ML) LLC and Central Pacific Bank
98-880 Iwaena St
Aiea, HI 96701
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Project: The Fairways at Maui Lani Cost $1.7
Million
(Emphases added.)
Both parties’ General Commercial Liability policies
include duties to both defend and indemnify.
B.
On June 3, 2008, Karen Goo and a number of Maui
residents sued VP & PK, Kila Kila, and other VP & PK
subcontractors for damages resulting from construction in Maui
Lani. The complaint alleged facts falling within the coverage of
both policies. Nautilus funded the defense of both Kila Kila and
VP & PK during the entirety of the Goo lawsuit. Ultimately, VP &
PK was found solely liable on some claims and ordered to pay
damages totaling $232,700. Kila Kila was not found liable on any
claims.
C.
Lexington acknowledged that it would indemnify VP & PK
for the jury verdict, and satisfied the entirety of the judgment
against VP & PK. It does not appear to dispute its obligation to
pay the full amount of damages. However, Lexington denies any
obligation to contribute to Nautilus’s costs in funding the
defense.
D.
On September 14, 2009, Nautilus filed a Complaint in
the Hawai#i Circuit Court of the Second Circuit, seeking, inter
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alia, a declaration that Lexington owed VP & PK a duty to defend
and that it breached that duty, and (2) equitable contribution
from Lexington for defense costs. On November 10, 2009,
Lexington removed the case to the District Court,2 pursuant to 28
U.S.C. 1332(a)(1).3 On November 17, 2010, the District Court
granted summary judgment to Lexington on all of Nautilus’s
claims.
The District Court found that (1) Lexington was
permitted to look beyond the face of the complaint and its policy
-- and, specifically, to Nautilus’s policy -- to determine
whether it had a duty to defend; (2) Lexington’s policy was in
excess to Nautilus’s policy; (3) as a result, Lexington’s duty to
defend had never been triggered; and (4) Nautilus was entitled to
neither a declaratory judgment nor any contribution for the
defense costs. Nautilus Ins. Co. v. Lexington Ins. Co., Cv. No.
90-00537 DAE-LEK, 2010 WL 4812742, at *12-16 (D. Haw. Nov. 17,
2010).
Nautilus appealed to the Ninth Circuit on December 14,
2010, and on October 9, 2012, the Ninth Circuit sua sponte
requested that the parties file supplemental briefing addressing
2
The Honorable David A. Ezra presided.
3
28 U.S.C. 1332(a)(1) provides that “[t]he district courts shall
have original jurisdiction of all civil actions where the matter in
controversy exceeds the sum or value of $75,000, exclusive of interest and
costs, and is between (1) citizens of different States[.]”
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whether questions in the case should be certified to this court,
and inviting them to comment on four proposed questions for
certification. Neither party objected to certification in their
briefs, and both concede that Hawai#i law governs this
controversy.
On November 2, 2012, the Ninth Circuit filed a request
with this court to answer four certified questions. Hawai#i
Rules of Appellate Procedure Rule 13(a) provides that “[w]hen a
federal district or appellate court certifies to the Hawai#i
Supreme Court that there is involved in any proceeding before it
a question concerning the law of Hawai#i that is determinative of
the cause and that there is no clear controlling precedent in the
Hawai#i judicial decisions, the Hawai#i Supreme Court may answer
the certified question by written opinion.” On January 10, 2013,
this court accepted the certified questions. Nautilus filed its
Opening Brief on August 5, 2013, Lexington filed its Answering
Brief on September 12, 2013, and Nautilus filed a Reply Brief on
September 26, 2013.
II.
Question 1: Whether an insurer may look to another
insurer’s policy in order to disclaim the duty to defend, where
the complaint in the underlying lawsuit alleges facts within
coverage.
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A.
1.
Both parties’ arguments on this question focus on this
court’s 2000 opinion in Dairy Road Partners v. Island Ins. Co.,
92 Hawai#i 398, 992 P.2d 93 (2000). However, we hold that Dairy
Road Partners does not clearly resolve the scenario presented by
this certified question.
In Dairy Road Partners, the insurer, Island Insurance,
disclaimed its duty to defend insureds Dairy Road Partners (DRP)
and Shell in a pending action. 92 Hawai#i at 408, 992 P.2d at
103. The complaints against the insureds alleged facts that
would fall within Island Insurance’s coverage, thereby requiring
that Island Insurance defend the claims.4 Id. at 414, 992 P.2d
at 109. However, Island Insurance conducted its own
investigation and disclaimed the defense based on the facts
uncovered in that investigation, which would apparently put the
underlying events outside the scope of Island Insurance’s
coverage. Id. at 409, 992 P.2d at 104.
In reaching its conclusion as to whether Island
Insurance had a duty to defend under these circumstances, this
court relied on Hawai#i insurance law principles with respect to
the duty to defend. Id. at 411-13, 992 P.2d at 106-08. The
4
The opinion noted that “Island [Insurance] does not dispute that
the complaints in both of the underlying lawsuits allege claims that, if
proven, would be covered by the policy.” Id. at 414, 992 P.2d at 109.
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operative question was whether, “for the purposes of overcoming
the duty to defend, Island [Insurance] was permitted to conduct a
factual investigation despite the allegations of the underlying
complaints.” Id. at 415, 992 P.2d at 110 (emphases in original).
Prior case law in Hawai#i had indicated that “insurers
may generally overcome their duty to defend by relying on
‘factual’ sources beyond the pleadings[,]” and Dairy Road
Partners expressed concern about this holding, because of the
potential for adverse consequences to insureds. Id. at 417, 992
P.2d at 112. First, the insured could “be saddled with the
Procrustean dilemma of being forced to adduce facts proving his
or her own liability in the underlying lawsuit in order to
satisfy the insurer that there may be merit to the underlying
covered claim.” Id. For example, in Dairy Road Partners, DRP
would have had to prove that its employee was acting within the
scope of his employment in order to demonstrate to Island
Insurance that DRP had coverage under its policy and thus Island
Insurance was required to defend. Id. However, DRP would be
liable in the underlying litigation if its employee was found to
be acting within the scope of his employment. Id. Thus, DRP
would be compelled to take inconsistent positions. Id.
Second, this court was also concerned with the
inconsistent judgments that could result if an insurer could look
to facts outside the complaint in disclaiming its duty to defend.
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Id. Dairy Road Partners explained that “[a] circuit court
presiding over a declaratory judgment action might rule, based on
an insurer’s superior production of evidence concerning material
facts that will be directly in dispute in the underlying lawsuit,
that there is no possibility of coverage[,]” and “[s]ubsequently,
the trier of fact in the underlying lawsuit . . . might find that
the insured is liable on a claim covered by the policy.” Id.
(emphasis in original).
This court noted that “the majority of jurisdictions
addressing the issue forbade insurers from relying upon extrinsic
evidence for the purposes of disclaiming the duty to defend.”
Id. at 418, 992 P.2d at 113. Dairy Road Partners ultimately
adopted the majority rule, with a limited exception, wherein an
insurer “may only disclaim its duty to defend by showing that
none of the facts upon which it relies might be resolved
differently in the underlying lawsuit.” Id. at 422, 992 P.2d at
117 (emphasis in original). In other words, the decision held an
insurer who relied on extrinsic facts in disclaiming its duty to
defend would have to show that those facts could not be disputed
in the underlying lawsuit. Id. Otherwise, the insurer would not
be allowed to disclaim its duty to defend based on those
extrinsic facts. Id. To illustrate, where an insurer argues
that an occurrence was outside of the effective period of the
policy, an insurer would likely be able to rely on that extrinsic
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fact, because “the parameters of the effective period of the
policy would not normally be subject to dispute in the underlying
action.” Id. at 422 n.14, 992 P.2d at 117 n.14.
Holding thus, Dairy Road Partners concluded that Island
Insurance was required to defend DRP and Shell, because the
additional facts it uncovered through its own investigation were
“inextricably intertwined in the factual matters at issue in the
underlying lawsuits and [could not], therefore, serve as a basis
for disclaiming the duty to defend.” Id. at 423, 992 P.2d at 118
(emphasis added).
2.
Nautilus interprets the Dairy Road Partners decision as
dispositive on the issue of whether an insurer may look to “other
insurance” to disclaim its duty to defend. Under Dairy Road
Partners, Nautilus asserts, “an insurer that issues a general
liability policy to an insured is obligated to defend a claim
whenever there is a ‘mere potential for coverage’ under the
policy.” (Emphasis in original.) (Quoting id. at 413, 992 P.2d
at 108.) According to Nautilus, Dairy Road Partners completely
excluded the possibility for an insurer to look to any extrinsic
evidence beyond the allegations in the complaint in determining
whether it had the duty to defend, unless such evidence would not
bear any relation to the question of liability in the underlying
suit.
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Nautilus avers that the provision in its policy, adding
VP & PK as additional insureds, would constitute extrinsic
evidence bearing a relation to the question of liability in the
underlying suit, and thus cannot be considered by Lexington in
disclaiming its duty to defend. In Nautilus’s view, the “facts”
this court referred to in Dairy Road Partners “(1) must be
relevant to the underlying lawsuit, and (2) cannot be open to a
different resolution than what the insurer believes them to be.”
Lexington, on the other hand, responds that “[t]o find
that insurers may not consider other policies covering their
insured would deprive them of essential information in
ascertaining whether there is a duty to defend.” Lexington
argues that to hold otherwise “would render ‘other insurance’
clauses meaningless, in contravention of this court’s case law
holding that contract provisions should not be interpreted such
that they are rendered meaningless. (Citing Stanford Carr Dev.
Corp. v. Unity House, Inc., 111 Hawai#i 286, 297, 141 P.3d 459,
470 (2006).) (Other citations omitted.)
As to the import of Dairy Road Partners, Lexington
avers that that decision does not preclude an insurer from
looking at the available insurance policies in order to determine
whether or not it has a duty to defend an insured. According to
Lexington, this court “focused on the unintended consequences of
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permitting insurers to rely on factual sources beyond the
pleadings.” (Emphasis added.)
Lexington emphasizes that the two concerns articulated
by this court in Dairy Road Partners, first, that an insured
would have to prove his or her own liability in the underlying
lawsuit in order to satisfy the insurer that it has the duty to
defend, and second, that allowing insurers to rely on factual
sources behind the pleadings that may result in inconsistent
judgments, are not present in this case. Instead, it argues, “VP
& PK was not forced to allege facts proving its own liability in
order to trigger the duty to defend because Nautilus had already
agreed to provide a defense; and [] there was no risk of
inconsistent judgments because the Nautilus and Lexington
policies were not before the jury in the [u]nderlying [a]ction.”
3.
Dairy Road Partners clearly established the principles
that the duty to defend is broader than the duty to indemnify,
and that “[a]ll doubts as to whether a duty to defend exists are
resolved against the insurer and in favor of the insured[.]” 92
Hawai#i at 412, 992 P.2d at 107 (citations and internal quotation
marks omitted). In the same vein, this court has held that “the
duty to defend ‘rests primarily on the possibility that coverage
exists. This possibility may be remote but if it exists, the
insurer owes the insured a defense.’” Id. (emphasis in original)
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(quoting Standard Oil Co. of California v. Hawaiian Ins. & Guar.
Co., Ltd., 65 Haw. 521, 527, 654 P.2d 403, 407 (1973)) (other
citation and internal quotation marks omitted). These precepts
are ultimately relevant to our answers to the certified questions
presented to this court.
However, the specific holding in Dairy Road Partners
does not appear dispositive of the outcome of the first certified
question. The extrinsic evidence considered in Dairy Road
Partners included factual matters relevant to the outcome of the
underlying litigation. Here, in contrast, the question is
whether an insurer may take into account the operation of its
policy in conjunction with other insurance policies, to determine
if it must defend a particular suit. Thus, the insurer would be
looking at the construction and operation of other insurance
policies in disclaiming a duty to defend, which presents some
different considerations than the “extrinsic evidence” that was
at issue in Dairy Road Partners.
The clearest signal that Dairy Road Partners does not
control in this case is the rationale expressed in Dairy Road
Partners that allowing insurers to rely on extrinsic factual
evidence could potentially (1) compel the insured to adduce facts
proving his or her own liability in the underlying suit; and (2)
result in inconsistent judgments regarding facts that would be in
dispute in the underlying lawsuit as well as relevant to the
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insurer’s duty to defend. 92 Hawai#i at 417, 992 P.2d at 112.
As Lexington correctly points out, these concerns will generally
not be implicated when the question is whether an insurer should
be able to look to other insurance companies’ policies when
disclaiming the duty to defend. The question of whether the
insured has coverage under another policy is typically one of
contract interpretation, and thus may not involve issues that
could be in dispute in the underlying action.5
While the insurance company in Dairy Road Partners
conducted independent investigative research into the
circumstances of the underlying occurrence, here, in contrast,
the “research” contemplated would be identifying and interpreting
the policies of other companies that had potentially applicable
insurance. Therefore, extrinsic “facts” may be distinguished
analytically from extrinsic “policies”, and Dairy Road Partners
does not mandate a specific answer to the first certified
question.
B.
“Primary insurance is typically the first layer of
coverage.” See 23 Appleman, Insurance Law and Practice § 145.1,
5
As this case illustrates, however, sometimes the question of
whether the insured is covered under another policy will involve facts that
could be relevant to the underlying litigation. As will be explained infra,
the question of whether VP & PK is covered under Nautilus’s policy turns on
whether Kila Kila was negligent -- an issue squarely addressed in the
underlying litigation.
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at 3 (2003) [hereinafter “Appleman”]; Liberty Mut. Ins. Co. v.
Sentinel Ins. Co., 120 Hawai#i 329, 354, 205 P.3d 594, 619 (App.
2009). A carrier’s obligations under a primary policy attach
whenever there is a possibility of coverage, even when that
possibility is remote. See, e.g., Dairy Road Partners, 92
Hawai#i at 412, 992 P.2d at 107. “The second layer of coverage
is excess coverage.” 23 Appleman § 145.1, at 4. The difference
between coverages has been explained thusly:
Because separate premiums are assessed against the insured
for excess and primary coverage, excess coverage is not
triggered until the underlying primary policy limits are
exhausted within the meaning of the excess policy. Also, in
contrast to primary policies, a pure excess policy provides
specific coverage above an underlying limit of primary
insurance and often will refer directly within the excess
policy declaration and policy itself to primary insurers as
well as other excess insurers.
Id.
1.
Here, Lexington’s policy provides that its otherwise
primary insurance becomes excess in the event that “other
insurance” is available. This is known as an “other insurance”
clause. See Walton v. State Farm Mut. Auto Ins. Co., 55 Haw.
326, 329, 518 P.2d 1399, 1401 (1974). Such clauses have been
upheld in this jurisdiction, so long as “‘they are not in
contravention of statutory inhibitions or public policy.’”
Liberty Mut. Ins. Co., 120 Hawai#i at 349-50, 205 P.3d at 614-15
(quoting First. Ins. Co. of Hawai#i v. State, 66 Haw. 413, 423,
665 P.2d 648, 655 (1983) (other citation omitted)). As relevant
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to this case, Lexington’s otherwise primary policy becomes an
excess policy by operation of the “other insurance” clause.
The relationship between the potential primary and
excess coverages in this case is different from many other types
of cases where excess coverage is considered. Here, Lexington’s
policy was primary coverage for VP & PK (not taking into
consideration the “other insurance clause”), and Nautilus’s
policy was primary coverage for Kila Kila, and possibly also
provided primary coverage for VP & PK by operation of Nautilus’s
“Additional Insureds” endorsement. Thus, presumably, VP & PK
negotiated with Lexington and paid premiums for a primary
coverage policy that included, inter alia, the “other insurance”
clause, and Kila Kila negotiated with Nautilus and paid premiums
for a primary coverage policy that included, inter alia, the
additional insured endorsement of VP & PK.6
2.
To reiterate, the policy that Nautilus issued to Kila
Kila included an endorsement of VP & PK as an “additional
insured”, stating that “WHO IS INSURED is amended to include as
an insured [VP & PK], but only for liability arising out of [Kila
Kila’s] negligence and only for occurrences or coverage not
6
Nautilus’s policy also contained a substantially similar “other
insurance” provision, but as will be explained infra, since there are no
allegations that Kila Kila had “other insurance”, this provision from
Nautilus’s policy is not at issue.
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otherwise excluded in the policy to which this endorsement
applies.” (Emphasis added.) Lexington’s “other insurance”
clause, in turn, only applies if VP & PK has other insurance, and
so in order for Lexington’s “other insurance” clause to become
operable, it appears that the “additional insured” endorsement in
Nautilus’s policy must also be triggered.
Nautilus alleges that the “additional insured”
endorsement in its policy could have been resolved in two
different ways, depending on the outcome in the underlying case.
Based on the language of the endorsement, Nautilus asserts that
VP & PK would only be covered as an additional insured under its
policy in the event that Kila Kila were found to be negligent.
According to Nautilus, the coverage of VP & PK was contingent on
the outcome of the underlying litigation, and therefore,
Lexington had no right to consider Nautilus’s policy when
disclaiming the duty to defend.
Nautilus further cites to a New York case, 83 Kajima
Const. Servs., Inc. v. Cati, Inc., 302 A.D.2d 228 (N.Y. App. Div.
2003), in support of its contention. Nautilus analogized the
circumstances in Cati, Inc., which involved two insurers with
“additional insured” language in one of the policies, to those in
this case. According to Nautilus, the coverage of one of the
insureds in Cati, Inc. was contingent on “the negligence or
responsibility of the named insured.” (Quoting Cati, Inc., 302
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A.D. at 228.) The New York Appellate Division, First Department,
held that under those circumstances, the duty of one of the
insurers to defend could be “deferred pending determination of
the underlying action.” (Quoting id. at 229.) Nautilus contends
that in this case, based on its additional insureds provision,
Nautilus’s duty to defend VP & PK could have similarly been
deferred until Kila Kila’s negligence was determined in the
underlying case, and that, until such a determination was made,
Lexington would have been obligated to defend VP & PK.
Nautilus also alleges that Lexington wrongly assumed
that it was an excess insurer pursuant to its “Other Insurance”
clause. In Nautilus’s view, “Lexington was primary as to the
liability of its named insured, and could have been primary
throughout the entire defense[,]” because Nautilus’s Additional
Insured Endorsement did not even apply until Kila Kila was found
negligent. According to Nautilus, it had the right to place
conditions on its additional insured endorsement obligation, and
if those conditions were not met, then VP & PK would not have
been an additional insured to Nautilus’s policy.
Moreover, Nautlius alleges that “[if] members of the
Hawai#i Supreme Court can come to two different interpretations
with respect to the same insurance policy,” as they did in Dairy
Road Partners, where two justices dissented to the majority’s
interpretation of the business automobile liability policy,
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“surely Lexington can appreciate the possibility that when it
interpreted Nautilus’ policy that there may be an interpretation
of the policy that was different from its own interpretation.”
As a policy matter, Nautilus maintains that, “[b]ased on the
complexity of an insurance policy, an insurer should not be
allowed to look at another insurer’s policy when deciding whether
or not the insurer owes its insured a duty to defend.”
As to the significance of the limitations on Nautilus’s
“Additional insured Endorsement,” Lexington argues that it does
not matter whether it was conditioned on Kila Kila’s negligence,
because there were allegations in the underlying action that Kila
Kila had been negligent, and Nautilus had a duty to defend based
on those allegations. According to Lexington, “[j]ust because it
was later determin[ed] that Kila Kila was not negligent, does not
negate Nautilus’ duty to defend.”
Lexington avers that, by operation of its “Other
Insurance” provision, Nautilus was the primary insurer of VP &
PK, and was defending, and therefore Lexington had no duty as an
excess insurer to defend under the circumstances. Lexington
distinguishes Cati, Inc. on the basis that the additional insured
provision in that case was worded differently than Nautilus’s
Additional Insured Endorsement. In Cati, Inc., the policy
provided that “additional insured coverage will be primary only
if the underlying claim is determined to be solely as a result of
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the negligence or responsibility of the named insured[,]” (some
emphasis omitted) (quoting Cati, Inc., 302 A.D.2d at 229),
whereas Nautilus’s Additional Insured Endorsement does not
contain that specific contingent language. Therefore, Lexington
asserts, because there was negligence on the part of Kila Kila
alleged in the underlying action, Nautilus “had the primary duty
to defend as determined at the outset pursuant to the language of
the Additional Insured Endorsement and Hawai#i law.”
In its Reply Brief, Nautilus responds that in a
coverage dispute all relevant insurance policies may be
considered, but that when an insurer is determining its duty to
defend its insured, “[t]he fact that there is another insurer
providing a defense to the insured is irrelevant [because] [a]n
insurance policy between an insurer and its insured is personal.”
Nautilus argues that allowing one insurer to look at another
insurer’s policy would increase the risk of prejudice, for
example, should the insurer misinterpret another insurer’s
policy. Nautilus explains that, illustrative of such, Lexington
has misinterpreted Nautilus’s Additional Insured endorsement to
be contingent on “alleged negligence” when in actuality it is
contingent on “actual negligence.” According to Nautilus, if
Lexington’s interpretation of the Additional Insured Endorsement
were accurate, then Nautilus would have had to pay the judgment
against VP & PK so long as the complaint alleged negligence
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against Kila Kila, regardless of whether the jury found Kila Kila
to actually be negligent.
Nautilus also counters Lexington’s argument that
limiting an insurer’s ability to consider other insurance
policies would render “other insurance” provisions meaningless.
Nautilus avers that “other insurance” clauses, like the one in
Lexington’s policy, relate to the duty to indemnify, rather than
the duty to defend. The duty to indemnify would not be affected
by any limitations on what an insurer can consider in deciding
whether it has the duty to defend.
3.
In recognition of the fact that the duty to defend is
broader than the duty to indemnify, Hart v. Ticor Title Ins. Co.,
126 Hawai#i 448, 458, 272 P.3d 1215, 1225 (2012), courts have
held that “if an exclusion may operate to relieve an insurer of
its duty to indemnify and the applicability of the exclusion
cannot be determined until after a trial, the insurer must defend
the underlying suit.” Ostrager & Newman, Insurance Coverage
Disputes § 5.02(a), at 312. Nautlius’ argument is that since
the “other insurance” provision in Lexington’s policy would
operate to relieve Lexington of its duty to indemnify only if
Kila Kila was negligent, an issue to be determined at trial,
Lexington had the duty to defend the underlying suit.
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C.
Ultimately, in deciding whether insurers may look to
other policies in disclaiming the duty to defend, we rely on
policy considerations behind why the duty to defend exists,
including what options are available to insurers, Hawai#i
jurisprudence on the duty to defend, the possible risks in
allowing insurers to disclaim their duty based on other policies,
and the reasonable expectations of insureds.
We have observed that “insurers have the same rights as
individuals to limit their liability[] and to impose whatever
conditions they please on their obligation, provided they are not
in contravention of statutory inhibitions or public policy.”
First Ins. Co. of Hawai#i, Inc. v. State, 66 Haw. 413, 423, 665
P.2d 648, 655 (1983) (internal citations and quotation marks
omitted). On the other hand, however, we have long held that any
ambiguities in an insurance contract regarding coverage are
resolved in favor of the insured as against the insurer. See
Tri-S Corp. v. W. World Ins. Co., 110 Hawai#i 473, 489, 135 P.3d
82, 98 (2006) (explaining that ambiguities must be resolved in
favor of the insured and “policies are to be construed in accord
with the reasonable expectations of a layperson”); Allstate Ins.
Co. v. Ponce, 105 Hawai#i 445, 458, 99 P.3d 96, 109 (2004)
(holding that the ambiguity in the term of the insurance contract
should be resolved in favor of the insured); Estate of Doe v.
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Paul Revere Ins. Group, 86 Hawai#i 262, 277, 948 P.2d 1003, 1118
(1997) (stating that this court must “resolve any contractual
ambiguities against the insurer”); see also Allstate Ins. Co. v.
Pruett, 118 Hawai#i 174, 186 P.3d 609 (2008) (applying these
principles in interpreting ambiguous language in an insurance
contract exclusion).
When it comes to the duty to defend, a heavy burden is
placed on the insurer if that insurer wishes to disclaim its
duty. To reiterate, “‘the duty to defend rests primarily on the
possibility that coverage exists.’” Tri-S Corp., 110 Hawai#i at
488, 135 P.3d at 97 (emphasis in original) (quoting Dairy Road
Partners, 92 Hawai#i at 412, 992 P.2d at 107). Furthermore, to
reiterate, all doubts as to a duty to defend are resolved against
the insurer and in favor of the insured. Id.
“The contractual obligation to defend is triggered by
the insured tendering the defense to the insurer.” 22 Appleman §
136.1, at 8. If an insurer is not certain as to whether coverage
exists, there are several options available to that insurer. The
insurer may file a declaratory judgment action to determine
whether it is required to defend, it can defend under a non-
waiver agreement or reservation of rights, or it can refuse to
defend and risk the consequences. 22 Appleman § 136.7, at 45.
The first of these options enables an insurer to
establish in a court action whether it must defend. This permits
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an insurer to determine coverage issues, “allowing the insurer to
address the limits of its duty to defend without risking a later
finding that it acted in bad faith.” Id. at 50. However, as
will be explained, an otherwise primary insurer may not disclaim
its duty to defend on the basis of a general “other insurance”
provision.7 By requiring that a primary insurer have the duty to
defend, regardless of its “other insurance” clause, an insured
will be ensured a defense where he or she may be entitled to one.
The second option, defending under a non-waiver
agreement or reservation of rights, permits an insured to
“satisfy its duty to defend the policyholder while simultaneously
preserving its ability to rely later on any available policy
defenses that might have vitiated the duty.” Id.; see AIG Hawaii
Ins. Co., Inc. v. Smith, 78 Hawai#i 174, 179-80, 891 P.2d 261,
266-67 (1995) (discussing the validity of a reservation of rights
by the insurer in connection with tendering a defense). It has
been explained that “[a] reservation of rights agreement is
notice by the insurer to the insured that the insurer will defend
the insured but that the insurer is not waiving any defenses
. . . it may have under the policy.” First Ins. Co. v. Hawaii,
Inc. v. State, 66 Haw. at 422, 665 P.2d at 654 (internal
7
Of course, where one insurance policy explicitly contemplates the
operation of another specifically named policy by reference, the insurer will
not be looking outside its own policy, and therefore may look to that named
policy in disclaiming its duty to defend.
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quotation marks and citation omitted). In the event that it is
later determined that the insurer had no duty to defend, the
insurer may recoup its expenses from the insured. See 22
Appleman § 136.7, at 46.
This ability of an insurer to tender a defense under a
reservation of rights, without necessarily acceding to the notion
that its policy provides coverage, supports the conclusion that
insurers should not be permitted to look to other policies in
disclaiming the duty to defend. Insofar as an insurer may
believe that another policy provides coverage, in lieu of its
policy, that insurer may tender a defense under a reservation of
rights -- leaving open the possibility that another insurer may
be ultimately responsible for the costs of coverage.
It is the third of these options -- an insurer refusing
to defend and risking the consequences -- that we hope to avoid
in situations where the insurer would be primary, except by
operation of its “other insurance” clause. Where an insured has
contracted for primary insurance, an insurer should not be able
to refuse to defend and place the risk on the insured, of the
insurer’s erroneous understanding of another insurance policy
that is not part of the original contract. Instead, all primary
carriers should be involved in the initial proceedings where the
complaint alleges facts within the scope of coverage. See Dairy
Road Partners, 92 Hawai#i at 422, 992 P.2d at 117.
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In Hawai#i, it has been established that insurers may
look to the facts of the complaint8 and their own policies in
determining whether they have the duty to defend a particular
action. In Lexington’s view, insurance companies should be able
to interpret other policies as well in disclaiming the duty to
defend. The danger in this approach, as Nautilus points out, is
that the insurance company may misinterpret the other policy in
disclaiming its duty. Of course, an insurer may misinterpret its
own policy, but misinterpretation may be of a greater risk where
the insurer is examining a contract to which it is not a party.
We have held that “[t]o ascertain whether coverage
exists in insurance coverage disputes, we must look to the
language of the insurance policy consistent with the insurer and
insured’s intent and expectations.” Methven-Abreu v. Hawaiian
Ins. & Guar. Co., 73 Haw. 385, 390, 834 P.2d 279, 283 (1992)
(internal quotation marks omitted); but cf. Willis v. Swain, 129
Hawai#i 478, 485 n.12, 304 P.3d 619, 626 n.12 (2013) (“While
courts say they are looking for the intention of the parties, in
reality they are making a judgment about the scope of coverage
based on the text of the policy, the circumstances, and public
policy.” (emphasis omitted) (internal quotation marks and
citation omitted)). An insurer who is not a party to a
8
As explained supra, Dairy Road Partners limited the ability of
insurers to use extrinsic facts in disclaiming their duty to defend.
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particular “other” contract may not be able to accurately
ascertain the expectations of the insurer and insured who are the
actual parties to the other contract.
Moreover, the relationship between the insured and its
primary insurer with respect to the duty to defend is a personal
one. See, e.g., Am. Fid. & Cas. Co. v. Penn. Thresherman &
Farmers’ Mut. Cas. Ins. Co., 280 F.2d 453, 459 (5th Cir. 1960)
(stating that “the duty to defend is one which is personal to the
relationship of [the] insurer and [the] assured”). The insured
chose a particular insurer as its primary insurer, and as such, the
insured has the reasonable expectation that that insurer will come
to the insured’s defense where coverage is applicable. See Dairy
Road Partners, 92 Hawai#i at 422, 992 P.2d at 117; Commerce & Indus,
Ins. Co. v. Bank of Hawai#i, 73 Haw. 322, 327, 832 P.2d 733, 736
(1992) (“An insurer has a duty to proceed in defense of a suit, at
least to the point of establishing that liability upon which
plaintiff was relying was in fact not covered by the policy, and
not that it merely might not be.” (internal quotation marks and
citation omitted)).
Accordingly, where an insured has contracted for primary
insurance, that insured should be entitled to a defense by its
insurer. See Hawaiian Holiday Macadamia Nut Co. v. Indust. Indem.
Co., 76 Hawai#i 166, 169, 872 P.2d 230 (1994) (holding that the
“insurer’s duty to defend its insured is contractual in nature”).
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In General Motors Acceptance Corp. v. Nationwide Insurance Co., 828
N.E.2d 959 (N.Y. 2005), for example, the New York Court of Appeals
addressed a similar situation where there were two coincidental
primary insurance policies, but where one was deemed “excess” by
the operation of an “other insurance” clause. 828 N.E.2d at 962.
That court reasoned that “[p]rimary insurance premiums are based,
at least in part, on the insurer’s consideration that it may be
liable to defend an action[,]” and held that “[r]elieving primary
insurers of the duty to defend would provide a windfall to the
carrier insofar as the costs of defense -- litigation insurance --
are contemplated by, and reflected in, the premiums charged for
primary coverage.” Id.
Therefore, we hold that a primary insurer may not look to
another insurance policy in disclaiming its duty to defend. If a
primary insurer is tendered a defense, and believes that it is
actually an excess insurer or otherwise has no duty to defend by
operation of its “other insurance” clause, then that primary
insurer must still defend in the action. This is the appropriate
remedy, rather than leaving the defense up to other insurers or,
potentially up to the insured, where the insured has contracted for
primary insurance coverage.9 The options available for a primary
9
However, where an insurer holds a true excess policy, then the
parties have bargained for excess insurance. As noted, in many of these true
excess policies, the other applicable primary insurance is specifically
listed, and such policies are designed to provide coverage over and above
(continued...)
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insurer that believes it has been rendered an excess insurer by the
operation of its “other insurance” clause are discussed below.
III.
Question 2: Whether an “other insurance” clause that
purports to release an otherwise primary insurer of the duty to
defend if the insurer becomes excess as to liability is
enforceable.
A.
As to this question, the bulk of Nautilus’s arguments
are premised on the specific provisions of Lexington’s policy,
rather than as addressed toward the more general question posed
by the Ninth Circuit to this court. Nautilus avers that
Lexington’s “Other Insurance” clause violated “‘the rule the
insurance provisions that take away or limit coverage must be
conspicuous, plain, and clear.’” (Quoting Carmel Dev. Co. v. RLI
Ins. Co., 126 Cal. App. 4th 502, 516 (2005).) It reiterates that
Lexington’s “Other Insurance Clause” is contingent on the outcome
at trial, and since Kila Kila was found not to be negligent,
9
(...continued)
other existing primary policies. See 23 Appleman § 145.1, at 5 (“[I]n
contrast to primary policies, a pure excess policy provides specific coverage
above an underlying limit of primary insurance and often will refer directly
within the excess policy declaration and policy itself to primary insurers as
well as other excess insurers.”). In such cases, an insurer may look to other
insurance policies in disclaiming its duty to defend in order to avoid
needless litigation either in the form of declaratory judgment actions, or
contribution of defense costs after the fact, where the insured did not
bargain for primary coverage from that insurer in the first instance, as was
explicitly considered in the contract between the insurer and insured.
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Nautilus was not responsible for any loss and therefore VP & PK
had no “other valid and collectible insurance.” Nautilus further
argues that Lexington’s “Other Insurance” clause should be
interpreted to limit indemnification only. As to “Other
Insurance” clauses generally, however, Nautilus does posit that
an “Other Insurance” clause that purports to release an otherwise
primary insurer of the duty to defend if the insurer becomes
excess as to liability should not be enforceable because it
“fails to give the insured adequate notice that it may not
receive a defense it believed it bargained for” and “blurs the
distinction between an insurer’s duty to defend and duty to
indemnify.”
In response, Lexington alleges that there is no public
policy against enforcement of “other insurance” provisions, and
that the ICA has recognized the utility of excess “other
insurance” clauses in the context of uninsured motorist
insurance. Liberty Mut. Ins. Co, 120 Haw. at 353-354, 205 P.3d
at 618-19. Lexington maintains that under California law,
federal and state courts routinely enforce excess other insurance
clauses in the absence of prejudice to the insured. (Citing
Fireman’s Fund Ins. Co. v. Md. Cas. Co., 65 Cal. App. 4th 1279,
1304 (1998) (“The courts will generally honor the language of
excess ‘other insurance’ clauses when no prejudice to the
interests of the insured will ensue.”).) Lexington avers that
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the insured in this case was not prejudiced by the enforcement of
the “other insurance” clause, and was not left without a defense
due to the circularity of other insurance provisions. Lexington
also declares that the placement of its clause does not violate
“the rule that insurance provisions that take away or limit
coverage must be conspicuous, plain, and clear”, that if Nautilus
had refused to defend VP & PK, Lexington would have defended
under the terms of its policy and contrary to Nautilus’s
suggestion, the insured would not be left “in a lurch”.
In its Reply Brief, Nautilus reiterates that
“[i]nsureds should not be left to wonder if the carriers that
they have been paying premium rates to may or may not come to
their defense because they have been added on to another policy
as an additional insured.” As a policy matter, Nautilus suggests
that “[i]f insureds are added on as additional insureds on
another policy, let the insureds reap the benefits, not the
insurance companies who have been receiving premiums to provide
primary coverage.”
B.
1.
In Liberty Mutual Insurance Co., the ICA majority10
10
The Honorable Corinne K.A. Watanabe filed an opinion dissenting in
part, holding that the excess “other insurance” clause “invalidly limited
Liberty Mutual’s [uninsured motorist] liability, as defined by Hawai#i
statutes and case law, is against public policy and is, therefore void and
(continued...)
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addressed an “other insurance” clause of an insurance policy
sharing some characteristics with the type of policy described in
the Ninth Circuit’s certified question -- specifically, it made
the named insurer into an excess insurer if there was any other
collectible insurance, under certain circumstances. 120 Hawai#i
at 345, 349, 205 P.3d at 610, 614. The “Other Insurance”
provision in Liberty Mutual’s policy stated, in part, that “any
insurance we [Liberty Mutual] provide with respect to a vehicle
you [the named insured] do not own shall be excess over any other
collectible insurance.” Id. at 345, 205 P.3d at 610 (emphases
added). Thus, as with the “Other Insurance” provision presented
in this case, the Liberty Mutual provision transformed some of
its apparently primary coverage into excess coverage, if there
was other collectible insurance available. See id.
Rather than the duty to defend, the question in Liberty
Mutual Insurance Co. was whether Liberty Mutual was required to
pay for uninsured motorist benefits as a primary insurer or as an
excess insurer. Id. at 336, 205 P.3d at 601. In addressing this
issue, the ICA referred to policy considerations, and also
considered the statutory scheme governing automobile insurance
coverage, which is not at issue in this case. The ICA majority
10
(...continued)
unenforceable.” Liberty Mut. Ins. Co., 120 Hawai#i at 356, 205 P.3d at 621
(Watanabe, J., dissenting in part).
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upheld the excess “other insurance” clause in Liberty Mutual’s
policy, stating that “such clauses serve valid purposes, such as
helping to keep costs of premiums down[,]” and that “[b]y
allowing insurance companies to set the priority of payment
through excess provisions, they are better able to assess the
risk of providing the coverage and to charge the insured
accordingly.” Id. at 353, 205 P.3d at 619.
2.
This case presents a different question, however, in
that Liberty Mutual Insurance Co. considered an excess “other
insurance” clause in the context of the duty to indemnify -- and
here we consider the validity of that type of provision when it
allows the insurer to escape or become excess11 as to the duty to
defend where the insurer is excess as to liability. In the
discussion supra, it was explained how the duty to defend is
broader than the duty to indemnify, Hart, 126 Hawai#i at 458, 272
P.3d at 1225, and in accordance with that axiom, Nautilus urges
us to make unenforceable any clauses relieving the primary
insurer of the duty to defend if the insurer becomes excess as to
liability.
11
Lexington avers that the operation of its “other insurance” clause
makes it only excess as to the duty to defend, and does not allow it to escape
the duty to defend entirely when it becomes excess as to liability. Both
situations are addressed herein, and the same result would apply in either
situation.
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However, in light of our holding as to the first
certified question, we conclude that we need not render those
clauses completely unenforceable. Instead, we simply reiterate
that a primary insurer has the initial duty to defend, regardless
of any “other insurance” provision purporting to relieve that
insurer of the duty to defend if it is deemed excess as to
liability, but that an insurer may enforce such an “other
insurance” clause when obtaining equitable contribution or
reimbursement for defense costs where it believes that it has
been made excess by operation of an “other insurance” clause.
This result is consistent with the expectations of the
insured, specifically that where the insured is paying for
primary insurance, it will be defended where there is a
possibility of coverage. See Dairy Road Partners, 92 Hawai#i at
412, 992 P.3d at 107. The insured will not be “left in a lurch,”
as Nautilus avers, because the primary insurer, regardless of its
“other insurance” clause, will have a responsibility to defend.
Moreover, while such clauses may not be used to allow an
otherwise primary insurer to refuse to tender a defense
altogether, they will be enforced to achieve an equitable result
between two or more insurance companies, an approach that allows
the terms of the contract to take effect, without placing an
undue burden on the insured. Cf. Sentinel Ins. Co., 76 Hawai#i
at 302, 875 P.2d at 919 (holding that under the circumstances of
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the case, “[e]quity . . . dictates that the court allocate
contribution among liable insurers in proportion to the time
periods their policies covered”).
We note that some courts have held that if a primary
insurer undertakes the insured’s defense, it may not seek
reimbursement from another primary insurer, on the grounds that
there is no contractual relationship between the two insurers and
that the defending insurer was undertaking duties consistent with
its contract with the insured. 22 Appleman § 136.10 at 80-81;
see, e.g., Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 166
(Minn. 1986) (“This court has held that when there is a bona fide
dispute between two carriers with overlapping coverages as to
which is primary, whichever undertakes to defend cannot pass on
its defense expense to the other carrier.”). However, we
conclude that the better approach is to allow one insurer to
obtain contribution from another co-insurer that is also
contractually obligated to defend the insured. See Nat’l Indem.
Co. v. St. Paul Ins. Co., 724 P.2d 544, 544-45 (Ariz. 1986)
(“When an insurer has a duty to defend the insured, there should
be no reward to the insurer for breaching that duty. A breach of
the obligation to defend should not be encouraged, but the rule
which allows an insurer to avoid the costs of defense tends to
encourage an avoidance of the insurer’s responsibilities.”).
This contribution or reimbursement shall be in accordance with
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all contract terms, including those purporting to make one
insurer excess to the other where “other insurance” is
available.12
As to the Ninth Circuit’s second certified question, we
therefore answer “yes”, but conditionally. “Other insurance”
clauses purporting to relieve the insurer of the duty to defend
if the insurer becomes excess as to liability are enforceable,
but only in an action between two or more insurers for recovery
of defense costs.
IV.
Question 3: Whether the irreconcilability of “other
insurance” provisions in otherwise primary insurance policies
should be determined before or after the operation of the “other
insurance” provisions is determined.
The “irreconcilability” referenced by the Ninth Circuit
in this question is the concept, mentioned above, that “other
insurance” provisions may become irreconcilable, or mutually
repugnant, where identical clauses are presented in two primary
liability policies. “When both policies contain ‘other
insurance’ clauses which provide that the coverage afforded shall
be deemed excess insurance if other insurance exists to cover the
12
As will be discussed infra, where both primary insurers have
“other insurance” clauses purporting to relieve them of the duty to defend,
such clauses are irreconcilable, or “mutually repugnant” and therefore will
not be enforced, leaving both insurers as primary insurers for purposes of
cost allocation.
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loss, most courts hold that the excess clauses operate to cancel
each other out and the policies of both insurers must be
considered primary insurance.” Ostrager & Newman, 2 Handbook on
Insurance Coverage Disputes § 11.03, at 1001.
A.
Nautilus argues that it should be first determined
whether the two policies insured against the same risk at the
same level of coverage, then determine whether or not the two
policies conflict, and only then determine the operation of the
“Other Insurance” provisions. According to Nautilus, the two
policies in this case did not insure against the same risk at the
same level of coverage, and so there was no need to determine
whether the policies conflict. Nautilus further alleges that,
even assuming that the two policies did provide the same level of
coverage, the policies contain almost identical “other insurance”
language and therefore are irreconcilable. Finally, Nautilus
contends that the operation of the “other insurance” provisions
should be determined last because until it has been determined
that there is a “loss”, which is typically determined at the end
of the underlying lawsuit, it is not necessary to determine the
operation of the “other insurance” provisions.
Lexington responds that a court should first determine
whether “other insurance” provisions in two policies actually
conflict. In Lexington’s view, “[t]he rule of repugnancy should
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only apply if there is an actual conflict between the two “other
insurance” clauses,” and here, there was no such conflict.
(Citation omitted.) (Emphasis in original.) Contrary to
Nautilus’s argument, Lexington maintains that there is no need to
decide whether there is the same level of coverage or level of
risk between the two policies, because the duty to defend does
not require this determination. Instead, Lexington notes,
“‘other insurance’ provisions must be reviewed at the inception
of litigation,” because “[i]f there is a covered claim . . .
then there is a duty to defend; but then where there are multiple
insurers, then the policy language, the contractual language,
must be reviewed and analyzed to determine if there is a priority
or primary in that defense.”
B.
As noted, the majority view is that “other insurance”
policies that are irreconcilable, or “mutually repugnant” will
negate each other, and neither will be enforced. See Liberty
Mut. Ins. Co., 120 Hawai#i at 354, n.23, 205 P.3d at 619 n.23
(explaining, but not applying, this concept). The underlying
proposition is that where both policies have identical “other
insurance” provisions which provide that the coverage afforded
will be deemed excess insurance if other insurance exists to
cover the loss (or tender a defense), these excess clauses
operate to “cancel each other out”, and the policies of both
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insurers must be considered primary insurance. See, e.g., CSE
Ins. Grp. v. Northbrook Prop. & Cas. Co., 23 Cal. App. 4th 1839
(1994); Empire Cas. Co. v. St. Paul Fire & Marine Ins. Co., 764
P.2d 1191, 1199 (Colo. 1998); Universal Underwriters Ins. Co. v.
Allstate Ins. Co., 592 A.2d 515, 517 (N.H. 1991). Put another
way, if each excess clause was given effect, neither policy would
provide primary coverage.13 See, e.g., Fed. Ins. Co. v. Atl.
Nat’l Ins. Co., 250 N.E.2d 193 (N.Y. 1969).
Setting the issue of irreconcilability aside
temporarily, we note that although both policies in this case
contain an “other insurance clause,” by their operation the
clauses do not create a scenario in which the two policies would
“cancel each other out” and neither would provide primary
coverage. Only Lexington’s “other insurance” provision could
potentially take effect in this case, because VP & PK was added
as an “additional insured” onto Nautilus’s policy. By contrast,
the “other insurance” provision in Nautilus’s policy would not
have taken effect because Kila Kila was not an “additional
insured” on Lexington’s policy. By adding VP & PK as an
“additional insured” under certain circumstances, Nautlilus
understood that it may have had to provide coverage for VP & PK.
13
This same reasoning applies where two or more primary policies
contain “escape” clauses, which, if both were enforced, would deprive the
insured of all coverage. See 22 Appleman § 140.3, at 399.
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Presumably this consideration was taken into account as part of
the premiums that Nautilus charged to Kila Kila.
These circumstances are distinguishable from the
situation argued by Nautilus in its briefs. A more typical
situation arises where there is one insured and two insurance
companies, and both insurance companies are deemed excess by
operation of the “other insurance” provisions, thereby leaving
the insured with no primary insurance. Here, instead, VP & PK
will either be covered by Nautilus as a primary insurer, because
it is listed as an “additional insured” on Nautilus’s policy, or,
the “additional insured” provision will not come into play, so VP
& PK will not be covered by Nautilus, and therefore, the “other
insurance” provision in Lexington’s policy will not be triggered,
and Lexington will remain the primary insurer.
Where it is possible to avoid a finding of “mutual
repugnance” altogether, therefore, it should be determined from
the face of the two policies, and the allegations in the
complaint, whether such allegedly “mutually repugnant” clauses
are actually relevant before both clauses are deemed inoperable.
For example, it has been explained that “[w]hen only one of two
policies co-insuring the same loss contains an ‘other insurance”
clause, courts generally will give effect to the ‘other
insurance’ provision (if it is not contrary to statute or public
policy).” Ostrager & Newman, 2 Handbook on Insurance Coverage
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Disputes § 11.03[b], at 999. This rule seeks to effectuate the
intent of the insurers and avoid cancelling out contract terms
that need not be voided. Similarly, when only one of the “other
insurance” clauses in two or more policies would be relevant in a
given case based on the terms of the clause and the allegations
in the underlying case, the clause that does become operational
should be given effect.
This is not to say, however, that the full operation of
the clauses must be determined before irreconcilability may be
considered. For example, here, there is a dispute about whether
VP & PK was actually covered as an “additional insured” under
Nautilus’s policy, based on the issue of Kila Kila’s negligence,
which was resolved only in the underlying trial. A court looking
at the insurance contracts at any time prior to the conclusion in
the underlying litigation would not necessarily be able to
ascertain whether Lexington’s “other insurance” would actually
become fully operational. However, in this case one would be
able to determine whether the clauses would even be relevant by
looking at the face of the contracts and the allegations of the
complaint. Lexington’s clause is relevant and Nautilus’s is not.
Based on this preliminary determination, there would be no need
to consider irreconcilability or mutual repugnance.
By determining whether an “other insurance” clause is
triggered first, a court may be able to avoid irreconcilability
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or mutual repugnance, such as in this case, and better effectuate
the contract language. This is consistent with the principle
that “[i]nsurance policies are subject to the general rules of
contract construction,” and thus, “the court must . . . respect
the plain terms of the policy and not create ambiguity where none
exists.” First Ins. Co. of Hawai#i, Inc., 66 Haw. at 423-24, 665
P.2d at 655 (alteration in original) (internal brackets,
citations, and quotation marks omitted). We hold, therefore,
that it must first be determined whether two or more “other
insurance” provisions are relevant, based on the face of the
policies and the complaint, and only then must it be decided
whether the provisions are irreconcilable. The complete
operation of the “other insurance” clauses may be resolved
thereafter.
V.
Question 4: Whether, and when, an excess insurer, or
otherwise primary insurer who becomes an excess insurer by
operation of an “other insurance” clause, has a duty to defend.
A.
1.
As to this question, as noted before, Nautilus avers
that a primary insurer who becomes an excess insurer by operation
of an “Other Insurance” clause has the duty to defend its insured
because “the duty to defend is one which is personal to the
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relationship of [the] insurer and [the insured].” Nautilus
analogizes the facts to those of American Fidelity & Casualty
Co., where, according to Nautilus, two individuals, Clay and
Britt, were covered by two different insurers. (Citing 280 F.2d
at 455.) “American” was Clay’s primary insurer and
“Pennsylvania” was Britt’s primary insurer. (Citing id.)
American brought an action seeking a declaration that it did not
have a duty to defend Clay, because Clay was an additional
insured under the insurance policy between Britt and
Pennsylvania. (Citing id. at 457.)
American’s argument was based on the “other insurance”
clause in its policy, which American alleged rendered its policy
excess and Pennsylvania’s primary, thus relieving American of any
duty to defend Clay until Pennslyvania had exhausted its policy
limitations in doing so. (Citing id. at 456-57, 456 n.4.)
Nautilus refers to the Fifth Circuit’s holding stating that
American was incorrect in believing that based on the “other
insurance” clause, “‘it was merely an ‘excess’ insurer, its duty
to defend, like the obligation to pay, was excess also.’”
(Quoting id. at 458.) The Fifth Circuit concluded that “‘there
can be no possible basis for American’s denial of its contractual
duty of defense.’” (Quoting id. at 457.)
Thus, Nautilus maintains that Lexington is still
required to defend VP & PK even if it were excess as to its
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defense obligations. In support of this contention, Nautilus
cites to Southern Farm Bureau Casualty Insurance Co. v. Allstate
Insurance Co., 150 F. Supp. 216 (W.D. Ark. 1957), for the
proposition that even where the insured’s primary insurer was
excess to another insurer for damages, it still had the duty to
defend the named insured, and to State Farm Mutual Automobile
Insurance Co. v. Foundation Reserve Insurance Co., 431 P.2d 737,
741 (N.M. 1967), which held that even though Allstate’s insurance
was excess, that did not relieve it of its duty to defend. In
Nautilus’s view, the better rule is to require a primary insurer
who finds itself in an excess position because of an “other
insurance” clause to defend its named insured, because this rule
would “benefit an insured who paid for primary coverage and
expected primary coverage,” closing loopholes that would allow an
insurance company to “shirk its responsibility.”
If the rule were otherwise, Nautilus points to the
possibility for oscillating coverage in this case, where
Lexington looked at Nautilus’s policy and concluded it was excess
and therefore did not owe a duty to defend, but where because at
trial Kila Kila was found not negligent, Nautilus’s policy then
became inapplicable to VP & PK, making Lexington VP & PK’s
primary insurer again. Nautilus concludes that because there is
only a possibility that a primary insurer may become excess, that
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insurer has the duty to defend regardless of what the “other
insurance” clause may state.
2.
Lexington answers that by operation of its “other
insurance” clause, it did not have a duty to defend unless and
until Nautilus had exhausted its coverage, or unless Nautilus
refused to defend. Lexington avers that despite Nautilus’s
allegations about the expectations the insured, here it is
undisputed that VP & PK never tendered its claim to Lexington,
but instead directly to Nautilus, “who VP & PK must have assumed
would provide them a defense.” Lexington states that it is “not
asserting that it had no duty to defend, but rather by its policy
terms, [its] duty to defend was excess to Nautilus’s duty under
[both insurance companies’] policy language.”
According to Lexington, some courts hold to the
contrary of the Fifth Circuit’s decision in American & Casualty
Co., with respect to the respective duties that subsist among one
or more otherwise primary liability insurers. Lexington
maintains that the better approach is to “follow those courts
that give effect to or reconcile competing clauses dealing with
the existence of other insurance, at least where the insured is
being provided a defense by one or more of its carriers.” In
connection with this proposal, Lexington cites to United States
Fidelity & Guaranty Co. v. Federated Rural Electric Insurance
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Corp., 37 P.3d 828 (Okla. 2001), for the proposition that
“‘[W]here an insured has both primary and excess liability
insurance, the excess insurer is not responsible to participate
in the costs of defense until after the limits of the primary
policy are exhausted[,]’” (quoting U.S. Fid. & Guar. Co., 37 P.3d
at 832-33), and to Western Casualty & Surety Co. v. Western World
Insurance Co., 769 F.2d 381 (7th Cir. 1985), for the view that
“‘when one policy is primary and the other is excess, only the
primary insurer need defend claims below the limits of the
primary policy.” (Quoting W. Cas. & Sur. Co., 769 F.2d at
385).)14
Finally, Lexington asserts that its approach is
consistent with the insurance law principles of “(1) honoring
insurers’ rights to limit their liability and impose whatever
conditions they please on their obligation, provided they are not
in contravention of statutory inhibitions or public policy; and
(2) that every insurance contract shall be construed according to
the entirety of its terms and conditions as set forth in the
policy.” Lexington also points out that there is no prejudice to
14
Lexington also cites Liberty Mutual Insurance Co. v. Pacific
Indemnity Co., 579 F. Supp. 140, 145 (W.D. Pa. 1984), Continental Casualty Co.
v. Pacific Indemnity Co., 134 Cal. App. 3d 389 (1982), Hartford Accident &
Indemnity Co. v. Ryder Truck Rental, Inc., 85 A.D.2d 145, 447 (N.Y. App. Div.
1982), and U.S. Fire Insurance Co. v. United Service Auto Ass’n, 772 S.W.2d
218, 220 (Tex. Ct. App. 1989).
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the insured, apparently under terms such as those at issue in
this case, “because it must be and will be defended.”
3.
Nautilus replies that the cases cited by Lexington in
support of its position are not applicable to this case.
Nautilus argues that United States Fiduciary & Guarantee Co.
dealt with a true excess carrier, not one who becomes excess
through an “other insurance” provision, and that similarly,
Pacific Indemnity Co. dealt with “true excess” insurers.
Additionally, it states that Continental Casualty Co., Hartford
Accident & Indemnity Co., and U.S. Fire Insurance Co. do not
involve an additional insured issue.
With respect to the Seventh Circuit’s decision in
Western Casualty & Sururety Co., Nautilus maintains that that
case supports its position that Lexington owed a duty to defend.
According to Nautilus, Western Casualty & Sururety Co. held that
“‘when a case is settled the claims of the two insurers must be
resolved according to the terms of the excess clauses.’”
(Quoting W. Cas. & Sur. Co., 769 F.2d at 385.) Nautilus points
out the hypothetical Western Casualty & Sururety Co., regarding
the possible outcome had that case gone to trial, and “the
judgment revealed” that the first primary insurer did not cover
the “loss”, then that court may have allowed that primary insurer
to recover from a second primary insurer who had been deemed
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excess because there was other primary insurance covering the
“loss”. (Citing id. at 386.) Nautilus says that it, like the
first primary insurer in the hypothetical, did not cover the
“loss” and therefore Nautilus should be able to recover the costs
of defense from Lexington.
B.
In response to this certified question, we hold that
an otherwise primary insurer who becomes an excess insurer by
operation of an “other insurance” clause owes the duty to defend
from the time the defense is tendered. “[T]he duty to defend
must be determined when the claim is initially asserted.” Hart,
126 Hawai#i at 458, 272 P.3d at 1225 (internal quotation marks
and citation omitted).
1.
Our disposition as to the first question essentially
resolves this question as well -- because we hold that primary
insurers who could allegedly become excess insurers by operation
of an “other insurance” clause are not permitted to look to other
policies when determining whether they have a duty to defend.
Therefore, the duty to defend will arise as if they are the
primary insurers, inasmuch as they have not yet been deemed an
“excess insurer” by operation of the “other insurance” provision.
Pursuant to our holding herein, only if an otherwise primary
insurer is deemed an “excess insurer” in an action seeking
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contribution or reimbursement of defense costs may that insurer
look to the operation of an “other insurance” clause making it
excess.
As to question 2, we held that “other insurance”
clauses purporting to release an otherwise primary insurer of its
duty to defend if it becomes excess as to liability are
enforceable in certain circumstances. However, the question of
liability cannot be determined until after the conclusion of
litigation (or sometimes at all, in the event that the case
settles). “[A]n insurer’s ultimate non-liability should not free
it from its concurrent and distinct contractual duty to defend.”
Id. (internal quotation marks and citation omitted). Therefore,
the duty to defend may not be disclaimed by an otherwise primary
insurance carrier during the proceedings on the basis of a clause
purporting to make that insurer excess.
The instant case illustrates the problem with allowing
an insurer to disclaim the duty to defend at any time before the
conclusion of the litigation based on such a clause. For
example, the underlying litigation has been concluded in this
case, and it does not appear that Lexington can actually be
deemed an “excess insurer”. As explained supra, Lexington can
only be an excess insurer if VP & PK is covered by another
policy. VP & PK is covered by Nautilus’s policy only for
occurrences arising out of Kila Kila’s negligence. Kila Kila was
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found not to be negligent in the underlying litigation. Hence,
the additional insured coverage of VP & PK in Nautilus’s policy
was not operable, and, accordingly, Lexington’s “other insurance”
policy was also not operable. It would appear to answer the
question presented, that Lexington, therefore, is the primary
insurer, and Nautilus should be able to recover defense costs in
full from Lexington. None of this could necessarily have been
determined before the close of litigation, however, since VP &
PK’s indemnity coverage was dependent upon a particular finding.
As explained supra, our case law holds that the duty to
defense arises where there is a mere possibility of coverage.
See Dairy Road Partners, 92 Hawai#i at 413, 992 P.2d at 108.
Extrapolating from this principle, we conclude that where it
cannot be determined whether an otherwise primary insurer becomes
an excess insurer until the conclusion of the underlying
litigation, that an otherwise primary insurer has the duty to
defend, from the time it receives tender of the defense. In the
Seventh Circuit decision cited by parties’ briefs, Western
Casualty & Surety Co., that court stated that “[t]he state [of
Illinois] seeks to encourage all carriers to participate in the
initial proceedings, and as the state courts have found, it is a
bad idea to inform insurance carriers that whichever is the least
faithful to its obligation to the insured will escape all
liability as long as a responsible carrier covers the loss.” 769
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F.2d at 383. We agree that all carriers must be encouraged to
participate in initial proceedings, and our holding as to these
questions is intended to mandate otherwise primary insurers to
defend and avoid uncertainty on the part of insureds as to who
will in fact provide his, her, or its defense.
2.
We turn briefly to the cases cited by the parties in
support of their respective positions. In American Fiduciary &
Casualty Co., cited by Nautilus, the Fifth Circuit appears to
have reached the same conclusion that we reach herein, namely
that where the insurance coverage of an otherwise primary insurer
would become excess over other “valid and collectible insurance”
by operation of an “other insurance” clause, that primary insurer
must undertake the defense. 280 F.2d at 457. The Fifth Circuit
explained that the duty to defend is one which is personal to the
relationship of the insurer and the insured -- and as such,
“[w]hatever may be the right ultimately to saddle off a part of
the cost of defense actually undertaken once payment has been
made, . . . it is contrary to the very nature of the contract
that the insurer can scout around in hopes that it can find
someone whose defense the [insured] is compelled to accept.”15
15
The Fifth Circuit does also appear to rely, in part, on the fact
that the “other insurance” clause at issue in that case did not refer to the
duty to defend. American Fiduciary & Casualty Co., 280 F.2d at 459. As
quoted supra, the “other insurance” clause in this case does refer to the duty
(continued...)
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Id. at 459-60 (emphasis added).
Lexington does not appear to dispute the holding of
American Fiduciary & Casualty Co., but instead sets forth case
law from other jurisdictions in support of a different approach.
In U.S. Fiduciary & Guarantee Co., the Oklahoma Supreme Court
held that an excess insurer has no duty to participate in defense
costs. 37 P.3d at 830. In that case, however, one of the
insurance companies involved was a primary insurer and one was a
true excess insurer, and thus it is not relevant in deciding this
certified question. Id. In Pacific Indemnity Co., the Western
District of Pennsylvania held that two insurance policies
covering the same risk both contained competing excess clauses,
and therefore neither clause was given effect and the two
insurers stood on equal ground. 579 F. Supp. at 143. The costs
of the defense were then pro-rated in proportion with the policy
limits of the primary policies. Id. at 144. Thus, Pacific
Indemnity Co. also appears not to support Lexington’s position
because the two competing “other insurance” clauses were deemed
irreconcilable and not given effect. Id. at 143.
In Continental Casualty Co., the California Court of
Appeal addressed a dispute between two insurance carriers over
15
(...continued)
to defend. However, the Fifth Circuit’s reasoning remains persuasive
regardless of the presence or absence of a reference to the duty to defend in
the “other insurance” clause.
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their respective liability for settlement of a malpractice case.
134 Cal. App. 3d at 393. That court construed the two “other
insurance” clauses in the policies, where the issue was
“conflicting excess insurance coverage[,]” id. at 397, and
accordingly concluded that it could “see no justification for
choosing one policy over the other as being primarily liable for
the excess liability.” Id. Continental Casualty Co. thus
allocated liability where there were irreconcilable clauses,
unlike this case, where the issue is defense costs.
Hartford Accident & Indemnity Co. is also inapposite,
in that it appears to rest its holding on the fact that the
action involved an accident with a lessee driver, where one
insurer was the lessor’s insurer and one insurer was the driver’s
insurer. 85 A.D.2d at 147 (“There is no reason why the insurer
of a lessor should not be required to defend against an accident
of a lessee driver even when the driver has his own separate
insurance coverage.”). In U.S. Fire Insurance Co., moreover, it
was “undisputed and uncontested” by one of the insurers that if
both insurers’ automobile liability policies provided coverage,
then under Texas law, its policy would be the primary policy and
the other one would be the excess policy. 772 S.W.2d at 222.
Thus, the primary/excess issue had already been resolved by
operation of Texas law, id., and as such, U.S. Fire Insurance Co.
is not on point.
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In the Seventh Circuit’s decision in Western Casualty &
Surety Co., one otherwise primary insurer was deemed excess based
on a provision in its policy deeming it excess if the insured had
“other insurance insuring against a loss covered by this policy.”
769 F.2d at 383-84 (emphasis added). That court’s holding
appears to be based on the fact that the case settled, and
therefore there was an established “loss” that would make one of
the insurers excess. Id. at 384. It stated that “when a case is
settled the claims of the two insurers must be resolved according
to the terms of the excess clauses[.]” Id. at 385. Although the
Seventh Circuit did explain that “when one policy is primary and
the other is excess, only the primary insurer need defend claims
below the limits of the primary policy[,]” this statement was in
a context where one insurer sought compensation from the other
for the costs of litigating and settling the suit. Id. at 383,
385.
In sum, none of the cases cited by Lexington evince
policy rationales that would support an approach different from
the one we take in responding to the Ninth Circuit’s certified
questions. We therefore hold that the duty to defend arises at
the outset of the litigation for an otherwise primary insurer who
could become an excess insurer by operation of an “other
insurance clause.”
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VI.
Based on the foregoing, we answer the certified
questions as follows:
1. Whether an insurer may look to another insurer’s policy
in order to disclaim the duty to defend, where the complaint in
the underlying lawsuit alleges facts within coverage.
Unless another insurer’s policy is specifically named
in the first insurer’s policy, an insurer may not look to another
insurer’s policy in order to disclaim the duty to defend, where
the complaint in the underlying lawsuit alleges facts within
coverage.
2. Whether an “other insurance” clause that purports to
release an otherwise primary insurer of the duty to defend if the
insurer becomes excess as to liability is enforceable.
An “other insurance” clause purporting to release an
otherwise primary insurer of the duty to defend if the insurer
becomes excess as to liability is enforceable, but only as
between two or more insurers seeking to allocate or recover
defense costs.
3. Whether the irreconcilability of “other insurance”
provisions in otherwise primary insurance policies should be
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determined before or after the operation of the “other insurance”
provisions is determined.
The relevance of the “other insurance” provisions
should be determined from the face of the policies and the
allegations in the complaint first. Then, it can be decided
whether the relevant “other insurance” provisions are
irreconcilable or “mutually repugnant.” If the provisions are
reconcilable, the operation of the “other insurance” provisions
may then be considered.
4. Whether, and when, an excess insurer, or an otherwise
primary insurer who becomes an excess insurer by operation of an
“other insurance” clause, has a duty to defend.
An otherwise primary insurer who becomes an excess
insurer by operation of an “other insurance” clause has a duty to
defend as soon as a claim is tendered to it and there is the mere
possibility that coverage of that claim exists under its policy.
Roy F. Hughes and /s/ Mark E. Recktenwald
Charlene Tran Murata,
for plaintiff-appellant /s/ Paula A. Nakayama
Randall Y. Yamamoto and /s/ Simeon R. Acoba, Jr.
Christine E. Savage,
for defendant-appellee /s/ Sabrina S. McKenna
/s/ Richard W. Pollack
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