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Justia › US Law › Case Law › California Case Law › Cal. 3d › Volume 27 › Signal Companies, Inc. v. Harbor Ins. Co.
Signal Companies, Inc. v. Harbor Ins. Co.
Brewster L. Arms, William J. Currer, Jr., and Richard T. Kayaian for Plaintiffs and Appellants.
Morris & Polich, Landon Morris, John K. Morris, Robert S. Wolfe and Herbert S. Brumer for Defendant and Respondent.
Gibson, Dunn & Crutcher, John L. Endicott, Robert A. Miller, Hancock, Rothert & Bunshoft, Harlow P. Rothert, LaBrum & Doak, [27 Cal. 3d 362] Edward C. German, Michael D. Gallagher, Lewis, D'Amato, Brisbois & Bisgaard, Robert F. Lewis and M. Patricia Marrison as Amici Curiae on behalf of Defendant and Respondent.
Plaintiff, Pacific Indemnity Company (Pacific), a primary liability insurer, appeals from a judgment which relieved defendant Harbor Insurance Company (Harbor), an excess insurer, from any contribution for the costs of defense incurred on behalf of an insured of the parties. The issue presented is the proper allocation between insurance carriers of defense costs incurred in defending the insured when the amount of settlement of the underlying tort claim exceeds the limits of primary insurance coverage thus requiring some contribution by the excess insurer. We will affirm the trial court's judgment which, under the circumstances, imposed the defense costs on Pacific, the primary carrier.
The Signal Companies and Signal Oil and Gas Company (Signal) purchased a policy of public liability insurance from Pacific. The policy, in effect from October 1, 1962, through September 30, 1965, provided that, for an annual premium of approximately $106,000, Pacific would afford primary insurance for liability for specified types of bodily injury and property damage to a limit of $25,000. Under the policy Pacific agreed that it would defend Signal in any civil actions against Signal arising under the insured risks, and would also pay defense costs in addition to the "applicable limit of liability" of the policy.
Shortly thereafter, Signal purchased from Harbor "Excess Bodily Injury and Property Damages" insurance. The Harbor policy provided that its excess coverage of $10 million would not attach until either the primary insurer had admitted liability or Signal had been adjudged liable and the full primary exposure had been paid and satisfied. The Harbor policy further recited that it was subject to the same terms and conditions as the primary policy "except as regards ... the obligation to investigate and defend." Defining "costs" as "understood to mean interest accruing after entry of judgment, investigation, adjustment, and legal expenses," Harbor's agreement further provided that if a claim or claims appeared likely to exceed the primary limits, Signal was required [27 Cal. 3d 363] to obtain Harbor's written consent before incurring costs. In the event that the settlement of any claim against the insured exceeded the limits of the primary policy, Harbor agreed, if it had consented "to the proceedings continuing," to contribute a pro rata share of the defense costs based upon the proportion which its contribution bore to the ultimate settlement by, or judgment against, its insured.
On December 13, 1963, in the City of Los Angeles (City), the Baldwin Hills reservoir and dam collapsed. City and its Department of Water and Power (DWP) settled the individual claims of property owners arising from the disaster. City and DWP then filed two civil actions, one as subrogors of the individual claimants, the other on their own behalf, seeking approximately $25 million in damages resulting from the dam and reservoir failure. Signal was one of numerous oil companies which were named as defendants in the first amended complaint alleging that soil subsidence induced by subterranean oil well digging structurally weakened the dam. In 1967 service of the complaint was effected on Signal which thereupon forwarded copies of the complaint to its carriers, Pacific and Harbor.
Pacific, as the primary insurer, arranged for and provided Signal's defense. The entire litigation against all defendants ultimately was settled in 1971 for approximately $3 million, of which $35,000 was contributed on behalf of Signal. Pacific paid its policy limits of $25,000 and Harbor contributed $10,000.
At all times during the pendency of the litigation, the attorney representing Signal on behalf of Pacific, William Currer, asserted that Signal was not liable to any plaintiff because of the distance of the Signal wells from the dam, and he so informed Harbor. Nonetheless, on February 4, 1970, Attorney Currer, on behalf of Signal, sent a telegram to Harbor which read in part: "This case may now be adjustable for a sum in excess of primary coverage. ... We want to know how much in excess of the primary coverage you are willing to pay to adjust this claim. Otherwise proceedings must continue and Signal Oil and Gas Company will consider that you have consented to contribute to the cost including attorney fees and expert witnesses for the proceedings about to commence."
The telegram was followed by a telephone conversation between Attorney Currer and John Callaghan, Harbor's claims manager, in which Currer suggested to Callaghan that Signal contribute $30,0000 to a proposed [27 Cal. 3d 364] settlement with the plaintiffs. Callaghan promptly agreed that Harbor would contribute $5,000 of that amount. Currer then wrote to Callaghan, under date of February 6, 1970, confirming Harbor's agreement to contribute, and asserting for the first time that Pacific believed that Harbor had an equitable duty to contribute to defense costs "in the proportion which the primary limits bear to the excess limits." In a responding letter on February 10, 1970, Callaghan rejected Currer's assertion that Harbor was required to contribute to the defense costs. Callaghan noted that Harbor possessed no information which pointed to Signal's possible liability, and requested that Currer furnish Callaghan with certain information on the case. Currer replied by stating that he believed that plaintiffs' case against Signal was very weak and that Signal might be dismissed from the suit upon motion after plaintiffs rested, and possibly after opening statements. A few days later, Currer advised Harbor that the case could be settled for $35,000 from Signal, which would require a $10,000 contribution from Harbor. Harbor again promptly agreed to pay $10,000, and the litigation against Signal was settled for $35,000.
Thereafter, Pacific renewed its demand that Harbor contribute to the $95,000 legal expenses incurred by Pacific for Signal's defense. Harbor refused and this action followed. Signal, although a nominal plaintiff, had incurred no defense expenses and therefore, as noted by the trial court, had no basis for recovery. The litigation thereafter proceeded between the affected insurance carriers alone.
The trial court ruled that Harbor was not obligated to contribute to the defense expenses. The court reasoned that under the express terms of Harbor's excess policy, Harbor was obligated to pay defense costs if the claim was settled for a sum in excess of the primary limits provided that Harbor had agreed to a "continuation of the proceedings." Because Harbor had promptly agreed to contribute the amounts necessary on its part to settle the case, the court found that there was no "continuation" of the proceedings, thus absolving Harbor under the terms of its policy.
[1a] Upon reviewing Pacific's various contentions, we agree with the trial court's conclusion that Harbor was not obligated to contribute to the defense costs which were incurred by Pacific before Pacific's coverage was exhausted and before notification to Harbor that its participation in defending the action was desired.
We dispose of a preliminary question, namely, once a carrier (in this instance, Pacific) has paid its full policy limits has it thereby exhausted its obligation to defend its insured? There is disagreement among the authorities. (14 Couch on Insurance (2d ed. 1965) § 51:49 at pp. 542-543 and cases cited therein.) This issue, however, is presented to us only marginally because in the matter before us the exhaustion of primary coverage and the settlement of all claims occurred simultaneously.
In the case at bench the trial court refused to impose on Harbor any obligation to contribute to defense costs because no such costs were incurred following the settlement, and Pacific's primary duty to defend did not terminate until settlement. Pacific has conceded that, except for [27 Cal. 3d 366] insubstantial amounts, all of the defense costs for which it seeks Harbor's contribution were incurred prior to Currer's request that Harbor contribute to the settlement and costs of defense. Pacific responds, however, that once the excess insurer has been given notice that the tort claim against its insured might invade the excess coverage, and the amount of potential exposure is reasonably ascertainable, the excess insurer should be obligated to participate immediately in the defense, either directly with the claimant or, indirectly, by contribution to the primary carrier.
The acceptance of Pacific's position, however, essentially would make Harbor a coinsurer with Pacific with a coextensive duty to defend Signal. Pacific relies on Aetna Cas. & Surety Co. v. Certain Underwriters, supra, in arguing that Harbor had a coextensive duty to defend Signal because Signal's potential liability was in excess of the combined coverage afforded by both insurers. Aetna is clearly distinguishable, however. In that case, Union Oil Company (Union) had three insurance policies. Aetna Casualty and Surety Company (Aetna) provided primary coverage up to $50,000, and Harbor and Lloyds of London (Lloyds) each extended coverage for 50 percent of any excess loss to a limit of $475,000. Lloyds provided an additional $21 million of excess coverage. When a substantial property loss occurred due to a mishap involving a Union oil well located in the Santa Barbara Channel, Aetna undertook Union's defense and paid its $50,000 primary coverage in settlement of various individual claims. Before exhausting its full limits of liability, Aetna advised Harbor and Lloyds that once its policy limits were paid, its duty to defend would thereupon terminate and Harbor and Lloyds would be required to assume that duty. The excess carriers refused to defend, and Aetna, reserving its right to deny liability for any further defense, continued its representation. Thereafter, Harbor paid its full policy limits and Lloyds paid more than $800,000 in claims.
Although Aetna involved costs of defense when the primary carrier had clearly exhausted its policy limits and the proceedings continued, Pacific would apply the Aetna holding to require the excess carrier to participate in the defense of the insured as soon as it is notified of the claim, and even though the primary insurance coverage has not as yet been exhausted.
The foregoing result urged by Pacific is untenable for several reasons. First, Harbor's policy explicitly states that its liability would not attach until the primary coverage has been exhausted. Next, the same policy provides that the duty to contribute to costs would arise only if Signal obtained Harbor's written consent to incur costs which Signal neither sought nor obtained. Additionally, unlike the situation in Gray v. Zurich Insurance Co. (1966) 65 Cal. 2d 263 [54 Cal. Rptr. 104, 419 P.2d 168], relied on by Pacific, it is unnecessary to impose an immediate duty to defend on the excess carrier to afford the insured that to which it is entitled, namely, the full protection of a defense on its behalf. In Gray, we held that where "the potential of liability under the policy" exists, an insurer is obligated to defend because the duty to defend and the duty to indemnify were obligations under the policy and the duty to defend was not contingent on the ultimate duty to indemnify. (Id., at pp. 276-277; see also Comunale v. Traders & General Ins. Co. (1958) 50 Cal. 2d 654 [328 P.2d 198, 68 A.L.R.2d 883]; Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal. 2d 27 [17 Cal. Rptr. 12, 366 P.2d 455]; Lowell v. Maryland Casualty Co. (1966) 65 Cal. 2d 298 [54 Cal. Rptr. 116, 419 P.2d 180].) Unlike the situation in Gray, insofar as the duty to defend is concerned, the insured here was fully protected by the primary insurer.
Continental presented significant factual dissimilarities, including three separate insureds and three separate policies, each providing primary coverage with a primary obligation to defend. The insurance companies, relying on various clauses in their respective policies requiring either that proration occur in the event of other coverage or that coverage would be deemed excess in the event of other primary coverage, each disputed which company was obligated to indemnify and defend. The insured defendant in the underlying tort action demanded a defense from all three companies. After determining the relative duties to indemnify and which companies were primary and which excess, we then held that the three companies were liable for defense costs on a pro rata basis determined by the amount of contribution to the judgment against the insured.
None of the Continental carriers was solely or explicitly an excess insurer. Each provided primary coverage with a concomitant duty to defend upon which the insured was entitled to rely. (See Gray, supra.) In addition, each of the carriers in Continental was tendered the defense [27 Cal. 3d 369] and two of the three refused to participate after the tender. The insured potentially could have been left without a defense.
Unlike the situation in Continental, where the relative obligations of different carriers who have assumed the same primary risk must be adjusted, we are here concerned with the obligation of a carrier that is expressly designated as an excess insurer. In such a situation there is no reasonable basis for assuming that the reasonable expectations of either the insured or the primary carrier were that the excess carrier would participate in defense costs beyond the express terms of its policy.
When the opportunity was presented to settle the tort claims against the insured and Pacific informed Harbor of that fact, the two carriers were then acting at arms' length. Attorney Currer, Pacific's counsel acting for Signal, consistently took the position that Signal's liability was extremely doubtful. Had Harbor at that time refused to contribute to settlement, Pacific potentially could have incurred substantial additional costs in the expected two- to three-month trial. Harbor did not refuse to contribute, however, but instead promptly facilitated settlement by contributing $10,000. If, under these circumstances, Pacific intended at the time of demand for a settlement contribution to impose an additional obligation on Harbor to contribute also to defense costs as part of the overall settlement, Pacific should have obtained Harbor's agreement to such contribution as part of the settlement. Because it did not do so, no equitable basis appears for shifting to Harbor costs which Pacific had previously incurred primarily on its own behalf, in discharge of its own contractual obligations.
 Finally, we reject Pacific's contention that the two insurance contracts should be read together as one instrument. Pacific argues that such a construction benefits the insured both by providing a single system for the handling of the defense and defense costs incurred on Signal's behalf, and requiring that the primary and excess carrier share the costs of defense.
In support of this argument Pacific relies on section 1642 of the Civil Code which in aid of contractual interpretation provides "Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together." (Italics added.) However, Pacific's argument ignores a basic prerequisite to unified interpretation, namely, that the parties to the contracts must be the same. This, of course, is untrue in the matter before us. Furthermore, nothing in the Pacific contract made it contingent upon, or required the existence of, excess coverage and nothing in the Harbor contract made it dependent upon the existence of the specific contract between Pacific and Signal, although a primary policy was required. The contracts were separately negotiated with the insured with different dates of inception and termination. We conclude that the two documents are separate contracts and must be independently interpreted.
[1c] In summary, Signal was protected by Pacific's duty to defend. We cannot conclude that Signal reasonably expected that Harbor [27 Cal. 3d 371] would be required to contribute to the costs of defense or to provide a defense prior to the exhaustion of Pacific's policy limits. Nor can we conclude that Pacific was entitled to expect Harbor to contribute to Signal's defense in the absence of a prior demand for Harbor's assistance in the defense and without Harbor's written consent to the costs incurred as provided in the Harbor policy. Although an excess carrier, once a good faith request is made, might in a given case be required to contribute to the continuing costs of defense after the primary coverage limits are exhausted, we cannot say, under the facts at bench, that Harbor breached any duty to defend. Having fulfilled its own contractual obligation to provide Signal a defense, Pacific is not entitled to Harbor's contribution to Pacific's costs incurred in Signal's defense.
Mosk, J., Clark, J., Manuel, J., and Newman, J., concurred.
Harbor Insurance Company (Harbor) consented to Pacific Indemnity Company's (Pacific) pretrial settlement of a commonly insured loss claim made against The Signal Companies (Signal) for an amount $10,000 in excess of Pacific's (the primary insurer's) policy limits. By reason of these admitted facts and the explicit words of paragraph 2(b) of Conditions of its contract, Harbor was required to "contribute to the costs incurred" on behalf of its insured Signal "in the ratio that its proportion of the ultimate net loss as finally settled bears to the total agreed settlement."
Harbor's undertaking as to costs fn. 1 is found in paragraphs 1, 2, subdivisions (a) and (b) of Conditions: "1. Incurring of Costs. In the event of claim or claims arising which appear likely to exceed the Primary ... Limit(s), no Costs shall be incurred by the Assured without the written consent of the Company.
"(a) Should any claim or claims become adjustable prior to the commencement of trial for not more than the Primary ... Limit(s), then no Costs shall be payable by the Company.
Pacific is the primary insurer. Under Coverage C (property liability), Pacific is obligated "[t]o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of the injury to or destruction of property, including the loss of use thereof" up to $25,000, the policy limit.
In the context of these policy provisions certain conceded facts become critical: (1) The claim against Signal did not proceed to trial but "became adjustable" and was in fact settled before trial. (2) The "ultimate net loss liability" was $35,000, $10,000 in excess of Pacific's duty to indemnify. (3) Harbor expressly authorized Pacific's settlement proceedings that continued by the negotiations process to fruition. (4) In satisfying the first $25,000, Pacific "paid ... the full amount ... of their ultimate net loss liability." (5) Harbor paid $10,000 in discharge of its portion of the loss.
The trial court found, since the claim was settled for $10,000 in excess of the primary policy limits, that subdivision (2) of Conditions of Harbor's policy "applies to such situation." The court reasoned: "It provides for a contribution to the costs incurred where the claim can be settled in excess of the primary limit."
Thus the trial court correctly perceived the core of this contractual construction conundrum but fell into error when it concluded: "However this provision applies only if the Company consents to the proceedings continuing. The litigation did not proceed in the present case. Harbor promptly agreed to pay its $10,000 contribution as soon as it was determined that the case could be settled for $35,000. The case did not continue."
The precise language of the Harbor policy does not yield itself to such (mis)interpretation.
Paragraph 2(b) of Conditions makes the primary insurer -- Pacific -- a third party beneficiary of the insurance contract between Harbor and Signal.
While Pacific was not named specifically as the beneficiary of the undertaking by Harbor in paragraph 2(b), supra, yet Pacific was clearly a member of the class of beneficiaries contemplated. Pacific is the "primary insurer."
Paragraph 2(b) of Conditions is from a Harbor insurance policy "Form U 604E CFS (11-61)." The uncontradicted testimony indicates there were no negotiations regarding this critical language. These uncontradicted facts -- a standardized form contract -- accepted without negotiations by the insured, warrant the use of rules of interpretation applied to adhesion contracts. (Gray v. Zurich Ins. Co. (1966) 65 Cal. 2d 263, 269 [54 Cal. Rptr. 104, 419 P.2d 168].) Yet such special rules for construction of contracts are not necessary in order to hold Harbor responsible on third party beneficiary principles. General rules [27 Cal. 3d 375] governing the construction of any and all contracts point to an explicit undertaking on the part of Harbor to apportion costs incurred by Pacific by a most specific formula.
Equally well settled is the rule that the contract must be construed as a whole and the intention of the parties must be ascertained from the consideration of the entire contract, not some isolated portion (Civ. Code, § 1641; Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal. 2d 751, 760 [128 P.2d 665]; Stewart Title Co. v. Herbert (1970) 6 Cal. App. 3d 957, 963 [96 Cal.Rptr. 631]).
Also, where a contract is susceptible of two interpretations, the courts shall give it such a construction as will make it lawful, operative, definite, reasonable and capable of being carried into effect if it can be done without violating the intention of the parties (Civ. Code, §§ 1643, 3541; Rodriguez v. Barnett (1959) 52 Cal. 2d 154, 160 [338 P.2d 907]).
An analytic approach, in light of the foregoing rules discloses: Harbor's policy (par. 1, Conditions) treats generally with "Incurring of Costs" and proclaims if claims arise "which appear likely to exceed the primary ... limits" then "no costs shall be incurred by assured [Signal] without the written consent of the Company."
Thus neither the general language of paragraph 5 of Conditions (supra) nor paragraph 1 of Conditions expressly exempts Harbor either from a duty of defense or responsibility for costs of defense when incurred by the primary insurer. There is no flat denial of responsibility for costs of investigation and defense but rather a conditioned recognition of a duty to defend and assumption of costs that may be gleaned from a none-too-clear "exculpating clause" an expression of a general intent to limit responsibility for costs except where express consent is given.
These general -- and somewhat oblique -- provisos must be read in connection with just perceptibly more specific language of paragraph 2 of Conditions where Harbor expressly agrees to an apportionment of costs in these words: "Costs incurred by or on behalf of the Assured with the written consent of the Company, and for which the Assured is not covered by the Primary and Underlying Excess Insurers, shall be apportioned as follows:"
Paragraph 2, if first analyzed apart from the following subdivisions 2(a) and (b), lends itself to this rational construction: all costs, not just costs arising from a claim "where it appears likely to exceed the primary ... limits," will be apportioned (not fully assumed as in par. 1) (1) if incurred with the written consent of Harbor and (2) for which the assured is not protected by the primary policy.
Paragraphs 1 and 2 must be read in conjunction with the immediately following subdivisions 2(a) and 2(b). Each of the subdivisions contain [27 Cal. 3d 377] clear, specific, precise language, limited in time and scope of event(s) and to a specifically defined area of costs. Subdivisions (a) and (b) apply only to costs incurred in connection with a claim that "become[s] adjustable," i.e., capable of being settled by agreement "prior to commencement of trial." Thus subdivisions (a) and (b) are to be contrasted with paragraph 1's general applicability to payment of costs incurred at any time whether pre- or posttrial.
In further contradistinction, subdivision (a) clearly is limited to these precise factual situations where (1) the claim "become[s] adjustable" before trial and (2) the claim is settled for less than the primary coverage. "Then no costs shall be payable by the company."
This is the most clear, specific, detailed undertaking to be found in these conditions. It must be contrasted with the opaque, general language of paragraphs 1 and 2 requiring the "written consent" of Harbor before any liability for costs generally would accrue. The words of paragraph 2(b) impose on Harbor -- for the benefit of a named class of third party beneficiaries -- an obligation to pay a specific proportion of "costs incurred" by the primary insurer on behalf of the insured "if it [Harbor] consents to the proceeding."
It should be noted: No other condition is attached to this unqualified promise to share costs in this limited amount and specified factual circumstances. The requirement in the general language of paragraphs 1 and 2 for "written consent" as to costs to be incurred prospectively is glaringly absent in paragraph 2(b). The requirement of paragraph 2 that the costs "not be covered by the primary" insurance is also noticeably absent.
A common sense interpretation of these plain words points unerringly to a purposeful omission of the earlier "written consent" general precondition [27 Cal. 3d 378] to Harbor's cost liability. For before any liability whatsoever in the context of a pretrial settlement of a claim for a sum greater than the primary coverage, Harbor must consent to the "proceedings continuing." For Harbor to be required both to consent in writing before incurring (future) costs and to consent to the settlement proceedings continuing to fruition is to introduce a contradiction, an absurd meaning. Harbor, when it consents to the proceeding continuing in the fact context of 2(b), undertakes not a general obligation for costs as in paragraph 1 or a general apportionment of costs as in paragraph 2 but agrees to a specific formula for sharing costs with the third party primary insurer that is totally inconsistent with the exculpatory conditions expressed in paragraphs 1 and 2. These juxtaposed clauses present a classic example for application of the rule that specific provisions of an agreement, if inconsistent, prevail over those that are general.
Harbor was not bound by its express contract to give its consent to a pretrial settlement of the claim for a figure that exceeded the primary's coverage, fn. 2 yet it did consent in the fact context of paragraph 2(b) and thereupon became expressly obligated not only for the excess over the $25,000 primary coverage limits but also for "costs incurred" in accord with its specific agreed upon pro rata formula.
Third, if we give "proceeding" the meaning as did the trial court, an absurdity is created. An inoperative concept is imported into an otherwise reasonable interpretation.
Such interpretation destroys the entire sense and purpose of paragraphs 2(a) and (b). If we assume Harbor's intent was to require a consent to the litigation proceedings continuing, the whole concept of pretrial settlement of a claim for an amount in excess of the primary's liability coupled with a specific agreed upon sharing of costs upon such contingency becomes an absurd, unreasonable, a nonconformable provision.
Paragraphs 1 and 2 each provide that no costs shall be incurred without Harbor's written consent. In contrast paragraph 2(b) requires, not a consent to costs being incurred, but a totally different species of consent. The required consent is to the proceedings continuing to a settlement approved by Harbor. Such specific consent and approval to a settlement was required of, obtained from, Harbor. Harbor, in giving this species of consent -- whether written or verbal 2(b) does not define -- to those clear express conditions of settlement, pretrial in an amount in excess of the primary coverage -- triggered its obligation to share the costs incurred in the agreed proportions.
The trial court in its analysis of paragraph 2(b) concluded that since the "case" did not continue -- it being settled -- Pacific incurred no other cost or expense after such settlement was effected. fn. 3 This view of paragraph 2(b) overlooks the tense of the operative verb "occurred." This use of the past tense refers plainly and explicitly to costs incurred in the past -- before settlement -- not to costs to be incurred in the future as in paragraphs 1 and 2.
To say that the undertaking to share costs incurred in the context of pretrial settlement negotiations terminating in success would apply only [27 Cal. 3d 380] to costs incurred after the settlement is effected results in a nonsensical meaning. To apply such meaning to "costs incurred" if the case, the litigation, continues and is not settled, results in even greater assault upon reason and perhaps a cry of foul from Harbor. Any other meaning attached to "incurred" in its context results in a nonoperative clause disrupting the entire sense and meaning of paragraph 2(b).
The cases relied upon by the majority construe policy language which differs significantly from the policy provisions in the cases at bench -- excepting only Aetna Cas. & Surety Co. v. Certain Underwriters (1976) 56 Cal. App. 3d 791 [129 Cal. Rptr. 47], which affirms the obligation to apportion costs where the primary coverage is exhausted. Moreover, the factual context here is unique, absent from any authority cited by the majority, including Aetna Cas. & Surety Co., supra.
"(c) Should, however, the sum for which the said claim or claims may be so adjustable exceed the Primary Limit or Limits, then the Company, if they consent to the proceedings continuing, shall contribute to the 'Costs' incurred by the Insured in the ratio that their proportion of the ultimate net loss as finally adjusted bears to the whole amount of such ultimate net loss."
In St. Paul Fire & M. Co. v. Indemnity Ins. Co. of N.A., supra, 158 A.2d 825, 826, the policy "provides that defendant shall pay no costs if the claims are adjusted prior to trial for a sum not in excess of the retained limits; and even where the claims appear likely to exceed the retained limits, defendant shall not be obligated unless it first gives consent to incurring the charge. But if defendant consents to 'trial court proceedings continuing' and if the settlement or judgment exceeds the retained limits, then it agrees to contribute to the costs in the ratio that its proportion of liability bears to the whole amount of the settlement or judgment."
Superficially, the Occidental Fire case would appear to support the majority view as to the meaning and interpretation of the apportionment of cost language of Harbor's contract; yet a careful examination into the geneology of the authorities relied upon by the Illinois Appellate Court demonstrates without a shadow of doubt its conclusions are based upon rules of law, judicial decisions long ago overturned, rejected by the California courts. The Illinois court expressly relies upon a covey of cases in which Financial Indem. Co. v. Colonial Ins. Co. (1955) 132 Cal. App. 2d 207, 210 [281 P.2d 883], is oft (erroneously) cited as a viable example of California authority for the proposition that the duty to defend a particular lawsuit is personal to each insurer; the obligation is several, and an insurance carrier is not entitled to divide the duty to defend, nor to require contribution for defending from another carrier, without a specific contractual agreement to that effect.
This view was rejected, and Financial Indem. Co. v. Colonial Ins. Co., supra, was overruled by this court in Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal. 2d 27, 37, 38 [17 Cal. Rptr. 12, 366 P.2d 455].
This legal stance is again directly opposed to unquestioned California authority detailed in IV, infra.
Concerning Occidental F. & C. Co., supra, 7C Appleman, Insurance Law and Practice, section 4691, pages 276-278, is sharply critical, stating: "In some cases it is indicated that an insurer that incurs defense costs cannot recover them because there are no subrogation rights under the contract or because each insurer has an independent obligation to defend and the matter is exclusively between the insurer and its insured.
In sum, the only authority that even facially supports the interpretation and conclusion of the majority opinion is based upon authority and reasoning long ago expressly overruled, rejected by the California courts.
These foregoing reasons, authorities compel the conclusion that Harbor is bound by paragraph 2(b) to share costs with the third party [27 Cal. 3d 384] beneficiary in proportion to its contribution to the total ultimate settlement figure.
If we make the fanciful assumptions that paragraphs 1, 2(a) and (b), and 5 do not exist in the Harbor policy, or if the presence is conceded, that section 1559 of the Civil Code and the assembled host of statutory rules for construction of contracts have no applicability to the words Harbor chose to use, yet there would be a right of equitable subrogation in favor of Pacific.
Harbor's policy (Conditions, par. 5, supra) is not equally clear as to any general assumption duty to defend. On the other hand the Harbor policy, at no level of expression, in language either precise or ambiguous, expressly rejects the duty to investigate and defend a claim against its insured on a covered risk.
The doctrine has been many times extended to multiple insurers of the same risk. As was stated in Amer. Auto. Ins. Co. v. Seaboard Surety Co. (1957) 155 Cal. App. 2d 192, 195-196 [318 P.2d 84]: "The reciprocal rights and duties of several insurers who have covered the same event do not arise out of contract, for their agreements are not with each other. [Citations.] Their respective obligations flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. As these principles do not stem from agreement between [27 Cal. 3d 386] the insurers their application is not controlled by the language of their contracts with the respective policy holders."
The Continental Cas. Co. court expressly disapproved of the views announced in Pac. Indem. Co. v. Cal. State Auto Assn. (1961) 190 Cal. App. 2d 293 [12 Cal. Rptr. 20]; Columbia Southern Chemical Corp. v. Manufacturers & Wholesalers Indem. Exch. (1961) 190 Cal. App. 2d 194 [11 Cal. Rptr. 762]; and Financial Indem. Co. v. Colonial Ins. Co. (1955) 132 Cal. App. 2d 207 [281 P.2d 883]. Each of these overruled cases expressly held that the other or underlying or excess or secondary insurance carriers had no obligations absent a specific contract with the primary or first insurer or with the insured to contribute to or pay for the defense provided by the primary or first insurer assuming the defense.
In Aetna, as here, the trial court concluded that the duty to defend only arose if Harbor's duty to indemnify arose. A similar contention was answered by this court in Gray v. Zurich Insurance Co., supra, 65 Cal. 2d 263, 271, where the identical argument was made by the primary carrier with regard to its duty to defend the insured. In rejecting such an argument, this court stated: "At the threshold we note that the nature of the obligation to defend is itself necessarily uncertain. [Fn. omitted.] Although insurers have often insisted that the duty arises only if the insurer is bound to indemnify the insured, this very contention creates a dilemma. No one can determine whether the third party suit does or does not fall within the indemnification coverage of the policy until that suit is resolved; in the instant case, the determination of whether the insured engaged in intentional, negligent or even wrongful conduct depended upon the judgment in the Jones suit, and, indeed, even after that judgment, no one could be positive whether it rested upon a finding of plaintiff's negligent or his intentional conduct. The carrier's obligation to indemnify inevitably will not be defined until the adjudication of the very action which it should have defended. Hence the policy contains its own seeds of uncertainty; the insurer has held out a promise that by its very nature is ambiguous." (Id., at pp. 271-272.) Such circular argument, found unacceptable to this court in Gray v. Zurich in defining the scope of the primary insurer's duty to defend an insured, should be equally unacceptable in defining the scope of the excess insurer's duty to defend where the primary coverage is exhausted by an agreed-to pretrial settlement.
In Am. Fid. Ins. Co. v. Emp. Mut. Cas. Co. (1979) 3 Kan.App.2d 245 [593 P.2d 14], after a scholarly review of California judicial decisions treating with division of duty of defense and costs by multiple insurers of the same risk, the court concluded (at p. 23): "From the foregoing the following principles may be derived: "1. Where the same risk is covered by both primary and secondary insurance, the primary insurer has the primary duty to defend.
"2. Where the claim made is within the limits of the primary policy, and the primary insurer undertakes the defense, the secondary insurer is not required to defend.
"3. Where the claim is over the limits of the primary policy and only one insurer undertakes the defense, the primary insurer and the excess insurer will each be liable for a pro rata share of the costs of defense in proportion to the amount of the claim each is required to pay.
No roadblock, equitable, legal, logical or constructional precludes the application of equitable subrogation principles to require proration of costs in this case in accord with the Conditions paragraph 2(b) formula.
In the landmark case of Gray v. Zurich Ins. Co., supra, 65 Cal. 2d 263, this court adopted a far reaching, enlightened consumer-oriented approach to interpretation of ambiguous language of an insurance policy. "We test the meaning of the policy according to the insured's reasonable expectation of coverage. ..." And the Gray court held (at p. 276) where the language of the policy would reasonably lead the insured to expect a defense, the carrier would not be exonerated.
This "reasonable expectation" doctrine has been uniformly followed and approved by this court in contexts of a variety of ex-contractually "implied" duties. (See Harris v. Glen Falls Ins. Co. (1972) 6 Cal. 3d 699, 701-702 [100 Cal. Rptr. 133, 493 P.2d 1]; Thompson v. Occidental Life Ins. Co. (1973) 9 Cal. 3d 904, 920-921 [109 Cal. Rptr. 473, 513 P.2d 353]; Gyler v. Mission Ins. Co. (1973) 10 Cal. 3d 216, 219-220 [110 Cal. Rptr. 139, 514 P.2d 1219]; State Farm Mut. Auto Ins. Co. v. Jacober (1973) 10 Cal. 3d 193, 201-203, 207-208 [110 Cal. Rptr. 1, 514 P.2d 953]; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 818 [157 Cal. Rptr. 482, 598 P.2d 452]; Neal v. Farmers Ins. Exchange (1978) 21 Cal. 3d 910, 920 [148 Cal. Rptr. 389, 582 P.2d 980]; Murphy v. Allstate Ins. Co., supra, 17 Cal. 3d 937, 940-941.) Last but not least to recognize this principle is Commercial Union Assurance Cos. v. Safeway Stores, Inc. (1980) 26 Cal. 3d 912, 918, 919 [164 Cal. Rptr. 709, 610 P.2d 1038].
This case cannot be viewed merely as a contest between two insurers each trying to absolve itself, to shift or share the burden of defense investigation [27 Cal. 3d 392] and costs. It is a contest in which every insured -- when this court opts for a denial of an excess carrier's duty to share costs of defense where excess coverage is invaded by settlement -- will have its reasonable expectations as to an adequate good faith defense diminished.
The majority opinion diminishes that legitimate expectation when it places the primary insurer in this untenable position. The duty to defend must necessarily encompass the providing of the same good faith defense whether the primary limits are "likely" or "not likely" to be exceeded -- at least to judgment. If this duty is imposed without coupling it with equitable subrogation rights against the excess carrier when the judgment or settlement exceeds primary coverage, then the primary insurer is put to a Hobson's choice. Hard economic reality stares the primary insurer in the face in that it is in a competitive industry; it is a profit-seeking corporation with duties to shareholders; it is not an eleemosynary institution. As this court observed in Wint v. Fidelity & Casualty Co. (1973) 9 Cal. 3d 257, 263 [107 Cal. Rptr. 175, 507 P.2d 1383, 90 A.L.R.3d 1185]: "Fidelity [excess insurer] argues that even if it was under a duty to defend McGregor, its failure to do so was of no consequence, because Great American defended him, and he therefore was not prejudiced. Great American's policy, however, had a $10,000 limit, and a defense by an insurer whose policy has a limit far below the amount claimed cannot be equated to the defense of an insurer who stands to lose 10 times as much as the insurer who defends." The insured's reasonable expectations are that the insurance company, [27 Cal. 3d 393] whether primary or excess, will provide the type of defense where the insured and the insurer's interests, objectives are compatible, not contrajuxtaposed.
The claims here made exceeded the combined primary and excess coverages. Signal's defense was a denial of any liability for the 1963 Baldwin Hills dam failure. While the primary and excess insurer boldly proclaimed nonliability, yet Pacific spent nearly $100,000 in investigation and defense costs to give substance to the stance taken. Whether upon trial a judgment would have been obtained against Signal for more than the insurance coverage is any person's guess. But if the claim is viewed not from hindsight, then the insured's reasonable expectations are to receive such quality defense as to preclude a judgment exceeding the combined policy limits thereby exposing the insured to personal liability. In short, the insured's reasonable expectation of a first class defense is not just limited to the first $25,000 of loss incurred.
Secondly, the majority opinion has chosen sides in a skirmish that is but part of a larger and longstanding "unfortunate and unnecessary conflict between certain primary insurers and excess insurers." (Lanzone, Resolving Conflicts Between Primary and Excess Insurers (1975) 635 Ins. L.J. 733, 739.) The specific policy provision here in issue -- Harbor's "Form U 604E CFS (11-61)" -- is reflective of the Jarndyce and Jarndyce specie of marathon negotiations between certain excess and primary carriers over the duties of defense of commonly covered losses that has been in process at least a generation and more. By each ell or cubit a carrier's (whether primary or excess) duty to defend has been diminished in this economically motivated debate, so also has the insured -- a nonparticipant in these discussions -- had its reasonable expectations of a full and adequate defense reduced.
The majority opinion represents more than just a retreat from economically salubrious principles. In following, sub silentio, the harsh inequitable holding of Occidental F. & Cas. Co. v. Underwriters at Lloyd's, Lon. supra, 311 N.E.2d 330, this court has turned back the clock, revived cases and doctrines rejected long ago. This decision constitutes an abandonment of the great principles enunciated in the California trilogy of insurance interpretation cases: Gray v. Zurich Insurance Co., supra, 65 Cal. 2d 263; Wildman v. Government Employees' Ins. Co. (1957) 48 Cal. 2d 31 [307 P.2d 359]; Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal. 2d 423 [296 P.2d 801, 57 [27 Cal. 3d 394] A.L.R.2d 914], and a taking of sides in an insurance policy draftsmenship battle where inevitably, the ultimate loser is the nonrepresented insurance buying public.
I would reverse the trial court's judgment with direction to apportion costs in accord with the formula expressed in paragraph 2(b) of Conditions of Harbor's policy.
FN 2. But see Comunale v. Traders & General Ins. Co. (1958) 50 Cal. 2d 654, 658-659 [328 P.2d 198, 68 A.L.R.3d 883], imposing an implied covenant of good faith upon an insurer to settle in an appropriate case.
FN 3. A settlement pretrial generally does not, did not here, contemplate the future expenditure of costs. The costs have been incurred in investigation, lawyer fees, etc., by the time settlement is effected. The only costs that usually occur after settlement is effected are in the drafting and exchange of releases, checks.
FN 4. None of these cases involve the unique hand-in-glove relation between the conceded facts and the language of 2(b) as is found in the case at bench.
FN 6. The pretrial settlement of claims fact matrix was not present in Aetna; therefore paragraph 2(b) of Harbor's policy had no application. In this particular, Aetna is not in point.
FN 7. The Aetna court plowed new legal ground in California when before judgment it shifted defense duties to the excess carrier. That issue is not here.
FN 8. The Aetna decision has been sharply criticized in an article entitled Allocation of the Duties of Defense Between Carriers Providing Coverage to the Same Insured in the April 1980 Ins. Counsel J. at pages 224, 251-260. The legal authority for the criticism is the holding in Occidental F. & C. Co. v. Underwriters at Lloyd's, Lon., supra, 311 N.E.2d 330, discussed above.

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