Opinion ID: 223511
Heading Depth: 3
Heading Rank: 1

Heading: Scope-of-Coverage Issues

Text: Liberty Mutual first argues that the district court erred in defining the scope of its duty to reimburse Pella's defense costs under the Policies. Liberty Mutual asserts that the district court construed the Policies so as to create an unqualified duty to reimburse defense costs, which Liberty Mutual describes as the functional equivalent of a duty to defend. The Policies, however, unambiguously disclaim such a duty to defend. According to Liberty Mutual, interpreting the duty to reimburse in this way would render meaningless its disclaimer of a duty to defend. Liberty Mutual maintains that the Policies instead unambiguously provide that it will have a defense cost reimbursement obligation, which is to reimburse defense costs in excess of the `[s]elf-insured amounts' in the event it is established that there was an `occurrence'.... Liberty Mutual contends that the phrase for each [or any] occurrence can only refer to an actual as opposed to an alleged occurrence. In other words, Liberty Mutual argues that the Policies clearly require that there can be no reimbursement obligation unless and until the existence of an `occurrence' has been established. Because, in its view, this is the only reasonable reading of the Policies, Liberty Mutual contends that the district court erred in finding that the Policies provide coverage for a suit that merely alleges an occurrence. Pella responds that the district court correctly concluded that the Policies could be read to require a contemporaneous duty to reimburse defense costs when the underlying lawsuit alleges an occurrence. According to Pella, the Policies (specifically the ALAE Endorsement) set only one precondition to the payment of defense costs: the satisfaction of the [Self-insured Amount]. The reference to an occurrence in the ALAE Endorsement only means that Pella must satisfy the Self-insured Amount separately for each occurrence; that is, if there are multiple occurrences, Pella must satisfy the Self-insured Amount for each. Pella contends that this interpretation of the Policies is especially clear in the 2005-2006 ALAE Endorsement, which provides that Liberty Mutual will reimburse defense costs after the `Self-insured Amount' has been exhausted. According to Pella, the plain language of the ALAE Endorsement does not require the additional condition that the occurrence be an established fact. Pella urges that its reading of the ALAE Endorsement is consistent with the Policies as a whole. The ALAE Endorsement provides that Liberty Mutual will reimburse Pella for Allocated Loss Adjustment Expense, which the Policies define to include attorneys' fees for claims in suit. In turn, the Policies define a suit as a civil proceeding in which damages because of ... property damages ... are alleged. When read together, Pella argues, these provisions show that [t]he payment of defense costs is directly tied to the allegations of the underlying action in question  not to the ultimate resolution of those allegations. Moreover, Pella maintains that this reading is consistent with the intended coverage of the Policies: if Pella was only entitled to reimbursement when the occurrence was established, it would not be able to receive reimbursement in many cases where it successfully defended itself in a suit alleging such an occurrence. In addition, Pella argues that its interpretation is not inconsistent with Liberty Mutual's disclaimer of a duty to defend. Although Pella concedes that the duty to defend is distinct from the duty to reimburse defense costs, Pella maintains that courts have recognized that, absent express language to the contrary ... the duty to pay defense costs, like the duty to defend, is a contemporaneous one. Thus, Pella asserts that the Policies can consistently disclaim a duty to defend while creating a contemporaneous duty to reimburse defense costs. State law governs the interpretation of insurance policies. Walnut Grove, 479 F.3d at 952 (quotation and citation omitted). Neither party disputes that Iowa law applies to our interpretation of the Policies. Iowa law provides that [t]he construction of an insurance contract and the interpretation of its language are matters of law for the court. Pudil v. State Farm Mut. Auto. Ins. Co., 633 N.W.2d 809, 811 (Iowa 2001) (quotation and citation omitted). Under Iowa law, the intent of the parties, as determined by the language of the policy, controls the court's interpretation of an insurance policy. Nationwide Agri-Bus. Ins. Co. v. Goodwin, 782 N.W.2d 465, 470 (Iowa 2010). Iowa courts will find an ambiguity in an insurance policy [o]nly when the policy language is susceptible to two reasonable interpretations. Id. (quotation and citation omitted). In addition, [The Iowa Supreme Court] has held that [a]n insurer assumes a duty to define any limitations or exclusionary clauses in clear and explicit terms. Hornick v. Owners Ins. Co., 511 N.W.2d 370, 374 (Iowa 1993). Thus, when an exclusionary provision is fairly susceptible to two reasonable constructions, the construction most favorable to the insured will be adopted. Thomas [ v. Progressive Cas. Ins. Co. ], 749 N.W.2d [678,] 682 [(Iowa 2008)]. Nonetheless, if there is no ambiguity, the court `will not write a new contract of insurance' for the parties. Id. (quoting Stover v. State Farm Mut. Ins. Co., 189 N.W.2d 588, 591 (Iowa 1971)) (citation omitted). If exclusionary language is not defined in the policy, we give the words their ordinary meaning. Farm & City Ins. Co. v. Gilmore, 539 N.W.2d 154, 157 (Iowa 1995). An exclusion that is clear and unambiguous must be given effect. Id. Id. This case involves a duty to reimburse defense costs  not the duty to defend. Iowa state courts have not examined how, or to what extent, the duty to reimburse defense costs may differ from the duty to defend. See Fed. Ins. Co. v. Sammons Fin. Grp., Inc., 595 F.Supp.2d 962, 976 (S.D.Iowa 2009) (interpreting a policy under Iowa law and noting that [t]he question of how to treat an insurer's duty to advance defense costs is one which few courts have had occasion to address). This court, interpreting a policy under Iowa law, has noted that the duty to reimburse defense costs and the duty to defend are different but similar in result. See McCuen v. Am. Cas. Co. of Reading, Pa., 946 F.2d 1401, 1407 (8th Cir.1991) (holding that a policy with similar language required the insurer to pay defense costs as the insured incurred them because the policy did not unambiguously state otherwise). Moreover, other state courts generally have viewed an insurer's duty to advance defense costs as an obligation congruent to the insurer's duty to defend, concluding that the duty arises if the allegations in the complaint could, if proven, give rise to a duty to indemnify. Fed. Ins. Co., 595 F.Supp.2d at 976 (citing Acacia Research Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 05-501, 2008 WL 4179206, at  (C.D.Cal. Feb. 8, 2008); Hurley v. Columbia Cas. Co., 976 F.Supp. 268, 275 (D.Del.1997); Am. Chem. Soc. v. Leadscope, Inc., No. 04AP-305, 2005 WL 1220746, at -8 (Ohio Ct.App. May 24, 2005)). Therefore, even though this case does not involve a duty to defend, the parameters of that duty, under Iowa law, nevertheless guide our analysis of Liberty Mutual's duty to reimburse Pella's defense costs. The Iowa Supreme Court has explained that the duty to defend rests solely on whether the petition contains any allegations that arguably or potentially bring the action within the policy coverage. Emp'rs Mut. Cas. Co. v. Cedar Rapids Television Co., 552 N.W.2d 639, 641 (Iowa 1996) (quotation and citation omitted). In other words, we must look to the facts alleged in the complaint to determine whether coverage exists for that suit. Id. Here, while the Policies explicitly disclaim a duty to defend any claim, the Policies do provide for the reimbursement of some defense costs. Liberty Mutual's duty to reimburse defense costs is defined two different ways in the different versions of the Policies. As noted supra, in the 2000-2005 version, the duty is phrased as follows: For each occurrence we will reimburse the insured for Allocated Loss Adjustment Expense paid by or on behalf of the insured in excess of the self-insured amount. The duty is phrased slightly differently in the 2005-2006 policy: [W]e will reimburse the insured for Allocated Loss Adjustment Expense incurred by the insured for any occurrence after the Self-insured Amount has been exhausted by the payment of damages and/or Allocated Loss Adjustment Expense by the insured for that occurrence.... (Emphasis added.) Liberty Mutual contends that, in both policy versions, the duty is unambiguously conditioned upon the established fact  not the mere allegation  of an occurrence. The plain language of the policy does not compel Liberty Mutual's interpretation. To begin with, the Policies do not explicitly condition reimbursement of any defense costs on the establishment of an occurrence. Instead, the Policies only condition reimbursement on Pella's having paid or incurred the requisite amount of Allocated Loss Adjustment Expense. Moreover, the 2005-2006 version of the Policies states that Liberty Mutual will reimburse Pella for its defense costs for any `occurrence' after the `Self-insured Amount' has been exhausted. (Emphasis added.) This language suggests that Liberty Mutual will begin to reimburse Pella as soon as it has paid defense costs equal to the Self-insured Amount. Pella could well reach this threshold prior to any determination of whether an occurrence had been established by the facts of the case. [1] Similarly, nothing else in the Policies indicates that the duty to reimburse would be triggered at the conclusion of the suit  or, at least, at the point when the existence of an occurrence could be established. The Policies provide for reimbursement of Allocated Loss Adjustment Expense, which the Policies define, in part, as reasonable attorneys' fees for claims in suit.  (Emphasis added.) A suit is defined as a civil proceeding in which damages because of ... `property damage' ... to which this insurance applies are alleged.  (Emphasis added.) Thus, read together, the Policies provide that Liberty Mutual will reimburse Pella's attorneys' fees for claims in a suit in which covered property damage is alleged. [2] Pella interprets the Policies as requiring Liberty Mutual to reimburse defense costs as soon as the Self-insured Amount is satisfied for each alleged occurrence. The language and structure of the Policies do not expressly foreclose this interpretation. Given the requirement that insurers state any exclusions or limitations on coverage in clear and explicit terms, Nationwide, 782 N.W.2d at 470 (quotation and citation omitted), Pella's interpretation is, at least, a reasonable alternative. Consequently, if Liberty Mutual's interpretation is also reasonable, there is, by definition, an ambiguity that must be resolved in Pella's favor. See id. Liberty Mutual asserts that Pella's interpretation is unreasonable because it would give rise to a duty to reimburse that is the functional equivalent of a duty to defend, which the Policies explicitly disclaim. In making this argument, Liberty Mutual relies on Steyer v. Westvaco Corp., 450 F.Supp. 384 (D.Md.1978), in which that court rejected the insured's interpretation of a duty to reimburse, wherein the insurance company would be liable for defense costs whenever property damage is alleged, but not found, id. at 396. The court rejected this interpretation because such a construction would amount to a duty to defend even though that duty is expressly disclaimed by the policy. Id. Steyer, however, involved the duty to reimburse defense costs in the context of an indemnity policy, which explicitly provided coverage only after the fact of liability had been established. Id. at 395 n. 11; cf. McCuen, 946 F.2d at 1406-07 (explaining the difference between liability coverage and indemnity coverage). Liberty Mutual has not argued that the Policies provide only indemnity coverage; thus, Steyer is not directly on point. Pella's interpretation of the Policies does not nullify the Policies' disclaimer of the duty to defend. The duty to defend necessarily requires the insurer to pay defense costs, but it also requires the insurer to conduct and take control of the whole defense. See Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 32-33 (Iowa 1982) (discussing the scope of the insurer's obligations under a duty to defend). Contrary to Liberty Mutual's assertion, Liberty Mutual would still have no duty to defend even if it has to reimburse defense costs in a suit where an occurrence is alleged but not yet an established fact. Accordingly, the district court did not err in concluding that Liberty Mutual's duty to reimburse Pella's defense costs should be determined by looking at the allegations in the complaint to determine if they state a covered claim.
Liberty Mutual next argues that the district court erred in finding that Liberty Mutual's coverage under the Policies was not excess over Pella's other, pre-2001 insurance. The plain language of the Policies, Liberty Mutual contends, explicitly and unambiguously states that Liberty Mutual does not have to reimburse Pella's defense costs if those defense costs are fully covered by other insurers. Thus, Liberty Mutual maintains that the Policies were clearly intended to serve as excess policies because they are labeled as such. According to Liberty Mutual, by considering only whether the Policies were true excess policies (and concluding that they were not), the district court simply removed key language from the policy. Here, the Policies provide that Liberty Mutual will reimburse Pella's defense costs that are in excess of the Self-insured Amount. The Policies defined the Self-insured Amount as follows: Self-insured Amount means:    (b) If the insured has other insurance greater than or equal to the Self-insured Amount: All amounts payable or retained under such other insurance: but not less than the amount shown in the Declarations under Item 4, Self-Insured Amount[.] (Emphases added.) In turn, the Policies define other insurance as  any other valid and collectible insurance, whether primary, excess, contingent or on any other basis, except any such insurance purchased by the insured specifically to apply in excess of this insurance. (Emphasis added.) At first glance, the Policies' language suggests that Liberty Mutual owes a duty to reimburse only in excess of all amounts that Pella can recover under any other applicable insurance policies. Upon closer examination, however, the Policies' use of the present tense is significant: the Self-insured Amount could reasonably be read to provide excess coverage only over the insurance that Pella had in effect at the same time as the Policies. At the time the Policies were in effect  September 1, 2000, to September 1, 2006  Pella did not ha[ve] any other insurance. Under this reading, the district court did not err by concluding that Pella did not have to exhaust its coverage from its pre-2001 insurers before being reimbursed by Liberty Mutual. This interpretation finds additional support from Iowa courts' interpretation of other insurance. Iowa courts do not always interpret a policy's reference to other insurance to mean that its coverage will be construed as excess over other such insurance. See Nat'l Sur. Corp. v. Ranger Ins. Co., 260 F.3d 881, 884-85 (8th Cir.2001) (discussing Iowa courts' interpretations of other-insurance clauses). Otherwise, for example, an insured could be covered by two policies, which both contain other insurance provisions; if those provisions were construed literally, the insured might have no coverage, an obviously unacceptable answer. Id. at 884. (citing Union Ins. Co. v. Iowa Hardware Mut. Ins. Co., 175 N.W.2d 413, 417 (Iowa 1970)). Instead, Iowa courts distinguish between primary policies which contain other insurance provisions and true excess policies. A primary policy with an other insurance provision is a policy purchased to be the first tier of insurance coverage, one which is intended to kick in the moment liability is established, but which may be excess in certain, specified situations. LeMars Mut. Ins. Co. v. Farm & City Ins. Co., 494 N.W.2d 216, 218 (Iowa 1992) (quotation and citation omitted). In those circumstances, the primary insurer may be entitled to contribution from other insurers; the insured's right to coverage, however, will not be affected. 15 Lee R. Russ & Thomas F. Segala, Couch on Insurance § 219:1, at 219-8 (3d ed. 1999). In contrast, a true excess, or umbrella policy, is a policy purchased to be the final tier of insurance coverage, one which is intended to be excess over all other available insurance and which the parties intended to cover only catastrophic losses which exceed the insured's required primary insurance limit. LeMars, 494 N.W.2d at 218 (quotation and citation omitted). [A]n insurer that issued a `true excess' or `umbrella' policy is not liable for any portion of the loss until the primary insurer's policy limit has been exhausted, even if the primary policy contains an other-insurance clause. Nat'l Sur. Corp., 260 F.3d at 884 (citing Vigilant Ins. Co. v. Allied Prop. & Cas. Ins. Co., 609 N.W.2d 538, 541 (Iowa 2000); LeMars, 494 N.W.2d at 219). To determine whether a given policy is a primary policy with an other insurance provision or a true excess policy, Iowa courts consider the polic[y] as a whole in light of the pattern of coverage intended to result from multiple policies. LeMars, 494 N.W.2d at 218. In doing so, the court is permitted to consider the surrounding circumstances, the situation of the parties, and the objects the parties were striving to attain. Id. In identifying a policy as a true excess policy, the court may consider not only the title and terms of the policy but also the amount of the premium relative to the total amount of coverage. Id. at 219. For example, a low premium relative to the amount of risk insured is indicative of a true excess policy. See id. (noting the yearly premium of only $120 for excess coverage of $1,000,000 reflected [t]he `umbrella' nature of the policy). Furthermore, [t]rue excess and umbrella policies require the existence of a primary policy as a condition of coverage. Nat'l Sur. Corp., 260 F.3d at 885. This is so because the express purpose of a true excess policy is to protect the insured in the event of a catastrophic loss in which liability exceeds the available primary coverage. Id. (quoting 15 Couch on Insurance § 220:32, at 220-37). Considering these factors, we conclude that the Policies are primary policies with an other insurance provision that would allow Liberty Mutual to seek contribution from other insurers  but not affect Pella's right to recover from Liberty Mutual in the first instance. Although the Policies are labeled as excess, several other factors beyond the label strongly indicate that the Policies were intended to apply as primary coverage. First, and most importantly, the Policies do not require the existence of another, primary policy as a condition of coverage. In fact, the record indicates that Pella had no other applicable coverage during the policy periods from September 1, 2000, to September 1, 2006. Second, the Policies do not indicate that they were intended to cover only catastrophic losses. This is, in part, reflected by the third factor: as the district court observed, the Policies provided the same amount of coverage that Pella received under its pre-2001 primary policies. The amount of the premiums was similar, as well. Accordingly, the district court did not err in concluding that Pella did not have to exhaust all of its available insurance coverage before Liberty Mutual would owe a duty to reimburse defense costs.