Opinion ID: 1194203
Heading Depth: 1
Heading Rank: 2

Heading: liability of cna

Text: (5) CNA admits that its policy provides coverage over the $300,000 level. We must decide to what extent CNA covers Pisciotta below that level. The coverage provisions of the CNA policy state: Section II.... The Company [CNA] shall only be liable for the ultimate net loss in excess of either: ... 1. the amount recoverable under the underlying insurance as set out in the schedule of the underlying insurance; or 2. 20% of the ultimate net loss or $200 ultimate net loss whichever is lesser in respect of each occurrence not covered by said underlying insurance. The underlying insurance listed in the schedule of underlying insurance is the USF&G policy. The two coverage provisions, when read together, make the CNA policy applicable either as excess insurance over any amounts recoverable under the primary policy or as alternative primary coverage as to losses not covered by the primary policy. In the normal situation, such an excess policy would fill any gaps in coverage left open by the primary coverage in addition to increasing the total possible recovery by the insured. At the time Tyler was injured, however, the underlying insurance referred to in the CNA policy had lapsed and been replaced by the Reserve policy with its lower single-injury limit of $100,000. By procuring a replacement policy with a lower limit than that of the original primary policy, Pisciotta clearly breached the maintenance clause of the CNA policy. [5] The plain import of the maintenance clause is that CNA refuses to allow the insured to expand the scope of CNA's exposure by replacing the original primary policy with a second policy containing a narrower scope of coverage. Pisciotta's failure to comply with the maintenance clause created a gap in coverage between his primary and excess policies. Thus CNA is not responsible for any liabilities of Pisciotta between $100,000 and $300,000. The trial court therefore erred in requiring CNA to indemnify Pisciotta for his 25 percent responsibility for the coverage gap. (6) Pisciotta also contends that the postjudgment insolvency of Reserve causes the CNA coverage to apply over the amount recoverable under the Reserve policy, which may now be zero. [6] Before addressing this issue, we must first determine whether it is proper to consider the fact of Reserve's insolvency in deciding this appeal. It is an elementary rule of appellate procedure that, when reviewing the correctness of a trial court's judgment, an appellate court will consider only matters which were part of the record at the time the judgment was entered. ( People's Home Sav. Bank v. Sadler (1905) 1 Cal. App. 189, 193 [81 P. 1029].) This rule preserves an orderly system of appellate procedure by preventing litigants from circumventing the normal sequence of litigation. However, the rule is somewhat flexible; courts have not hesitated to consider postjudgment events when legislative changes have occurred subsequent to a judgment ( Complete Serv. Bur. v. San Diego Med. Soc. (1954) 43 Cal.2d 201, 207 [272 P.2d 497]; Tulare Dist. v. Lindsay-Strathmore Dist. (1935) 3 Cal.2d 489, 527-528 [45 P.2d 972]) or when subsequent events have caused issues to become moot ( Estate of Henry (1960) 181 Cal. App.2d 173, 176 [5 Cal. Rptr. 582] [death of a party abated a nonsurvivable cause of action]). Under the circumstances of this case, we deem it appropriate to consider Reserve's insolvency; because the fact is not in dispute, we do not usurp the fact-finding function of the trial court. A prompt determination by us avoids the necessity for repetitive litigation of issues that have been fully briefed. Furthermore, the court records regarding Reserve's insolvency would properly be the subject of judicial notice. (Evid. Code, § 452, subd. (d)(1).) (7a) Pisciotta has cited two cases to support his contention that an excess insurer bears the risk of a primary insurer's insolvency: Fageol T. & C. Co. v. Pacific Indemnity Co. (1941) 18 Cal.2d 748 [117 P.2d 669], and McConnell v. Underwriters at Lloyds (1961) 56 Cal.2d 637 [16 Cal. Rptr. 362, 365 P.2d 418]. In Fageol, the insured obtained a primary insurance policy which provided: This insurance shall be considered as excess insurance where any specific insurance exists in the name of or for the benefit of the assured ... and this insurance shall not apply nor contribute to the payment of any loss until any such specific insurance shall have been exhausted. The insured later obtained a second primary policy. The second insured became insolvent before entry of judgment. Relying on the language of the excess coverage provision and the fact that the first policy was purchased as primary insurance, the Fageol court reasoned that the first policy reverted to primary coverage upon the insolvency of the second insurer. ( Fageol, supra, 18 Cal.2d at pp. 751-752.) In McConnell, there were three applicable policies: Interstate Indemnity Company issued a primary policy; Underwriters at Lloyds of London issued a primary and an excess policy. Interstate became insolvent after the loss occurred. The McConnell court  without analysis  declared: [I]t is noted that insolvency of a primary insurer gives rise to liability under the excess policy, after, of course, any other primary coverage has been exhausted [citing Fageol ]. ( McConnell, supra, 56 Cal.2d at p. 646.) (8) Insofar as McConnell implies that an excess insurer is always obligated to bear the risk of a primary insurer's insolvency, regardless of express exclusions of that risk, that decision appears unsupportable. [7] It is axiomatic that absent a violation of public policy, a statute, or a constitutional provision, the parties to a private agreement may allocate risks in any manner they may choose. For this reason, we do not base our decision on the broadly stated holding of McConnell. (7b) Rather, we follow the sound reasoning of Fageol and ask whether the wording of the CNA policy requires CNA to provide the coverage that Reserve would have assumed had it not become insolvent. CNA assumed liability for any excess over the amount recoverable under the underlying policy. That language might possibly be interpreted either to expose CNA only for amounts over the dollar limits of the underlying insurance or to expose CNA for amounts which the insured is not able to actually recover from the underlying insurer because of its insolvency. Because there are two meanings which may reasonably be attributed to the term in question, it is ambiguous and under settled principles must be construed in favor of the insured. Reserve is now insolvent, so the amount recoverable from Reserve is something substantially less than the Reserve policy limit of $100,000. We therefore conclude that the CNA policy includes the risk of Reserve's insolvency within the scope of its coverage; [8] CNA must reimburse Pisciotta for the first $100,000 of his liability in addition to any amounts over $300,000. CNA argues that imposing liability upon it due to Reserve's insolvency puts CNA in a worse position than if Pisciotta had not obtained any replacement coverage at all. Although this is accurate, it does not follow that CNA is being treated unfairly. The CNA policy, as we have interpreted it, covered the risk of the primary insurer's insolvency. If Pisciotta had fully complied with the maintenance clause of the CNA policy by purchasing replacement primary coverage as broad as the USF&G policy and if the replacement primary insurer had then become insolvent, CNA would have been required to cover Pisciotta from zero up to $300,000. Since Pisciotta partially breached the maintenance clause by purchasing replacement coverage with lower limits, CNA is only exposed from zero up to $100,000 due to Reserve's insolvency. True, if Pisciotta had obtained no replacement coverage whatsoever, CNA would have had no exposure beneath the $300,000 level. But that hypothetical situation did not occur. Pisciotta only partially breached the maintenance clause; his breach therefore only partially reduced CNA's exposure to the risk of the primary insurer's insolvency. Pisciotta, on the other hand, urges us to find CNA responsible for his entire liability. His argument is based on the wording of CNA's maintenance clause. As discussed above, the clause declares that if the insured breaches it, CNA provides only the coverage it would have if the insured had complied with the clause. Pisciotta first argues that had he complied with the maintenance clause and obtained replacement primary coverage of $300,000, CNA would by virtue of Reserve's insolvency have incurred full liability below the $300,000 level. The same result, he continues, should obtain even though Pisciotta did breach the clause by purchasing a replacement policy with a limit of $100,000. Therefore, he concludes, he is covered by CNA as if he had complied with the maintenance clause, i.e., up to $300,000. This artful reasoning distorts the clear meaning of the maintenance clause, which was inserted into the CNA policy to limit the company's liability in case the insured replaced the primary policy with one affording narrower coverage. It cannot be employed to expand the scope of CNA's liability. ( Pacific Employers Ins. Co. v. Maryland Casualty Co., supra, 65 Cal.2d 318, 323.) CNA's liability is confined to amounts up to $100,000 and amounts in excess of $300,000.