Exhaustion Requirement In Umbrella Policy Does Not Negate The Duty To Defend
In Northwest Pipe Company v. RLI Insurance Company, 2010 U.S. Dist. LEXIS 83053 (D. Or., August 11, 2010), the court concluded the insurer’s duty to defend under an umbrella policy was triggered even where all other underlying coverage for all possible periods had not been exhausted. A federal magistrate had found the policy issued by RLI included an exhaustion provision and the policy required “horizontal exhaustion of all underlying policies before RLI’s duty to defend was triggered.” Id.
On review of the Magistrate’s decision, Plaintiff argued RLI had a duty to defend under the umbrella policy “when the underlying coverage is exhausted for the same effective period as RLI’s policy.” Id. RLI argued the duty to defend was not triggered under the umbrella policy until all of “Plaintiff’s underlying coverage for all possible periods had been exhausted.” Id. Prior to this case, Oregon courts had not analyzed the issue of whether the duty to defend is triggered for an umbrella insurer only after all of an insured’s primary insurance is exhausted so the court noted its reliance on California case law.
First, the Court focused on determining the meaning of the phrase “any other underlying insurance” in RLI’s duty to defend portion of the policy. The Court relied on the reasoning set forth in Legacy Vulcan Corporation v. Transport Insurance Company, 185 Cal. App. 4th 677, (2010), to conclude that RLI’s policy, unlike the policy in Legacy, did not set out an exhaustion requirement in the duty to defend portion of the policy, only in the indemnity portion of the policy. Therefore, the Court did not require exhaustion of the other primary policies to trigger RLI’s duty to defend.
In determining the duty to defend, the parties agree that the complaint alleged a covered occurrence. The dispute was whether there was “other underlying insurance collectable by [Plaintiff],” such that RLI did not have a duty to defend. RLI argued that only horizontal exhaustion of all primary insurance triggers the duty to defend as well as the duty to indemnify. The Court found, based on the scope of RLI’s coverage, that the phrase “any other underlying insurance” is limited to “underlying insurance that occurred during RLI’s policy period.” Id. Since the primary policy directly under RLI had no duty to defend because of an exclusion and RLI did not establish the applicability of other policies for its policy period, RLI’s duty to defend was triggered.
The Court was not persuaded by RLI’s argument that the duty to defend is not triggered under the policy since, for the same period at issue, other insurers were also defending Plaintiff in connection with their insurance polices. The Court held that since there is a covered occurrence which is not covered by any other underlying insurer for the alleged property damage during RLI’s policy period, then despite other insurers fully defending Plaintiff, RLI still owes the insured a duty to defend under the umbrella policy.
By saying that RLI had a duty to defend its insured, even though the insured was already being fully defended, did the court mean for RLI to contribute to the defense costs? Or was the court directing RLI to employ additional attorneys to enter an appearance on behalf of its insured?
The Court's holding does not specifically address the question of whether it requires RLI's duty to defend requires only a contribution to defense costs or whether it requires RLI to participate in the defense. It appears from reviewing the parties' underlying complaint and subsequent motions, that the Court, in its ruling, held RLI's duty to defend meant they have a duty participate in the defense. However, it is not entirely clear whether that was the result the Plaintiff was seeking or if Plaintiff's intent was for RLI to contribute to the costs for defense. As an added note, RLI has filed a Motion for Reconsideration that has not yet been decided by the Court.