Court Upholds Law Requiring Excess Personal Automobile Insurers to Pay Defense Costs Before Primary Insurers Exhaust

Generally, an excess insurer is not obligated to contribute to its insured defense costs until the underlying primary carrier has exhausted its indemnity limits. Usually, this means the primary insurer bears all the defense costs as it usually could not exhaust its indemnity limits before settlement or judgment is entered. The California Legislature attempted to alter this usual course of events in the personal automobile insurance context by enacting Insurance Code section 11580.9. This section requires primary and excess insurers to pay their share of defense costs in proportion to their share of the total settlement/judgment. Thus, excess insurers would be required to pay a portion of defense costs incurred before the primary insurer actually exhausts its limits.

In Mercury Casualty Company v. Scottsdale Indemnity Company, Scottsdale, an excess insurer, unsuccessfully challenged the validity of this statute on several grounds, including the legislation was “arbitrary” and serves no valid purpose. However, the court upheld section 11580.9’s validity and stated that no one “can have legislation invalidated on the basis it was unwise or ineffectual.” In the personal automobile context, an excess insurer will be required to pay a share of defense costs, even though its policy may explicitly state it has no duty to defend until the insured’s primary insurance exhausts.

[Submitted by Guest Contributor: Peter Sindhuphak of Barger & Wolen LLP.]