Expert Commentary

Can an Indemnity Agreement Determine Who's Primary and Who's Excess?

Joe Postel explains that the answer is simple: not unless the indemnitee has a judgment for indemnity against the indemnitor, citing a recent California Court of Appeal case.


Additional Insured Issues
January 2002

The California Court of Appeal recently took up this complicated question in Travelers Cas. & Surety Co. v. American Equity Ins. Co., 93 Cal App 4th 1142 (Cal App 2001). Although the analysis is complex, the answer is simple: not unless the indemnitee has a judgment for indemnity against the indemnitor.

Preferred Capital ("Preferred") managed Lakeview Tower Apartments in Oakland, which was in receivership. The property management agreement between Preferred and the receiver required the receiver to indemnify Preferred for any liability arising out of the property management agreement, and also to name Preferred an additional insured on the receiver's commercial general liability (CGL) insurance policy.

Alonzo Henry, a tenant at Lakeview, sued Preferred for injuries sustained when he jumped out of his apartment window to avoid an intruder. At the time, Preferred was the named insured on a CGL policy issued by American Equity Ins. Co. Preferred was also an additional insured under a property managers' endorsement to a CGL policy issued to Lakeview by Travelers. Both policies contained the Insurance Services Office, Inc. (ISO), CG 00 01 other insurance provision, providing for primary coverage that shared pro rata with other insurance.

Preferred tendered the defense of the tenant's suit to both American Equity and Travelers. Travelers accepted the defense and indemnification of Preferred, but American Equity did not. Travelers settled the suit and then sued American Equity for equitable contribution. The trial court entered summary judgment for Travelers, and American Equity appealed.

American Equity contended that, despite its pro rata other insurance clause, its coverage was excess over the coverage provided by Travelers because of the indemnity provision in the contract between Preferred and Lakeview's receiver. That agreement required the receiver to indemnify Preferred for all losses, claims, judgments, or damages resulting from the property while Preferred was managing it.

American Equity argued that to allow Travelers to recover equitable contribution would be contrary to the indemnity agreement, because the indemnity agreement reflected the parties' intent to transfer the entire risk to Lakeview's receiver, but to allow Travelers—Lakeview's insurer—to obtain equitable contribution from Preferred's insurer would result in transferring only half of Preferred's risk to Lakeview. In support of this contention, American Equity cited Rossmoor Sanitation, Inc. v Pylon, Inc., 13 Cal 2d 622 (1975).

The Rossmoor Case

In Rossmoor, the owner of a sewage construction project (Rossmoor) contracted with Pylon, Inc., to construct a sewage pump station and sewer lines. The contract required Pylon to indemnify Rossmoor for all claims arising out of that work, and to name Rossmoor as an additional insured on Pylon's CGL policy.

After Rossmoor's insurer, INA, paid a judgment in a suit for the wrongful death and bodily injury of two Pylon employees, INA (in Rossmoor's name) sued Pylon and its CGL insurer, U.S. Fire. INA/Rossmoor sought a judgment against Pylon for indemnity by virtue of its contract with Pylon, and a judgment against U.S. Fire under its contractual liability coverage for Pylon's obligations under the indemnity agreement. U.S. Fire cross-complained against INA, contending that by virtue of the pro rata other insurance clauses in the INA and U.S. Fire policies, INA would be obligated to share in any obligation U.S. Fire might have to reimburse Rossmoor.

The trial court entered judgment for Rossmoor and INA, and Pylon and U.S. Fire appealed. In analyzing the California Supreme Court's opinion, it is crucial to remember that Rossmoor had a judgment against Pylon for indemnity. Without that judgment, the court's analysis and holding would not have been possible.

The court first found that INA, having paid a judgment on behalf of Rossmoor that was subject to Rossmoor's indemnity agreement with Pylon, was thereby subrogated to Rossmoor's right to sue Pylon on that indemnity agreement. The court then affirmed the judgment against Pylon for indemnity, finding that Rossmoor was not actively negligent and therefore not precluded from obtaining indemnity. The court then analyzed what effect the indemnity judgment had on the primary/excess dispute between INA and U.S. Fire.

The court found that the other insurance clause in the U.S. Fire policy could not control the outcome, because this was a contest between insureds on an indemnity agreement, rather than a contest between insurers for equitable contribution. The court reasoned:

We view one factor as compelling, however: to apportion the loss in this case pursuant to the other insurance clauses would effectively negate the indemnity agreement and impose liability on INA when Rossmoor bargained with Pylon to avoid that very result as part of the consideration for the construction agreement. We therefore conclude that the rights of indemnity and subrogation must control, and are persuaded the trial court was correct in finding that because the U.S. Fire policy was part of the consideration for the construction job, it must be viewed as primary insurance under the facts of this case and that INA was subrogated to the rights of Rossmoor.

The Reliance Case

After analyzing Rossmoor, the Travelers court next discussed Reliance Natl. Indem. Co. v General Star Indem. Co., 72 Cal App 4th 1063 (Cal App 1999). The Reliance court held that a primary insurer (Reliance) that settled a case on behalf of its named insured (Lollapalooza) could not obtain reimbursement from an excess insurer (General Star) providing additional insured coverage to Lollapalooza, despite the indemnity agreement requiring General Star's named insured (Don Law) to indemnify Lollapalooza for the entire loss.

Reliance exhausted its primary policy in settling the claim against Lollapalooza and also paid a portion of its excess policy. Don Law's primary policy (written by Gulf) was also exhausted in achieving the settlement, as was a portion of its excess policy with General Star. In support of its claim for reimbursement from General Star, Reliance relied on the indemnity agreement between its named insured, Lollapalooza, and General Star's named insured, Don Law. (Reliance had settled its reimbursement claim against Don Law's primary insurer, Gulf.)

Reliance argued that it was subrogated to Lollapalooza's rights under the indemnity agreement, and that since General Star insured Don Law's obligations under that agreement, Reliance had a right to reimbursement from General Star, notwithstanding that Reliance was a primary insurer and General Star was an excess insurer. In making this assertion, Reliance relied on Rossmoor. But the court held that Rossmoor did not control:

[T]he [Rossmoor] court did not hold an indemnitee's policy will always be excess. * * * Rossmoor did not purport to establish a general rule that a contractual indemnification agreement between an insured and a third party takes precedence over well-established general rules of primary and excess coverage in an action between insurers[.] [72 Cal App 4th at 1081.]

The Reliance court also noted that unlike Rossmoor—which was an action between the parties to the indemnity agreement (the insureds), as well as their insurers—the case before the Reliance court involved only the insurers. [Id. at 1082.] (Thus, no judgment had been entered or determination been made on the indemnity agreement.) Accordingly, the Reliance court held the apportionment of the loss was controlled by the ordinary rules that require primary policies to be exhausted before excess policies pay.

The Travelers Court's Analysis of Rossmoor and Reliance

The Travelers court noted distinctions between its case and Rossmoor and Reliance, commenting as follows:

Reliance is most easily distinguishable on the basis that it involved insurance coverage at different levels: a true primary policy and a true excess policy. * * * However, unlike Reliance, this case does not involve insurance coverage at different levels, or different risks reflected in premium costs.

* * * *

Rossmoor is distinguishable as an action primarily between two insureds on a contract for indemnity between the two.

* * * *

Here, the action is between two insurers, both of whom have issued contracts of insurance covering the same insured, Preferred Capital. Thus, the case looks more like the typical dispute between insurance carriers, which should be governed by general principles governing the interpretation and enforcement of "other insurance" clauses between insurers.

More importantly, subrogation of the insurer to the rights of the insured presupposes the insured, Preferred Capital, has a right of indemnity from the receiver or from Lakeview under the indemnity agreement. This determination was never made below and those parties (the receiver, Lakeview and Preferred Capital) are not parties to this action. * * * [B]ecause it has not been established and we cannot say with certainty under the circumstances that Preferred Capital is entitled to indemnity from the receiver or Lakeview under the property management agreement, we never reach the equitable consideration which Rossmoor found controlling. [Slip opinion at pp. 15-17. (Emphasis supplied.)1]

The existence or nonexistence of a judgment for indemnity is the key distinction between Rossmoor on the one hand, and Reliance and Travelers on the other. Because there was a judgment for indemnity in Rossmoor, the indemnity agreement controlled over the other insurance clauses in the policies. But because there was no such judgment in Reliance and Travelers, the other insurance clauses controlled over the indemnity agreement. For a case from outside California that adopted Rossmoor's reasoning, see J. Walters Constr. Co. v Gilman Paper Co., 620 S2d 219 (Fla App 1993). That case, like Rossmoor, involved a judgment for indemnity.

A closely related point is that under a CGL policy's contractual liability coverage, the insured's indemnitee is a claimant, not an insured, and thus, he has no rights under the policy unless he has a judgment against the insured. [Alliance Syndicate, Inc. v Parsec, Inc., 741 NE2d 1039 (Ill App 2000); Alex Robertson Co. v Imperial Cas. & Indem. Co., 8 Cal App 4th 338 (Cal App 1992) ("no direct action lies against the insurer until a judgment has been obtained against the insured").]

A final point is that where the indemnitor's CGL policy incorporates the indemnity agreement by reference, then the indemnity agreement will control over the other insurance provisions, even absent a judgment on the indemnity claim. See, e.g., Truck Ins. Exch. v Liberty Mutual Ins. Co., 428 NE2d 1183 (Ill App 1981).

Absent an incorporation by reference of the indemnity provision into the indemnitor's insurance policy, or a judgment for indemnity against the indemnitor, an additional insured's rights under a CGL policy are generally unaffected by the terms of any indemnity agreement with the named insured. Indemnity agreements simply do not affect proration between insurers absent such an incorporation or judgment.

Old Business

My February IRMI.com column criticized the Illinois Appellate Court's opinion in Schal-Bovis, Inc. v Casualty Ins. Co., 732 NE2d 1179 (Ill App 1st Dist 2000). I am pleased to report that a downstate panel of the same court has now rejected Schal-Bovis's holding that one subcontractor's insurer that paid a loss for its additional insured general contractor cannot obtain equitable contribution from a different subcontractor's insurer, because they insure different risks. Cincinnati Ins. Co. v River City Constr. Co., 757 NE2d 676 (Ill App 3rd Dist 2001). The River City court recognized that the distinction between the subcontractors is unimportant in determining whether the requirements for an equitable contribution claim have been met, so long as both policies covered the loss. There is now a conflict in authority among districts of the court on this question, and it will eventually be resolved either by the Illinois Supreme Court, or by the first appellate district overruling Schal-Bovis.


1The court also noted that American Equity, since it had not paid anything on its insured's behalf, could not assert its insured's rights under the indemnity agreement as a defense to Traveler's claim.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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