Opinion
This petition for writ of mandate presents an issue of first impression in California: does a primary insurer’s duty to defend continue after a dispute arises over exhaustion of policy limits but before the insurer has established in court that its coverage limits have been exhausted? The superior court ruled that the duty to defend continues until the insurer proves in a coverage action that the policy limits have been exhausted. We conclude the court correctly applied
Horace Mann Ins. Co.
v.
Barbara B.
(1993)
Facts and Procedure
In an attempt to make our analysis clear, we simplify a complex, multiparty insurance coverage case. Real parties in interеst Syntex Corporation, Syntex (U.S.A.) Inc., Syntex Laboratories, Inc., and Syntex Agribusiness, Inc. (Syntex), are accused of playing a role in the deliberate distribution of toxic chemicals (dioxins) on various dirt roads and horse arenas in the Stаte of Missouri. Petitioner Hartford Accident & Indemnity Co. (Hartford) provided primary coverage for Syntex between 1970 and 1976 and accepted, under a reservation of rights, the duty to defend public actions brought by the State оf Missouri and the United States and more than 66 private actions brought by more than 2,500 plaintiffs against Syntex, alleging dioxin-related bodily injury and property damage. On June 24, 1988, after several years of *1778 defending actions against Syntex and paying settlements of $4.1 million in these actions, Hartford withdrew its defense, claiming the applicable limits for each of its policies had been exhausted.
Syntex asked its excess carriers to take over the defense and payment of the dioxin actions, but they declined, contending Hartford had not yet exhausted its policy limits. Hartford sought in a declaratory relief action to establish that, if the policy covered the incidents, its limits had been exhausted.
Exhaustion of the seven Hartford policies, six of which contain a $300,000-per-occurrence limit but no aggregate limit for bodily injury payments, turns on how many covered occurrences took place. If, as Hartford claims, there were few separate occurrences, the Hartford policies were exhausted. If, instead, there were many separate occurrences, Hartford was wrong about when its рolicies were exhausted. The superior court has not yet decided how many occurrences took place. For three and one-half years the coverage action was stayed to avoid interfering with the defense of the underlying dioxin actions.
Syntex sought summary adjudication that Hartford prematurely withdrew its defense. After hearing, the court granted the motion, stating: “There is no triable issue of material fact.... Hartford’s duty to defend is proven as a matter of law because the Court finds a potential for coverage exists under Hartford’s primary [comprehensive general liability] policies and that exhaustion of the applicable limits under the policies has yet to be proven as a matter of law.” This petition followed.
Duty to Defend
The key principles surrounding the duty to defend are well established. The Supreme Court restated them in Montrose: “In
Horace Mann Ins. Co.
v.
Barbara B.
(1993)
*1779
“ ‘The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with thе terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.
(Gray, supra,
“The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded
(Lambert
v.
Commonwealth Land Title Ins. Co.
(1991)
“The insured’s desire to securе the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability. As а consequence, California courts have been consistently solicitous of insureds’ expectations on this score. [Citations.]” (Mon trose, supra, 6 Cal.4th at pp. 295-296.)
Exhaustion of Policy Limits
“There are two levels of insurance coverage—primary and excess. Primary insurance is coverage under which liability ‘attach[es] to the loss immediately upon the happening of the occurrence.’ [Citation.] Liability under an excess policy attaches only after all primary cоverage has been exhausted. [Citation.]”
(North River Ins. Co.
v.
American Home Assurance Co.
(1989)
If an excess carrier shirks its duty to defend after exhaustion of the primary policy and the primary carrier cоntinues to provide a defense under a reservation of rights, principles of equity compel the excess carrier to reimburse the primary carrier for the excess carrier’s share of the defense cоsts.
(Aetna Cas. & Surety Co.
v.
Certain Underwriters
(1976)
Montrose
Montrose, supra, 4 Cal.4th 287, decided shortly after we issued the alternative writ in this case, is central to the issue here because Montrose explained the relationship between the duty to defend and summary judgment procedures. Montrose first considered whether facts known to the insurers and extrinsic to the third party complaint could defeat the defense duty. The insurers in Montrose adduced evidence which could support an inference the alleged contamination resulted from the insured’s deliberate practices rather than from an accident or occurrence. (Id., at pp. 293-294.) Montrose resolved an appellate court conflict by upholding use of such extrinsic evidence. However, the court held that, in the case before it, even the extrinsic evidence could not defeat the potential for coverage and therefore the duty to defend. (Id., at pp. 296-301.)
The court then explained how summary adjudication procedures mesh with the duty to defend: “It is appropriate to recall at this point the procedural ramifications of rulings on motions for summary judgment in actions seeking a declaration of the existence or nonеxistence of the duty to defend. When an insured successfully moves for summary judgment that the insurer owes a defense duty, the insurer’s duty is clear. If an insurer successfully moves for summary judgment that it owes no duty to defend, the absence of a duty is clear. But an unfavorable ruling on the insured’s motion does not establish the absence of a defense duty; it merely means that the question whether the insurer must defend is not susceptible of resolution by undisputed facts, but instead must go to trial.
In thе interim, presumably there continues to exist a potential for coverage and thus a duty to defend.
As we said in
Horace Mann, supra, 4
Cal.4th at page 1085, when the evidence adduced in the declaratory relief action does not permit the сourt to eliminate the possibility that the insured’s conduct falls within the coverage of the policy, ‘the duty to defend is then established, absent additional evidence
*1781
bearing on the issue.’
(Ibid.) If the insurer, having defeated the insured’s motion for summary judgment, seеks to escape the defense duty altogether,
it must present proof of the kind described in the preceding paragraph, i.e., evidence that the underlying claim cannot come within the policy coverаge by virtue of the scope of the insuring clause or the breadth of an exclusion. In order to avoid any possibility that a refusal to defend may subject it to eventual liability for bad faith, the insurer is well advised to seek a judiciаl determination that it owes no defense. This it may do by means of a cross-motion for summary judgment in the declaratory relief action.”
(Montrose, supra,
Montrose’s Application to the Exhaustion Issue
As revealed by
Montrose,
the duty to defend begins when a potential for coverage arises, and the duty continues until the insurer proves otherwise. Consistent with
Fireman’s Fund Ins. Co.
v.
Chasson
(1962)
The issue here, however, is not whether a potential for coverage and therefore a duty to defend ever existed. All agree the Hartford policies potentially cover the dioxin actions. The issue here is exhaustion of the Hartford policies.
Although Montrose is factually distinguishable, we conclude it applies here. Hartford could not unilaterally terminate а defense for which it potentially is responsible. When a dispute arises over exhaustion of policy limits, a primary insurer must defend until it obtains a declaratory judgment or summary judgment that it has exhausted its policy limits.
Montrose does not imply оr suggest, however, that it overrides the settled principle that a primary insurer is entitled to reimbursement from an excess carrier that improperly refuses to assume its duty of defense upon exhaustion of the primary policy. Thus, the primary insurer’s duty to defend is only a contingent duty in the interim period after a dispute over exhaustion of limits arises. If Hartford had provided a defense during the period between actual *1782 exhaustion of policy limits аnd proof of exhaustion, it could have obtained reimbursement from excess carriers obligated for that defense. 1
The court here summarily adjudicated that Hartford’s duty to defend continues. Although the court did not state thаt the duty was contingent, neither did it conclude it was unconditional. Interpreting the order in favor of its validity, we conclude the court found a contingent duty to defend.
The alternative writ is discharged and the petition for a peremptory writ of mandate is denied.
White, P. J., and Werdegar, J„ concurred.
Notes
We express no opinion about the conditions under which an insured without excess coverage might be required to reimburse the primary insurer for the defense costs incurred during this interim period.