On November 2, 2016, a federal judge in California ruled that a Real Estate Property Managed endorsement in policies issued to a real estate manager negated a standard policy exclusion, but also rendered the policies excess to other available insurance. The case involved a dispute over coverage for a bodily injury claim involving “Pigeon Breeders Disease,” allegedly contracted due to the insured’s failure to keep pigeons away from a condo complex’s rooftop HVAC units. The plaintiff sued the property owners, Jerry and Betty Lee, and the property manager, Sierra Pacific Management Co. Inc. (Sierra Pacific).

Atain Specialty Insurance Co. (Atain) insured Sierra Pacific, and California Capital Insurance Co. (California Capital) insured the Lees. California Capital also insured Sierra Pacific as an additional insured. Sierra Pacific tendered its defense to Atain three times; each was denied. California Capital undertook the defense and Sierra Pacific assigned its rights against Atain to California Capital. California Capital ultimately paid $1.9 million to settle the underlying case. Atain did not contribute to the defense or the settlement.

In the ensuing coverage litigation, Atain sought a declaration that it had no duty to defend or indemnify Sierra Pacific in the underlying case. California Capital sought contribution from Atain and asserted claims for breach of contract and bad faith for Atain’s repeated coverage denials. On cross-motions for summary judgment, the Court sided with Atain, holding that it had no duty to defend or indemnify as a consequence of the policies’ Real Estate Management endorsement.

The Attain policies contained standard professional services exclusions, which on their face purported to bar coverage for professional property management services. However, as the court explained, the Real Estate Property Managed endorsement undermined Atain’s arguments for exclusion. The endorsement states (emphasis added) “[w]ith respect to your liability arising out of your management of property for which you are acting as real estate manager, this insurance is excess over any other valid and collectible insurance available to you.” The language plainly shows, therefore, that the parties contemplated that Sierra Pacific could incur some covered liability for its work as property manager.

The endorsement also made Atain an excess insurer. The Court followed the modern trend and presumed the policy to be primary unless a predicate condition made it excess. Here, the predicate condition – that Sierra Pacific face liability arising out of its management of property – existed. Thus, California Capital was deemed the primary insurer. As such, California Capital had the duty to defend and indemnify Sierra Pacific. On the other hand, Atain’s obligations as an excess insurer never arose because California Capital’s policies were not exhausted. For that reason as well, there could be no bad faith by Atain.

The decision illustrates the determinative impact endorsements can have on the scope of coverage and underscores the importance of understanding how all policy endorsements interrelate to shape the final scope of coverage. Policy reviews by experienced coverage lawyers can help policyholders to unravel complex policy endorsements.

The decision also is illustrative of the modern trend concerning “other insurance” provisions, which is to deem coverage primary unless some triggering event converts the policy to excess. The case is Atain Specialty Ins. Co. v. Sierra Pac. Mgmt. Co., No. 2:14-cv-00609-TLN-DB, 2016 LEXIS 152874, at *4, *18-28, *33-38 (E.D. Cal. Nov. 3, 2016).