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April 26, 2018 Articles

When Parties Enter into an Agreement That Conflicts with Their Insurance Policies—A Hypothetical

Test your knowledge of basic priority of coverage issues for indemnity (not defense) with this hypothetical

by Nancy Gutzler and Elizabeth Sackett

Business partners often use contracts to transfer risks. However, contractual indemnification and insurance procurement requirements do not always fit together like jigsaw puzzles. Issues can arise when contract terms conflict, resulting in duplication of, or gaps in, insurance coverage. The priority of coverage – meaning the order in which insurance policies respond to a loss – is complex and often litigated. Test your knowledge of basic priority of coverage issues for indemnity (not defense) with the hypothetical below.  

A beach resort called “Seaside” and a management company named “Beacher” entered into a management agreement under which Beacher agreed to manage Seaside’s resort. The management agreement required that both Seaside and Beacher maintain a $1 million primary general liability policy as well as $10 million in umbrella coverage. The management agreement also required that Beacher add Seaside to its insurance as an additional insured. Accordingly, Beacher purchased a $1 million general liability policy and a $10 million umbrella policy with Beacher as the named insured on the policies, and Seaside as an additional insured. Seaside maintained its own liability insurance providing $1 million of primary coverage and $10 million of umbrella coverage. All four of the policies had other insurance clauses stating that each policy “will be excess over any other valid and collectible insurance for damages covered by that policy”.

One summer Brian, Carl, and Dennis Waterslide (the “Waterslide Boys”) performed a concert at the resort and celebrated with a midnight room service snack. The next day they became ill and were hospitalized. The Waterslide Boys canceled several concerts due to their illness. Once recovered, the group filed a lawsuit against Seaside and Beacher seeking damages for the alleged food poisoning they suffered while at the resort.

Before litigation got underway, Seaside and Beacher settled the lawsuit for $4 million, agreeing in the settlement agreement to joint and several liability. Each insurer funded $1 million of the $4 million settlement through an interim agreement, with all insurers reserving their rights to resolve the coverage and subrogation issues at a later date. Soon after, Seaside’s primary and excess insurers sued Beacher’s primary and excess insurers seeking reimbursement for the $1 million they each paid, claiming their policies owed no obligation to participate in the settlement.

Scenario No. 1

Can Seaside’s insurers obtain reimbursement from either of Beacher’s insurers?

Answer: No, in the majority of jurisdictions.

Here, there are two responsive primary and two responsive excess umbrella policies. As a general rule, to determine the priority of coverage - the order in which insurance policies will respond to a loss - we look to the policies’ respective “other insurance” clauses. BP Air Conditioning Corp. v. OneBeacon Ins. Group, 8 N.Y.3d 708, 871 N.E.2d 1128, 840 N.Y.S.2d 302 (2007). Such clauses are designed to establish how a loss is to be apportioned among concurrent policies providing coverage for a mutual insured. The other insurance clauses identify the circumstances by which a policy will be deemed primary, excess, or will in some fashion contribute with another insurer toward a particular loss. Often the clauses cannot be reconciled, like here where all four policies’ other insurance clauses call for each policy to be excess over all other policies.  

We turn to certain rules to work through other insurance issues. First, other insurance disputes arise between policies at the same level of coverage. North River Ins. Co. v. Amer. Home Assur. Co., 210 Cal. App. 3d 108, 257 Cal. Rptr. 129, 132 (1989). Here the four policies are not on equal footing: two are primary policies “purport[ing] to make [themselves] excess” and two are “true excess” umbrella policies. Monroe Guar. Ins. Co. v. Langreck, 816 N.E.2d 485, 492-93 (Ind. App. 2004). The true excess policies provide secondary coverage to the primary policies and are addressed second. The other insurance analysis, therefore, takes place at each layer.

The majority of courts resolve this type of conflict by declaring both Seaside’s and Beacher’s other insurance clauses to be “mutually repugnant” – meaning they cancel each other out. Courts order the policies to share the loss on a co-primary and co-excess basis pro-rating liability. See e.g., State Farm Mut. Auto. Ins. Co. v. U.S. Fidelity & Guar. Co., 490 F.2d 407, 410 (4th Cir. 1974); State Farm Fire and Cas. Co. v. Utica Nat. Ins. Group, 873 N.E.2d 416 (Ill. App. 2007). Under this method, both primary policies would apply on a co-primary basis and both umbrella policies would apply on a co-excess basis, sharing the liability on a pro-rata basis. Therefore, Seaside’s insurers would not be entitled to reimbursement from Beacher’s insurers.

Scenario 2

What if the other insurance clauses in Seaside’s policies were amended by endorsement to read “if collectible insurance with any other insurer is available to you for a loss also covered by this policy, this policy will be excess and will not contribute with such other insurance”? Can Seaside’s insurers obtain contribution from Beacher’s insurers applying this policy language?

Answer: Yes, but only Seaside’s umbrella insurer is likely to prevail on its contribution claim against Beacher’s umbrella insurer.

Here, the other insurance clauses are not technically in conflict because the Seaside policy specifically rejects sharing liability. Therefore, reading the clauses as written, courts deem clauses with non-contributory language to be “more excess” than Beacher’s policies’ other insurance clauses, which do not reference contribution. Utica Mut. Ins. Co. v. Government Employees Ins. Co., 98 A.D.3d 502, 504, 949 N.Y.S.2d 182, 184 (2d Dep’t 2012). At the primary layer, this means only that Seaside’s $1 million primary policy is now excess of Beacher’s $1 million primary policy instead of both insurers sharing on a pro-rata basis the first $2 million of the $4 million settlement. And, because Beacher’s umbrella policy is a “true excess” policy, Seaside’s primary insurer cannot seek reimbursement from Beacher’s umbrella policy. Reliance Nat. Indem. Co. v. General Star Indem. Co., 72 Cal.App.4th 1063 (1999); Oelhafen v. Tower Ins. Co., 492 N.W.2d 321 (Ct. App. Wisc. 1992). On the other hand, Seaside’s umbrella insurer can seek reimbursement from Beacher’s umbrella insurer because Seaside’s other insurance clause is more excess than Beacher’s. Dart Indus., Inc. v. Commercial Union Ins. Co., 28 Cal.4th 1059 (2008). Thus, both Seaside’s and Beacher’s primary policies would contribute $1 million and Beacher’s excess would contribute $2 million.

Scenario 3

What if the management agreement also contained an indemnification and hold harmless provision whereby Beacher agreed to defend and indemnify Seaside from liability arising out of Beacher’s management of the resort? Would Seaside’s insurers be able to seek reimbursement from Beacher’s insurers if each insurer paid $1 million toward the settlement and reserved their rights to seek reimbursement?

Answer: It depends on the jurisdiction. Courts have imposed different approaches to answering this question.

Under the majority approach, sometimes referred to as the vertical exhaustion approach, courts recognize that additional insureds and other insurance provisions may establish the priority of coverage. However, the approach also recognizes that the indemnification agreement further changes the priority of coverage established by the policies, if the policies contain the “insured contract” exception to the contractual liability exclusion. Wal-Mart Stores, Inc. v. RLI Ins. co., 292 F.3d 583 (8th Cir. 2002). This approach is grounded on the premise that an indemnitee’s insurer can pursue equitable subrogation against an indemnitor’s insurer. Equitable subrogation permits an insurance company to stand in the shoes of its policyholder to pursue any rights the policyholder might have under any indemnification agreement.  

Using equitable subrogation here, Seaside’s insurer could stand in Seaside’s shoes to enforce Beacher’s indemnity obligation, which in turn would be covered under Beacher’s primary and excess policies assuming the indemnity agreement qualifies as an “insured contract” under the terms of each policy. Thus, Seaside’s insurers (both primary and excess) could obtain reimbursement from Beacher’s umbrella insurer for each of their $1 million payments because the indemnity obligation resolves priority of coverage issues. This result is consistent with the objective of the contracting parties, to obtain the benefit of the bargained-for indemnity, and it encourages judicial economy because it bypasses or advances past the other insurance analysis by addressing the indemnity obligation as a covered claim. Continental Cas. Co. v. Auto-Owners Ins. Co., 238 F.3d 941 (8th Cir. 2000).

Under the minority or horizontal exhaustion approach, courts do not consider indemnity provisions in contracts between the parties in assessing the priority of coverage. Fireman’s Fund Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, PA,2014 WL 1247895 (S.D. Tex. March 25, 2014). Courts reason that the terms of the policies determine the priority of coverage, not extrinsic contracts. Bovis Lend Lease LMB, Inc. v. Great Amer. Ins. Co., 53 A.D.3d 140 (2008). Courts also recognize that in the context of defense coverage, there often will not have been a determination of the indemnitee’s liability to the claimant prior to verdict. Therefore, the horizontal exhaustion approach is a recognition that the indemnity issue is premature. This approach requires a second action to address any equitable subrogation issues between the insurers.


When approaching a priority of coverage issue, it is important to gather all relevant insurance policies and contracts and read them carefully to identify possible terms or provisions important to determining which insurance policies apply to a claim, and in which order. It is also important to provide notice and tender claims to all applicable insurers and possible indemnitors in a timely fashion. Then, hope that the relevant contracts and policies do not conflict; but if they do, the above basic rules can help you advocate for your client and make your case.

Nancy Gutzler is with KCIC, Washington, DC, and Elizabeth Sackett is with Hermes Netburn, Boston, MA.

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