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.