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ARTICLE

Policyholders, Do Not Accept a Coverage Denial Based on “Other Insurance”

Carrie Maylor DiCanio and Fiona Rose Hogan

Summary

  • A policyholder should not be denied recourse to its insurance company simply because an “other insurance” clause may be triggered.
  • Instead, the insurance company must pay the policyholder’s claim.
  • It should then seek contribution from the “other insurance” company on the risk.
Policyholders, Do Not Accept a Coverage Denial Based on “Other Insurance”
iStock.com/Nuttawan Jayawan

Many insurance claims, particularly commercial insurance claims, can implicate coverage under more than one insurance policy. Insurance companies insert “other insurance” clauses in first-party and third-party liability policies to stipulate how loss is to be apportioned among insurance companies when more than one policy covers the same loss. Problems can arise for policyholders when an insurance company incorrectly asserts that the “other insurance” clause in its policy permits it to delay in paying or refuse to pay a claim. Such a position directly contradicts the well-settled rule that “other insurance” clauses should only affect rights among insurance companies and do not affect the policyholder’s access to coverage under an insurance policy.

One Claim, Multiple Policies

For example, a claim for coverage of a construction dispute may trigger both errors and omissions (E&O) coverage and commercial liability coverage because it involves allegations of both professional liability and property damage. Or a claim involving coverage for a government investigation could trigger both directors’ and officers’ (D&O) coverage and representations and warranties insurance coverage because the investigation involves alleged wrongdoing prior to the sale of a company and implicates a breach of the representation in the purchase agreement concerning compliance with laws. In these circumstances, which insurance policy pays first is determined by the policies’ “other insurance” clauses and applicable law. Policyholders should be aware of the legal principles governing the application of “other insurance” because insurance companies may attempt to rely on a policy’s “other insurance” clause to delay in paying a claim or to deny coverage altogether.

What Does “Covers the Same Loss” Mean?

An “other insurance” provision purports to describe when an insurance policy is triggered where another insurance policy covers the same loss. Generally, as the Third Circuit held in Pacific Indemnity Co. v. Linn, “other . . . insurance exists only where there are two or more insurance policies covering the same interest, the same subject matter and [insuring] against the same risk.” Linn concerned coverage for the defense and indemnity of multiple underlying personal injury and wrongful death claims against a physician brought by and on behalf of persons who read the physician’s diet book, followed the diet program recommended in the book, and subsequently suffered personal injury or death. One issue before the court was whether two professional liability policies, a commercial general liability policy, and a homeowner’s policy were “other insurance” to each other. The court found that only the two professional liability insurance policies were “other insurance” to each other because they “cover[ed] the same interest, the same subject matter and insur[ed] against the same risk,” while the primary professional liability, commercial general liability, and homeowner’s policies were not other insurance because each insured against a risk distinct from the other.

When Both Policies Are “Excess”

Where two policies covering the same interest, subject matter, and risk apply to a claim, it is necessary to review the policies’ “other insurance” clauses to determine which policy pays on a primary basis. If both policies’ “other insurance” clauses state that they are excess, the clauses may cancel each other out such that both policies apply on a primary basis and share the loss on a dollar-for-dollar basis until the policyholder’s loss has been paid or the policies’ limits have been exhausted. In Federal Insurance Co. v. Empire Mutual Insurance. Co., a New York appellate court addressed coverage for a claim of negligence against Key Food and R-Jo that arose when a laborer suffered personal injuries while unloading Key Food merchandise from a tractor-trailer owned by R-Jo. At issue were a “Trucker’s Policy” from Empire Mutual Insurance Company, under which R-Jo was the first-named insured and Key Food was an additional insured, and a “Business Auto Policy” from Federal Insurance Company, under which Key Food was the first-named insured and R-Jo was an additional insured. After Empire refused to defend and indemnify Key Food, Federal undertook the defense and settled the claim. Thereafter, Federal commenced suit and sought a declaration that Empire provided primary coverage for Key Food and was obligated to reimburse Federal for the amount of the settlement and costs. The court found that the policies provided concurrent coverage and that because both “policies purport to be excess to each other, the excess coverage clauses cancel each other out, and render each policy primary.” Thus, the appellate court affirmed the lower court’s order that the liability of each insurance company be allocated on a pro rata basis.

Another case addressing pro rata allocation of liability between insurance companies with competing “other insurance” clauses is Shelter Mutual Insurance Co. v. Mid-Century Insurance Co. That case concerned a claim for coverage of losses arising from an automobile accident. The driver was driving his father’s car when the accident occurred. The driver had purchased “automobile liability insurance from Mid-Century, which covered him as a non-owner operator of the vehicle.” The father/owner had purchased automobile insurance from “Shelter, which covered the driver as a permissive driver.” Both insurance policies contained competing excess clauses, and the issue before the court was whether the excess clause in the father/owner’s Shelter policy was valid under Colorado law and, if valid, what effect that would have on the excess clause in the Mid-Century policy. The court held that the excess clause in the Shelter policy was valid because “a vehicle owner’s insurer need not be the primary insurer where there is more than one applicable insurance coverage.” Because the excess clauses in the Shelter and Mid-Century policies were valid standing alone, if the court “were to give full effect to both clauses, the named insured would be without coverage.” The court then held that because “that result is absurd and contrary to public policy, the clauses are mutually repugnant and void.” Thus, “both insurers are co-primary and must share the losses equally until the limits of either policy are exhausted.”

When Is the Other Insurance Policy “Valid and Collectible”?

The policyholder and the insurance company may dispute whether other insurance is “valid and collectible.” An “other insurance” provision stating that the policy is excess of other “valid and collectible” insurance “is meant to exclude invalid or illegal insurance, such as insurance which is voidable for misrepresentation, and uncollectible insurance, such as insurance of an insolvent company, from the effect of the other insurance clause.” Courts have held that self-insurance is not “other collectible insurance” because it is not “a contract whereby one party indemnifies another against loss from certain specified contingencies or perils.” State Farm Mutual Automobile Insurance Co. v. Universal Atlas Cement Co. concerned a claim for coverage of losses arising from an automobile collision. The driver had purchased automobile insurance from State Farm Mutual with policy limits of $15,000, and the lessee of the vehicle had purchased umbrella excess insurance from Insurance Company of North America, with a $1 million deductible. The lessee self-insured the $1 million deductible. The State Farm Mutual policy provided primary coverage and included an exception “that in the event an insured drives a non-owned automobile, State Farm’s liability becomes that of an excess carrier, if ‘other collectible insurance’ is available.” The issue before the court was whether the Insurance Company of North America’s policy or the lessee’s self-insurance was “other collectible insurance,” the effect of which would be to convert State Farm’s coverage into excess insurance. The court held that the lessee’s self-insurance was not “other collectible insurance” because it is not “a contract whereby one party indemnifies another against loss from certain specified contingencies or perils.”

“Other Insurance” Is Not a Defense Against Coverage

More broadly, state and federal courts have held consistently that an insurance company cannot rely on an “other insurance” provision to deny coverage for a claim when the existence of other insurance is in dispute. It is well settled that “‘other insurance’ clause disputes should affect only the rights among insurers. ‘Other insurance’ clauses govern the relationship between insurers, they do not affect the right of the insured to recover under each concurrent policy.”

Rhone Poulenc, Inc. v. International Insurance Co. concerned a claim for coverage in connection with five environmentally contaminated sites that the policyholder owned. The issue was whether several Environmental Impairment Liability (EIL) policies and several general liability policies were other insurance. The EIL insurance company argued that any coverage it owed to the policyholder was, pursuant to the EIL policies’ “other insurance” clauses, excess to the general liability policy. The court held that this interpretation of the “other insurance” clause was wrong. Because the general liability insurance companies had disclaimed coverage, there was no other collectible insurance, so the EIL policies were primary, and the “other insurance” clause did not apply.

In In re Deepwater Horizon, Liberty Insurance Underwriters insisted that because the policyholder (who had manufactured the blowout preventer at issue in the Deepwater Horizon oil spill) had an indemnity agreement with the oil rig owner potentially covering the loss at issue, under the policy’s “other insurance” clause, coverage was not triggered until the policyholder litigated the indemnity agreement and received a judicial determination as to whether the indemnity agreement applied. The court found this position untenable, especially because the owner of the oil rig had refused to indemnify the policyholder. The court refused to “read the Other Insurance Clause to require that [the policyholder] exhaustively litigate other potential sources of coverage before Liberty’s payment obligation is triggered.” Thus, the court held that “Liberty breached the contract . . . by constructively denying coverage and violating the policy’s ‘prompt payment’ requirement.”

“[W]hile other insurance clauses often are used to apportion liability among insurers, they generally have ‘no bearing upon insurance companies’ respective obligations to the policyholder. . . . [A]n ‘other insurance’ clause should not place an insured in a worse position than if it had no other insurance.” Bedivere Insurance Co. v. Blue Cross & Blue Shield of Kansas, Inc., concerned coverage for several antitrust class actions. The policyholder had purchased three insurance policies—an E&O policy from Allied World, a D&O policy from Allied World, and an E&O Excess Indemnity policy from OneBeacon. The OneBeacon policy followed form to the Allied World E&O policy but did not mention the D&O policy. Allied World agreed to provide coverage under the E&O policy subject to a reservation of rights but denied coverage under the D&O policy. The issue before the court was whether OneBeacon could rely on its “other insurance” clause to avoid paying the policyholder’s claim before the court determined whether concurrent coverage existed as between the D&O policy and the OneBeacon policy. The court held that “OneBeacon can’t rely on [the other insurance] clause to deny coverage while the actual existence of other insurance is in dispute” because the policy was ambiguous as to that issue and “it would be unjust to leave the insured without coverage—coverage it paid premiums for—while the parties await that determination” and because “providing the insured the coverage it paid for must take priority among insurers.”

1 + 1 (or 1 + 5) Does Not Equal Zero

In sum, a policyholder should not be denied recourse to its insurance company simply because an “other insurance” clause may be triggered. Instead, the insurance company must pay the policyholder’s claim and then seek contribution from the “other insurance” company on the risk.

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