Exploring New Ground in Personal Auto Policies
February 2010
For many years, the policies and forms used
by writers of personal auto policies were tightly regulated by the applicable
department of insurance. One consequence of that practice was that a body of
law developed over time that was predictable and, for the most part, applicable
throughout most of the 50 states. That is all changing.
by R. Brent
Cooper
Cooper & Scully
Many states have deregulated not only the rates charged by personal auto
insurers, but also the forms used. This has affected claims handling in many
respects. First and foremost, the decisions that had been relied upon for so
long are no longer valid because of the changed policy language. Second, the
predictability, especially when more than one insurer is involved, is simply
not there anymore. Each claim tends to turn on the unique language in each policy.
There is no more "one size fits all."
Safeco Lloyd's Insurance v. Allstate Insurance
An excellent example of this point is Safeco Lloyd's
Ins. Co. v. Allstate Ins. Co., No. 04–09–00322–CV (Tex. App—San Antonio
Dec. 23, 2009, no pet.). In that case, Natalia Ramos was driving a Mazda owned
by her brother. She was involved in an accident where she was at fault. Safeco
issued a policy covering the Mazda while Allstate issued a policy covering her
personal vehicle. After the accident, Safeco made several demands on Allstate
that Allstate contribute to the loss on a pro rata basis. Allstate refused,
arguing that its policy was excess to the Safeco policy. Allstate claimed that
"the insurance follows the vehicle, not the driver."
The Safeco policy contained the following "other insurance" provision:
If there is other applicable liability insurance available any insurance
we provide shall be excess over any other applicable liability insurance.
If more than one policy applies on an excess basis, we will bear our proportionate
share with other collectible insurance.
The Allstate policy contained an "other insurance" provision that read as
follows:
If there is other applicable liability insurance, we will pay only our share
of the loss. Our share is the portion that our limit of liability bears
to the total of all applicable limits.
However, any liability insurance we provide to a covered person for the
maintenance or use of the vehicle you do not own shall be excess over any
other applicable liability insurance.
The language in the Allstate policy was the traditional "other insurance"
language found in most, if not all, personal liability policies in Texas. Safeco
had changed the language in their policy in 2006 from that which was contained
in the Allstate policy to the present language.
Under traditional case authority, if both policies contained the Allstate
language, the coverage on the vehicle would be primary and the coverage on the
driver would be excess. However, in this case, both policies did not contain
the Allstate language. Except for the existence of the other policies, the coverage
under each would be primary. Because of the existence of the other policy, each
policy provided that it would be excess over the other policy.
Hardware Dealers Mutual Fire Insurance v. Farmers
Insurance Exchange
The court of appeals turned to Hardware Dealers Mut.
Fire Ins. v. Farmers Ins. Exch., 444 S.W.2d 583 (Tex. 1969). In that case,
the court noted that conflicts in "other insurance" clauses can be classified
into five groups:
-
One policy contains an excess clause, the other a pro rata clause.
-
One policy contains an escape clause, the other a pro rata clause.
-
Both policies contain excess clauses.
-
One policy contains an excess clause, the other an escape clause.
-
One policy contains a "specific escape clause," which specifies the kind
of "other insurance" that will relieve the escape clause insurer of liability.
The Hardware Dealers case dealt with the fifth
class, the "specific escape clause." (The Safeco
case addressed the third class.) In harmonizing conflicting clauses, the Texas
Supreme Court noted that other courts had come up with three theories to allocate
liability—the "prior in time" theory, the "primary tortfeasor" theory, and the
"more specific in its restriction" theory. The court rejected all three theories
as lacking and decided that the conflict was best resolved by giving "dominant
consideration to the rights of the insured."
The Texas Supreme Court held that in "resolving issues between double insurers,"
the court must determine whether, from the view point of the insured, "she has
coverage from either one of the two policies but for the other. If such a conflict
exists, the court held that it would resolve such conflict by holding each insurer
liable for its pro rata share, up to the limits of the policies, and that each
was obligated to defend the insured.
In Safeco, the court resolved the dispute
between Safeco and Allstate by applying the same test as
Hardware Dealers. But for the existence of the
Allstate policy, the Safeco policy would be primary. But for the existence of
the Safeco policy, the Allstate policy would be primary. The court held that
the two policies would apply on a pro rata basis, and that each insurer would
have a duty to defend.
Allstate also made a public policy argument that to adopt the rule suggested
by Safeco would encourage drafting contests by insurers for their policies.
The court noted that the Safeco policy had been approved by the Commissioner
of Insurance as required by law. The court noted further that the Texas Supreme
Court had instructed insurers that if they intend certain interpretations of
a policy provision, it should make such intent explicit in the policy and seek
approval from the Texas Department of Insurance. Don's
Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 at 29 (Tex. 2008).
Conclusion
The trend in many states has been toward deregulation of insurance, and particularly
the policy forms utilized. The changes being made to the "Personal Auto Form"
are not limited to the "other insurance" clauses. Changes are being made to
issues such as who is an insured under the policy, what type of liability is
being covered, and what vehicles are being insured.
These changes have several implications. First, it provides an opportunity
for progressive insurers to obtain competitive advantages over their competitors
by creative drafting. Second, the burden on insureds to read their policies
is even more critical than in the past. This will create additional burdens
on agents to explain the differences in the forms and to quantify the premium
differences. Finally, for claims professionals, their jobs have become more
challenging. No longer can they rely on old, well-established rules. Each situation
is unique, and the policies must be interpreted in light of the peculiar language
confronting the claim.
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