Builders risk insurance policies typically contain an "other insurance" clause. Why does this clause appear in the policy, what is its impact on the insured parties, and what should you do about it?
Overlapping insurance is a troublesome issue in the adjustment of property claims. It occurs when two or more insurance policies provide coverage to an insured for the same loss. This situation can occur in different ways, including:
Overlapping dates between two policies.
Two or more parties, such as an owner and a general contractor, purchase separate coverage on a single project.
A project-specific policy (such as builders risk) and a general floater policy (such as transit coverage or an installation floater) both apply.
While it is well settled that an insured may not be indemnified for an amount greater than the actual loss it sustains, insurers stand to gain or lose depending on the manner and order in which their policies apply. As a result, insurers have developed policy clauses that attempt to address the ramifications of overlapping or duplicate insurance. Such provisions are commonly referred to as "other insurance," "contributing insurance," "contribution from other insurance," or "insurance under more than one policy" (referred to collectively as "other insurance"). These clauses are located in the conditions section of policies or special endorsements.
History of the "Other Insurance" Condition
Dealing with overlapping insurance is not a new issue. Cases addressing this go back more than 250 years. In Godin v. London Exch. Assur. Co., (1758) 97 Eng. Rep. 419 (K.B.), there was a duplication of insurance with respect to cargo that was damaged. Lord Mansfield justified his position of proportional sharing of liability between the affected insurers: "If the insured is to receive but one satisfaction, a natural justice says that the several insurers shall all of them contribute pro rata, to satisfy that loss against which they have all insured." As to the concept of contribution, he stated, "If the whole should be one, he ought to stand in the place of the insured, to receive contribution from the others, who were equally liable to pay the whole."
During the 1800s, fire insurance policies in the United States did not allow for other insurance. A sample clause:
This entire policy, unless otherwise provided by agreement endorsed hereon or added hereto, shall be void if the insured now has or shall here make or procure any other contract of insurance whether valued or not on property covered in whole or part by this policy.
Underwriters wanted to avoid the situation where an insured overinsured a property, thereby potentially creating a moral hazard. There was another practical reason as well. Underwriters wanted to make sure that any other insurance was concurrent with the terms of their policy. In a guide issued in 1877,
1 if an insurance agent were unable to obtain and review copies of other policies on the risk, he or she was instructed to decline the risk or insert the following form of permit for other insurance.
$....... other insurance permitted, it being agreed that the whole amount thereof shall, so far as this policy is concerned, be considered as written concurrently therewith.
The 1943 New York Standard Fire Policy addressed "other insurance" beginning on line 25.
Other insurance may be prohibited by or the amount of insurance may be limited by endorsement attached thereon.
This was a departure from the wording noted above in that this policy could prohibit other insurance through issuance of an endorsement. The 1943 policy also contained a "pro rata liability" provision beginning on line 86.
This company shall not be liable for a greater proportion of any loss than the amount hereby insured shall bear to the whole insurance covering the property against the peril involved, whether collectible or not.
Fast-forward to more modern versions of other insurance conditions. These often state that if the insured has other insurance, the insurer will pay its share of the covered loss or damage in the proportion that the insurance limit applicable to the coverage part bears to the limits of all applicable insurance policies covering the same loss. Many go on to state that the insurer will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether collectible or not. In these policies, all qualifying insurance will be treated as contributing insurance and adjusted accordingly. However, if two or more policies have different terms, conditions, or other provisions, the "other insurance" is primary, and this policy is excess (even if the "other insurance" is not collectible). Said another way, if the other insurance would apply in the absence of this policy, this policy will apply after such insurance.
The foregoing paragraphs focus on the evolution of "other insurance" clauses in property insurance. A discussion of other insurance in inland marine policies is also very important, as most builders risk insurance today utilizes these forms. Early inland marine forms departed from the standard practice of American ocean marine policies. Ocean marine policies provided that the first policy written was the primary policy. Early inland marine policies largely consisted of "floaters." It was not uncommon for property to be insured under multiple policies secured by two or more parties, such as a property owner, bailee, and insurer. As a result, inland marine underwriters inserted clauses in their policies to avoid paying a claim if other insurance existed. A common clause used in the 1930s reads:
It is expressly agreed that this insurance shall not cover to the extent of any other insurance whether prior or subsequent hereto in date, and by whomever effected, directly or indirectly covering the same property, and this Company shall be liable for loss or damage only for the excess value beyond the amount of such other insurance.
Other insurance clauses in inland marine policies evolved over the years but are by no means standardized. Examples of "other insurance" wordings in modern builders risk policies generally fall into two categories: contribution or excess. Samples of wording taken from builders risk policies appear below.
Proportional Share—"You" may have another policy subject to the same "terms" as this policy. If "you" do, "we" will pay "our" share of the covered loss. "Our" share is the proportion that the applicable "limit" under this policy bears to the "limit" of all policies covering on the same basis.
If at the time any claim is made under this policy of insurance there is any other insurance covering the same loss, damage or liability, the insurer shall not be liable to pay more than the ratable proportion of any claim for such loss, damage or liability.
The intent of each of these clauses is to prorate a loss between multiple insurers based on the proportion the individual policy limits bear to the total insured limits. However, a prerequisite to such sharing is that each of the policies must be subject to the same terms, conditions, and other provisions.
Excess Amount—If there is another policy covering the same loss, other than that described above, "we" pay only for the amount of covered loss in excess of the amount due from that other policy whether "you" can collect on it or not. But "we" do not pay more than the applicable "limit."
If you have any other insurance covering the same loss or damage as is insured against by this policy, we will only pay for the amount of loss or damage which is insured against by this policy in excess of the amount due from such other insurance, whether you can collect on such other insurance or not.
Excepting Contributing and Excess Insurance, if there is other collectible insurance, this policy will cover as excess insurance and will not contribute with such other insurance.
If the Named Insured or anyone else claiming under the Policy has other insurance covering the same loss or damage that is also covered by this policy, then the Policy shall apply only as excess insurance over and above such other insurance, and then only after such other insurance has been exhausted whether or not such other insurance is collectible. In no event will this Policy apply as contributing insurance if other insurance applies.
If there is other collectible insurance, this policy will cover as excess insurance and will not contribute with such other insurance to the extent that proceeds are received.
The excess clauses treat the other insurance as primary insurance. The main difference between the clauses is the addition of the "whether collectible or not" provision. Also, the excess clauses in the "other examples" above are not always accompanied by a "contribution clause."
Resolving "Other Insurance" Disputes
Contribution clauses will generally be enforced where all insurers are equally liable for the discharge of a common obligation (when the policies in question cover the same property, interests, and risks and are payable to the same parties). Various courts have developed criteria tests for recognizing contribution from insurers. For instance, Arizona deems that a four-part test must be satisfied: The policies must cover (1) the same parties, (2) in the same interest, (3) in the same property, and (4) against the same casualty (see Western Agricultural Ins. Co. v. Industrial Indem. Ins. Co., 838 P.22d 1353, 172 Ariz. 592 (Ariz. App. Div. 1, Aug. 25, 1992)).
When insurers utilize excess clauses, they are attempting to treat the other insurance as primary and their policy as excess. When multiple policies have "other insurance" clauses, conflicts and sometimes litigation result. The insurance industry has attempted to deal with this "outside of the policies" through the promulgation of industry claims handling guidelines. Adherence to such guidelines by many insurers has resulted in custom and practice for much of the industry, but acceptance is not universal.
Conflicts between insureds and insurers were so prevalent in the 1920s and 1930s that the National Board of Fire Underwriters approved rules to deal with apportionment. As fire insurance increasingly overlapped with inland marine and casualty policies, the National Board of Fire Underwriters, the Inland Marine Underwriters Association, and the Association of Casualty and Surety Companies entered into a number of agreements with each other that outlined how losses involving overlapping coverages would be handled. The majority of stock fire, marine, and casualty companies and some mutual companies subscribed to these "Agreements of Guiding Principles."
Eventually, new overlapping situations evolved, particularly with multiline policies, and it was determined that the Guiding Principles were inadequate. Various industry groups began work in 1959 to create a new set of guidelines. The "Guiding Principles for Overlapping Insurance Coverages" was created. By resolution, it was agreed that the Association of Casualty and Surety Companies, Inland Marine Underwriters Association, National Automobile Underwriters Association, National Board of Fire Underwriters, National Bureau of Casualty Underwriters, and Surety Association of America recommend to their members and subscribers their concurrence in adopting the Guiding Principles effective as to losses occurring after November 1, 1963. These principles called for "other insurance" clauses to be set aside and inoperative to the extent they conflict with the Guiding Principles.
The Guiding Principles were designed to provide guidance to insurers when overlapping coverage existed. They were not intended to interpret coverage or create any coverage where none existed. The Guiding Principles are about 40 pages long and contain many examples. While the Guiding Principles have been helpful to adjusters for almost 50 years, they are not part of the insurance policy, and claims adjusters or insurers are not required to follow them. Some courts have considered the Guiding Principles in arriving at their decisions; others ignore the Guiding Principles because only the actual provisions contained in an insurance policy can determine coverage.
Sampling of Cases Involving Builders Risk Policies
Coverage cases involving builders risk policies and other forms of insurance are varied. These may involve commercial property, blanket property, homeowners, inland marine floaters, liability, and other forms of insurance. To address all the issues and nuances surrounding such litigation is well beyond the purview of this article. However, a few cases have been singled out to illustrate the types of conflicts that result when there is duplicate or overlapping insurance.
Builders Risk versus Blanket Property Policies
In Holden v. Connex-Metalna Mgmt. Consulting BMBH, 302 F.3d 358 (5th Cir. 2002), the court dealt with overlapping insurance between a project-specific builders risk policy (issued by Reliance Insurance Co.) and blanket property policies (issued by Lexington Insurance Co. and others). The blanket property policies covered all real and personal property in the United States held by Illinois Central Corp. and its subsidiaries, including IC RailMarine Terminal Co. ("owner").
The owner was constructing a bulk cargo terminal in 1998 and hired Connex-Metalna to design, build, and install a gantry crane that could load and unload cargo ships. The crane fell into the Mississippi River during pre-acceptance testing. The builders risk and property insurance policies maintained by the owner covered the loss. The district court apportioned the loss to the insurers based on the amount the limits of their respective policies bore to the total insured limits. On appeal, the insurers argued about whose policy should be primary and excess. Both the builders risk and property policies contained other insurance provisions that purported to make each policy an excess policy where another insurer provided concurrent coverage. Reliance argued that the property insurers (along with Reliance itself) were obligated to provide primary coverage because they all agreed to insure the same property and the same risk.
The appeals court held that the builders risk policy provided the primary coverage and the blanket property policies applied as excess. The court reasoned that when a policy is specifically purchased for a well-defined project (i.e., builders risk policy), the blanket policies provide coverage only for losses in excess of the limits of the project-specific policy. This ruling is in contrast with the majority view, which holds that policies that cover the same risks with respect to the damaged property must be treated as concurrent insurance. Instead, this ruling follows the "Pennsylvania Rule," whereby a specific policy and a blanket policy do not constitute concurrent insurance because they do not cover the same range of property.
Builders Risk versus Builders Risk Policies
Sometimes claims for damage to construction projects involve more than one builders risk policy. One such case is Reliance Ins. Co. v. Liberty Mut. Fire Ins. Co., 13 F.3d 982 (6th Cir. 1994). There, Jewish Federation Apartments ("owner") engaged Demaria Building Company ("contractor") to build an apartment complex. The construction contract required that the owner would purchase "an all risk policy and would insure against the perils of fire." Despite this requirement, the owner and contractor each purchased builders risk policies, neither of which named the other as an additional insured. A fire destroyed the apartment complex. Reliance paid the owner the full amount of the loss. The contractor informed its builders risk insurer (Liberty) that it was not pursuing its claim. Reliance sued Liberty for contribution. The court ruled that there is no right to contribution because Reliance's policy covered the owner's interest only. Contribution between insurers is available when all insurers are equally liable for the discharge of a common obligation, which was not the situation here.
Another case with a different result is Aetna Cas. & Sur. Co. v. Continental Ins. Co. & Bryant Elec. Co., Inc., 110 N.C. App. 278, 429 S.E.2d 406 (N.C. App. 1993). The court concluded that the two builders risk insurers must share payment of an insured fire loss on a pro rata basis. In October 1986, J.A. Jones Construction Co. ("contractor") entered into a construction contract with First Union National Bank ("owner") for construction work on a bank property. The contractor entered into a subcontract agreement with Bryant Electric Company, Inc. ("subcontractor") for electrical work. Aetna issued a builders risk policy to the contractor for $11.6 million. Continental issued a builders risk policy with a $5 million limit to the subcontractor.
A fire occurred, and Aetna paid more than $400,000 to settle the claim. It then filed a complaint seeking a declaratory judgment as to which builders risk policy applied first. Both policies contained dissimilar "other insurance" clauses, but both clauses made their respective policies excess if other insurance applied. The court concluded that the other insurance clauses were mutually repugnant and determined that each insurer should share payment of the claims pro rata, based on the insured limits of their respective policies.
Builders Risk versus Liability Policies
Occasionally, an insurer will try to stretch the meaning of "other insurance" in builders risk policies to include liability insurance. This is the case in Chubb Ins. Co. v. Brian DeChambers & Prairie Material Sales, Inc., 349 Ill. App. 3d 56, 808 N.E.2d 37, 283 Ill. Dec. 487 (Ill. App. Dist. 1. Mar. 24, 2004). On October 27, 1998, Mr. DeChambers operated a cement truck owned by Prairie. While making a delivery to a construction site, Mr. DeChambers backed into a support column, causing the collapse of a completed roof of a building. Chubb had issued a builders risk policy under which the defendants were additional insureds. Chubb paid the loss and attempted to subrogate against the defendants.
The Chubb policy contained an "other insurance" clause:
If at the time of loss or damage there is other insurance, whether such other insurance be in the name of the Insured or any third party, which would apply in the absence of this policy, the insurance under this policy shall only apply as excess insurance over such other insurance.
Chubb argued that its builders risk policy should be secondary to the defendants' liability insurance. The court ruled against Chubb. It reasoned that there was a conflict of interest because the other insurance clause gave Chubb the incentive to pursue against its own insured for a risk covered by the policy and for which Prairie had paid a premium (albeit indirectly).
Time To Eliminate "Other Insurance" in Builders Risk Policies?
Builders risk policies have evolved significantly over time. These policies increasingly are project specific in nature and cover multiple insureds. Having an "other insurance" condition in the policy applicable to the intended beneficiaries of the insurance defeats one of the goals of builders risk insurance: a single policy that reduces litigation between the stakeholders and that provides funds to repair/rebuild damaged property on a timely basis.
Another argument for eliminating other insurance clauses is supported by the builders risk insurance requirements contained in construction contracts. Standardized contracts produced by the leading providers—The American Institute of Architects, ConsensusDOCS LLC, Engineers Joint Contract Documents Committee, and Design-Build Institute of America—require the owner or contractor to provide the insurance. These requirements do not allow such insurance to be "excess insurance." The required insurance is to be primary for those parties intended to be protected by the policy (i.e., the owner, general contractor, and subcontractors). Otherwise, why have insurance requirements at all? For an insurer to impose an "other insurance" clause on an insured party under a builders risk policy would most likely put the sponsor of the policy in breach of its obligations in the construction contract. This includes coverage on goods in transit and while stored off the project site (when such insurance is required in the construction contract).
The other insurance condition is so ingrained in property and inland marine policies, underwriters often do not know how to respond to or deal with requests to eliminate or modify their respective clause(s). Slowly, the industry is beginning to recognize the conflicts and potential problems. Some insurance brokers are paying attention and, particularly on large projects, are negotiating special provisions. An example:
If any claim under this Policy is also covered in whole or part by any other existing insurance, the Insurer agrees to waive all rights of contribution from such other insurance…
It is understandable that insurers do not want to be solely responsible for paying claims if other insurance exists. In the opinion of this writer, excess clauses have no place in project-specific builders risk policies. Hopefully, insurers will take it upon themselves to modify their standard policies accordingly. This will provide contract certainty and reduce disputes. On the other hand, it would be helpful for underwriters to know up front what the contract documents call for in terms of the builders risk insurance requirements. Even if underwriters don't request these documents, an insured's agent/broker should make these available. The insurance protection anticipated by the beneficiaries of builders risk insurance, based on the construction documents, should not be taken lightly. Insureds and others simply can't rely on insurers following Guiding Principles that are not a part of the builders risk policies. The stakes are simply too high.
1 Moore, F.C. Fires: Causes, Prevention and Extinction, A Guide to Agents. New York: The Continental Insurance Company, 1877. P. 110.
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