In the world of construction, parties rely heavily on additional insured
endorsements as a means of risk transfer. Owners usually require their general
contractors to obtain liability policies that include them as additional
insureds, while general contractors require their subcontractors to do the
same.
Acknowledgment
The author would like to acknowledge and thank
coauthors Michael V. Pepe and David G. Jordan for their contributions to
this commentary.
As a result, there are often multiple policies implicated when a loss occurs
and, invariably it seems, disputes arise among the various insurers as to how
they share, or do not share, in covering the loss. These disputes often center
around the policies' "other insurance" clauses, which set forth
how one insurance policy responds to a loss when one or more other policies
also cover the loss.
"Other insurance" clauses were designed to prevent multiple
recoveries when more than one policy provided coverage for a particular loss;
they generally fall into one of three categories. The first is a "pro
rata" provision that limits an insurer’s liability to the total proportion
that its policy limits bear to the total coverage available to the insured. For
example, if there are two policies, each with a $1 million limit, and there was
a $500,000 loss, each policy would be responsible for $250,000 or 50 percent of
the loss.
The second is an "excess only" provision that requires the
exhaustion of the other insurance before any payments are available on the
excess policy. So, using the same example, the policy with the "excess
only" provision would pay nothing, and the other policy would pay the full
$500,000 loss.
The third is an "escape" provision that extinguishes the insurer’s
liability if the loss is covered by the other insurance. In that case, even if
the loss were $1.5 million, the insurer with the "escape" provision
would pay nothing, and the other insurer would pay its full limits. The
interplay between these "other insurance clauses" can be critical
when determining priority of coverage.
The Case of California
Some legal jurisdictions have provided clear guidance as to how these
competing clauses are to be reconciled, thereby helping contractors and
insurers plan for certainty of result. California, however, is not among
them.
The lack of clarity arises in circumstances where the policies in question
contain different types of "other insurance" clauses. When policies
of insurance contain the same, or similarly worded, "other insurance"
language, the competing clauses are considered to be repugnant and thus found
to cancel each other out. In such cases, each insurer is thus responsible to
pay a proportionate share of the loss. However, when the language of these
clauses is not harmonious, most jurisdictions apply a different rule.
Take, for example, a circumstance where there are two policies covering a
risk, and one contains a "pro rata" provision, while the other
contains an "excess only" provision. The policy with the "excess
only" provision requires it to be excess to the "pro rata"
policy, while the "pro rata" policy requires that both policies share
in the loss. A court cannot harmonize the competing language of the policies
without giving preference to the language of one policy over the other; it is
forced to choose. Usually, in such cases, the policy with the "excess
only" clause will be rendered secondary to the policy with the "pro
rata" clause.
California courts, however, have not applied a consistent methodology when
reconciling incongruent "other insurance" clauses. See
CSE Ins. Group v. Northbrook Prop. & Cas. Co., 23 Cal. App. 4th
1839 (1994) (containing a sampling of California Appellate Court cases
attempting to reconcile "other insurance" clauses). Rather, such
courts have taken equitable considerations into account. For example, some
courts in California have been disapproving of "escape provisions,"
because they allow coverage to evaporate when faced with the mere existence of
other coverage. These courts have held that such clauses are against public
policy. See Dart Indus., Inc. v. Commercial Union Ins. Co., 52 P.3d 79
(Cal. 2002).
"Excess only" provisions have also been met with scorn because
they are similar to "escape clauses." Like an "escape"
clause, an "excess only" provision allows an insurer to limit or
avoid its obligation to cover a loss that it otherwise is obligated to cover
simply because of the existence of other insurance. This makes sense in certain
situations, such as when a policy states that it is excess over any other
insurance where its insured is provided coverage "as an additional
insured." In that case, the parties clearly intended that insurance
provided for a specific risk (losses arising out of the project that the party
contracted for additional insured coverage) should provide coverage that is
prior to an insurer insuring general risks. When policies are written in a
manner so as to suggest that the insurer and insured intended for the insurance
to be excess in a specific situation, the "excess only" provision is
likely to be enforced. See, for example, Hartford Cas. Ins. Co. v.
Travelers Indem. Co., 110 Cal. App. 4th 710, 2 Cal. Rptr. 3d 18 (1st Dist.
2003); Century Sur. Co. v. United Pac. Ins. Co., 109 Cal. App. 4th
1246, 135 Cal. Rptr. 2d 879 (2d Dist. 2003), as modified (June 25, 2003).
But an "excess only" provision that states the insurance is excess
"over any other insurance you may have," or similar language, has
been held to be ineffective. See Fireman's Fund Ins. Co. v.
Maryland Cas. Co., 65 Cal. App. 4th 1279, 77 Cal. Rptr. 2d 296 (1st Dist.
1998).
While California appellate level courts have taken these positions, the
California Supreme Court has expressly declined to formulate a definitive rule
for determining priority of multiple policies. See Signal Cos.,
Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 165 Cal. Rptr. 799, 612 P.2d 889
(1980).
Guidance May Be Coming
Fortunately, some clarity may be on the horizon. In Migdal Ins. Co.,
Ltd. v. Insurance Co. of the State of Pa., No. 15-2588-cv (July 7, 2016),
the Second Circuit Court of Appeals has pointedly asked the California high
court to answer the question of how it would determine priority of two primary
liability policies.
The facts in Migdal involve a liability insurance policy issued by
Migdal to Kinetic Systems Israel, Ltd., and Kinetics Process Piping Israel,
Ltd. (collectively "Kinetics Israel"). The Migdal policy had no
"other insurance" clause. Another insurer, the Insurance Company of
the State of Pennsylvania (ICSOP), issued a liability insurance policy to
Kinetic Systems, Inc., covering its subsidiaries, including Kinetics Israel.
The ICSOP policy contained an "other insurance" clause stating,
"This insurance is excess over: … Any of the other insurance or your
self-insurance plan that covers a loss on the same basis."
A subrogee of Tower Semiconductor, Ltd., sued Kinetics Israel, Migdal, and
ICSOP for damage to Tower’s property allegedly caused by Kinetics Israel. ICSOP
refused to defend Kinetics Israel. Migdal defended and paid $1.75 million in
full settlement of the Tower action.
Migdal subsequently brought an action in 2014 against ICSOP for equitable
contribution. ICSOP argued that its policy was excess to the Migdal policy
based on the language of its other insurance clause. The district court ruled
in favor of Migdal, noting California courts' reluctance to determine
coverage priority based on "other insurance" clauses, and citing
Dart Indus., Inc. v. Commercial Union Ins. Co.,
supra, which stated, "the modern trend is to require
equitable contribution on a pro rata basis from all primary insurers regardless
of the type of ‘other insurance' clause in their policies."
Accordingly, ICSOP was ordered to pay one-third of the Tower settlement. ICSOP
appealed, claiming the district court erred in refusing to enforce the plain
reading of the "other insurance" clause in its policy, which stated
that its policy was excess over any other insurance available to the
insured.
ICSOP argued that California law does not require the court to reform the
"excess only" provision because it is not ambiguous in this case.
Unlike in other cases where there are irreconcilable, mutually repugnant
"other insurance" clauses, ICSOP pointed out that its policy was the
only one that contained an "other insurance clause" and therefore
plainly rendered its coverage excess to the Migdal policy.
Uncertain as to how California would resolve this important issue, based on
lack of guiding precedent, the Second Circuit asked the California Supreme
Court to render an opinion. That court will now have to decide whether it is
willing to reform or refuse to enforce policy language that is not in conflict
with language in another policy.
The question certified to the California Supreme Court is the following.
Where the insurance policies of two insurance companies (identified in this
question as A and B) cover the same risk, the policy of company A is primary
and contains no "other insurance" clause, and the policy of company
B, which is also primary, contains an "other insurance" clause
stating, "This insurance is excess over: … Any of the other insurance or
your self-insurance plan that that [sic] covers a loss on the same
basis," is company A entitled under California law to equitable
contribution from company B?
It is hoped that a definitive response from California will provide
policyholders and insurers alike a better understanding of how coverage between
competing policies is determined. That will allow parties to contractually
establish a hierarchy of coverage based on clear policy language.