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.
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.
The author would like to acknowledge and thank coauthors Michael V. Pepe and David G. Jordan for their contributions to this commentary.
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