Expert Commentary

Exploring New Ground in Personal Auto Policies

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.


Courts and Coverage
February 2010

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 First and foremost, the decisions that had been relied upon for so long are no longer valid because of the changed policy language.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:

  1. One policy contains an excess clause, the other a pro rata clause.

  2. One policy contains an escape clause, the other a pro rata clause.

  3. Both policies contain excess clauses.

  4. One policy contains an excess clause, the other an escape clause.

  5. 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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More