What do you do when less is more? In many loss scenarios, triggering coverage
under multiple policies can be a critical and effective strategy. However,
doing so has the potential to complicate the insurance recovery proceedings
immensely, and possibly even undermine those overall goals. The relation of
"other insurance" clauses, allocation schemes, and the practical
impacts of interacting with multiple insurers can all leave the insured with
some difficult questions.
Acknowledgment
Many thanks to Phil Brown-Wilusz, coauthor of
this article, and Ashley McWilliams, who assisted with research and finding
policy language.
We present here several scenarios that illustrate how these concerns can
arise and how they should be addressed to avoid running into what The Notorious
B.I.G.—had he been a coverage lawyer—would have called "The More Coverage
We Come Across, the More Problems We See."
The "Other Insurance" Issue
This first scenario is where a single-year loss implicates multiple lines of
coverage. Consider the following: a general contractor (GC) faces a property
damage liability claim from an owner. As a prudent insured, the GC notifies its
customary first line of defense, its commercial general liability (CGL)
insurer, to provide a defense. As knowledge of the claim evolves, it appears an
element of pollution may be involved. The GC also places its pollution insurer
on notice. Later, it's determined that the GC may have a professional
liability exposure, so it tenders a claim to its professional liability
insurer. Now assume that each insurer accepts coverage.
At first blush, this would seem to be an unmitigated success. However, this
is precisely a scenario where less can be more. Although each insurer under the
above facts has an obligation to defend their insured, how they share that
defense can quickly become a source of debate—and possibly even
litigation—between and among the insurers and the policyholder.
The first step1 of the analysis on who should be
providing coverage is to consider the "other insurance" language in
the policies. "Other insurance" clauses are designed to dictate
priority of coverage when multiple policies are triggered for the same risk and
for the same insured. The clause effectively defines the insurer's exposure
when other insurance exists for a loss. The "other insurance" clause
typically takes three forms: escape, excess, or pro rata.2 An escape clause renders its policy completely
inapplicable if other insurance exists. An excess clause renders the
policy excess to the other insurance. Finally, a pro rata clause
provides that the two policies proportionally contribute to the loss (courts
across the country take differing approaches to the pro rata calculation; some
divide based on time on the risk, others by limits).3
If the "other insurance" clauses can be read consistently
together, courts will prioritize based on those terms. When "other
insurance" clauses conflict, however, courts must determine how to
apportion the loss between each policy. Consider the following examples of
"other insurance" provisions.
General Liability Policy
This insurance is primary except when … this insurance is excess
over any of the other insurance, whether primary, excess, contingent or
on any other basis. If this insurance is primary, our obligations are
not affected unless any of the other insurance is also primary. Then,
we will share with all that other insurance … by equal shares…if any
other insurance does not permit contribution by equal shares, we will
contribute by limits.4
Under these policy terms, when the general liability (GL) insurer is the
only primary policy, it will pay the amount set forth in the declarations and
insuring agreement. However, when another insurer is also primary, the GL
insurer will contribute in equal shares with the other primary insurer. If the
other primary insurer's policy does not allow contribution in equal shares,
then the GL insurer will only contribute by policy limits.
Professional Liability—Errors and Omissions Policy
This Policy shall be excess insurance over any other valid and
collectable insurance available to You, whether such other insurance is
stated to be primary, contributory, excess, contingent or otherwise,
unless such other insurance is written only as a specific excess
insurance over the Limit of Liability provided in this
Policy.5
Here, the professional liability policy is excess to any other valid and
collectable insurance. In this case, the professional liability insurer has no
duty to the policyholder until the other insurance is exhausted, unless the
other policy is specifically designated as an excess policy to that
professional policy.
Contractor's Pollution Liability Policy
This insurance is primary, and the Company's obligations are not
affected unless any of the other insurance is also primary. If all of
the other insurance permits contribution by equal shares, the Company
will follow this method also.... If any of the other insurance does not
permit contribution by equal shares, the Company will contribute by
limit.... This insurance is excess where the Named Insured is an
insured on a pollution liability policy for Covered Operation performed
by or on behalf of the Named Insured at a specific job site and the
pollution liability policy applies to a specific job site.6
Under the terms in the contractor's pollution liability (CPL) policy,
the insurer is primary, and its obligations do not change unless another policy
is also primary. If multiple policies are primary, then the CPL policy will
contribute in equal shares. If the policy language in the other insurance does
not allow a contribution in equal shares, then the contractor's pollution
liability policy (PLL) will contribute by limits. However, if the named insured
is an insured on a PLL for a specific job site, then the CPL policy is
excess.
In the above hypothetical, all three other insurance clauses would need to
be analyzed. We can anticipate that the result would be that the PLL policy
would be excess to the CGL and CPL policies, which would most likely share by
equal shares. However, the specific facts and law (more so than discussed here)
would need to be analyzed in greater detail.
In this scenario, the CGL and CPL policies likely could be reconciled, but
that is not always the case. If the other insurance clauses cannot be
reconciled, a court will deem them to be mutually repugnant. Most courts hold
that where two policies conflict, and are indistinguishable in their meaning
and intent, the clauses are considered mutually repugnant and must be
disregarded. Courts often apportion loss payments among insurers on a prorated
basis, based on the policies' respective limits.7 Some courts hold that when other insurance clauses conflict,
they must be completely disregarded, and the insurers must share equally in
coverage.8
The Allocation Issue
Now, consider a second scenario: a multiple-year loss that triggers coverage
under policies spanning multiple years. Instead of a loss that triggers
different lines of coverage in a single year, let's assume that the loss is
a long-tail claim that triggers coverage under multiple years. Further,
let's assume that the insured placed coverage under its CGL coverage with
different insurers over the years. In this type of situation, courts will
select one of two methods to apportion losses, either all sums or pro rata
allocation.
Under an all sums approach, liability across multiple policy
periods permits the insured to collect its total liability under any policy in
effect during the periods that the damage occurred, up to the policy
limits.9 All sums allocation allows vertical
exhaustion or "pick and spike" to access coverage under a specific
policy (and any policies excess to that policy).10
This method is beneficial to insureds because policyholders can avoid coverage
gaps resulting from self-insured periods or from the commercial unavailability
of an insurance product.
In contrast, under the pro rata approach, each insurance policy is
allocated a pro rata share of the total loss representing the portion of the
loss that occurred during the policy period.11 Pro
rata shares of liability across multiple policy periods are often, although not
exclusively, calculated based on an insurer's time on the risk, a
fractional amount corresponding to the duration of the coverage provided by
each insurer in relation to the total loss.12 In
some jurisdictions, an insured will also be assigned a fractional amount in the
calculation for those years in which it is uninsured or
underinsured.13
The pro rata approach, in reality, can result in a number of different
calculations. An insurer may argue that the correct approach is to split the
fees per insurer. Another insurer may argue that the split should be based on
policy year. Finally, an insurer may argue that the total number of policies
should be split based on the loss. Each of these calculations could result in
the insurers arguing over who pays which percentage. Until this is resolved,
the insurers may take the stance that they will only pay the limited percentage
that they feel they owe, which could result in the insured holding the bag for
the difference.
Practical Considerations and Strategies
There are several key practical considerations that an insured should keep
in mind when dealing with claims that implicate multiple policies, as in the
scenarios above. First, be proactive. Although this may appear
to be a dispute among insurers, that dispute can have a practical impact on the
policyholder in many ways: lack of clear control over the defense, a separate
coverage litigation that requires the insured as a party and diverts resources
and attention from the main case, and possibly undermining underwriting intent
and relationships.
Second, the insured should seek advice early on a
choice-of-law analysis as to which law will apply to the interpretation of the
policies. All things being equal, a state that allows for an all sums approach
will make the insured's arguments for full coverage from a particular
insurer much easier, so the insured needs to strategically consider whether to
bring suit to get the benefit of that law.
If the choice of law results in a pro rata application, the insured might
strategically insist on having a "lead insurer" be selected.
Conceptually, that "lead insurer" would be the insured's primary
point of contact and be responsible for collecting the proportionate share from
the other insurers and issuing the payments to the insured's defense
counsel. At the same time, the insured should insist that the legal fees be run
through only the "lead insurer's" billing system to avoid the
fees being reduced multiple times.
Finally, to the extent that the insurers are unable to agree on the
percentage of the defense fees that each owes, the insured should push
for an interim agreement that results in the full defense fees being
paid to limit the exposure to the insured while the insurers figure out the
percentage each owes.
Another consideration to keep in mind when faced with "other
insurance" clause conflicts is disagreement among insurers. Under ideal
circumstances, all insurers will reach consensus to avoid duplication or a
clash in strategies. Unfortunately, discord among insurers is sometimes
inevitable. In such cases, a policyholder should push a primary policy
to defend and indemnify it fully, as "other insurance"
clauses are intended to provide a method of resolving conflict among insurers
and not to be an impediment to the policyholder.
Ultimately, there is no substitute for long-range case-specific planning;
unique facts and objectives require a unique strategy. Proper planning and
proactive discussions with insurers can help to alleviate some of these
concerns.