When there are multiple insurance policies in play, the operation of other
insurance clauses can have unexpected consequences.
"Other insurance" clauses in insurance policies are designed to
"vary or limit the insurer's liability when additional insurance
coverage can be established to cover the same loss."1 Where two or more insurance companies "provide concurrent
coverage for the same risk at the same level," courts rely on other
insurance clauses to determine if, and how, the insurance companies will share
in coverage.
There are three primary forms of other insurance clauses: "Pro rata
clauses provide that multiple policies contribute to a loss on a shared basis,
such as by limits of the respective policies or by equal shares; excess clauses
render a policy excess to other insurance; and escape clauses render a policy
inapplicable if other insurance exists."2
Generally, if other insurance clauses are in conflict, the court will deem them
to be mutually repugnant and require the insurance companies to share in
coverage, based on rules that vary by jurisdiction.
Recent Mississippi Case
The operation of other insurance clauses under Mississippi law led to a $3
million difference in liability in a recent Fifth Circuit Court of Appeals
decision, Southern Ins. Co. v. Affiliated FM Ins. Co., 830 F.3d 337
(5th Cir. Miss. July 21, 2016). In Southern Ins. Co., two insurance
companies provided coverage for a house owned by the University of Southern
Mississippi and leased to the University's Alumni Association. The house
was covered by the University's policy issued by Affiliated FM Insurance
Company. Consistent with the lease's requirement that the Alumni
Association obtain property damage coverage, the house was also insured under
the Alumni Association's Southern Insurance Company policy.
In February 2013, the house was damaged by a tornado. Southern and
Affiliated disagreed about which insurer owed primary coverage. Southern denied
coverage and filed a declaratory judgment action seeking a court ruling that
either the Affiliated policy was primary or that Southern owed only its pro
rata share of the loss (less than 1 percent). The University and the Alumni
Association were both joined in the suit and were required to defend. It was
not until a year after the loss that Affiliated began to pay the loss, a
process that was not complete until some 20 months after the loss.
Each insurance policy included an "other insurance" provision. The
Southern policy provided as follows.
G. Other Insurance
1. You may have other insurance subject to the same plan, terms,
conditions and provisions as the insurance under this Coverage Part. If you
do, we will pay our share of the covered loss or damage. Our share is the
proportion that the applicable Limit of Insurance under this Coverage Part
bears to the Limits of Insurance [5] of all insurance covering on the same
basis.
2. If there is other insurance covering the same loss or damage, other
than that described in 1. above, we will pay only for the amount of covered
loss or damage in excess of the amount due from that other insurance, whether
you can collect on it or not. But we will not pay more than the applicable
Limit of Insurance.
The Affiliated policy contained the following other insurance clause.
8. Other Insurance / Excess Insurance / Underlying Insurance:
If there is other insurance covering the same loss or damage that is
covered: [6]
a) Under this policy; and
b) Any other policy;
Then this insurance will apply only as excess and in no event as
contributing insurance, and then only after all other insurance has been
exhausted, whether or not such insurance is collectible.
Other than the competing other insurance clauses, the policies were silent
as to priority of coverage.
Each insurance company claimed the other was solely liable for the loss. The
Fifth Circuit found that both insurers covered the same risk for the benefit of
the University and the Alumni Association and, moreover, that since each other
insurance clause purported to make its coverage excess to the other, the
clauses were mutually repugnant. Under Mississippi law, where other insurance
clauses are mutually repugnant, courts apportion loss payments between
insurance companies pro rata, according to the policies'
respective limits.
Based on the limits of the Southern and Affiliated policies ($4,112,000 and
$500 million, respectively) against the stated $3,080,932.36 loss, the court
ruled that Southern was liable for $25,337.58, and Affiliated was responsible
for the remaining amount, $3,055,594.78.
The court rejected Affiliated's argument that the allocation should rely
on Affiliated's scheduled value of the house, about $3.7 million, rather
than the $500 million policy limit. Even though the Affiliated policy had a
schedule of individual properties and their values, the policy did not limit
liability based on this schedule by a scheduled limit-of-liability endorsement
or otherwise.
Lessons Learned
This case teaches valuable lessons. First and foremost, landlords must
structure the insurance program for tenanted buildings to avoid other insurance
disputes. The other insurance issue gave the insurers an excuse to delay paying
the loss for over a year. Most insureds, even commercial insureds, can suffer
serious consequences if a $3 million loss is not paid promptly. In addition,
the insureds became parties to the coverage litigation and were required to
participate—another unnecessary and avoidable expense.
A landlord must make sure that leases not only clearly specify which policy
is primary but must have a procedure in place to make certain all the policies
are properly endorsed to achieve that goal. Here, the tenant fulfilled the
lease obligation to obtain property insurance, but either the lease did not
specify priority of coverage, or the landlord did not verify that the lease
requirements were met.
Insureds should review policies when received and pay attention to other
insurance provisions and priority of coverage provisions. If there is the
possibility of overlapping coverage, priority of coverage should be addressed.
In addition, overlapping coverage should be evaluated to see if it is
necessary, as one or more policies can be endorsed to limit the overlap and
save premiums.
Conclusion
Other insurance issues have been around since property insurance developed.
The fact that the rules are well known and the case law is well developed does
not mean that a policyholder cannot get caught up in a dispute between insurers
to its own detriment. These problems can be prevented as long as policyholders
are aware of their existence and take the minimal steps necessary to prevent
them.
Acknowledgment
The author would like to thank and acknowledge
the contributions to this Expert Commentary by Maria T. Pellegrini, an
associate with Reed
Smith's Insurance Recovery Group Resident in the Philadelphia office.
She can be reached at