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.
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.
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.
Footnotes
1New Appleman on Insurance Law Library Edition § 22.02 (2015).
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.
The Affiliated policy contained the following other insurance clause.
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.
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.
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.