3.1.1 Apportioning Coverage

• Jurisdiction: Arizona

Coverage priority questions arise where "two or more policies affording valid and collectible automobile liability insurance apply to the same motor vehicle in an occurrence out of which a liability loss"^[1] occurs.

In 1978, the Arizona Legislature uniformly fixed primary and excess coverage priorities in automobile liability cases by enacting A.R.S. Sec. 28-1170.01 (now Sec. 28-4010) and 20-1123.01 (identical companion statutes).^[2] Under the provisions of subsection (B) of these statutes, it is conclusively presumed that the insurance afforded by the policy in which the motor vehicle is described or rated as an owned automobile is primary; the insurance afforded by any other policy or policies is excess. In all cases except garage operations, the primary coverage follows the vehicle. Excess coverage follows the non-owner operator. The conclusive presumptions established by these statutes act as "tie-breakers" and have aided the courts in resolving policy priority disputes.^[3] Another salutary purpose of the statutory presumptions is to require that the carrier for the negligent driver will usually be the primary carrier.^[4]

A different priority scheme applies for garage operations. Garage operations include the selling, repairing, servicing, delivering, testing, road-testing, parking, or storing of motor vehicles.^[5] In this context, priorities are fixed according to the status of the vehicle operator. If, at the time of the loss, the motor vehicle was being operated by any person engaged in any of the businesses described above, or by such person's employee or agent, it is conclusively presumed that the insurance policy issued to the garage business is primary. Any policy issued to or covering the customer or bailor is excess.^[6] Thus, when a customer brings an automobile into a dealership for servicing, and a dealership mechanic is involved in an automobile accident while test-driving the customer's vehicle, the dealership garage operations policy will be primary.

On the other hand, if the motor vehicle is not being operated by a person engaged in any of the garage businesses described above, or by such person's employee or agent, then it is conclusively presumed that all insurance available to the vehicle operator, whether as a named insured or otherwise, shall be primary. The garage operations policy is excess.^[7] Thus, if a potential automobile purchaser is involved in an accident while test-driving a dealership automobile, the customer's personal auto policy, or any other policy that provides automobile coverage, will be primary.

While A.R.S. Sec. 28-4010 and 20-1123.01 establish "conclusive" presumptions of coverage priorities, the statutory presumptions can be modified or amended by written agreement signed by all carriers who have issued a policy or policies applicable to a particular loss and by all named insureds under such policies.^[8]

The conclusive presumptions set forth in A.R.S. Sec. 28-4010 and 20-1123.01 apply to uninsured motorist (UM) and underinsured motorist (UIM) coverages.^[9]

A self-insured car rental agency is treated as primarily responsible for liability arising from the use of its rented cars.^[10] This primary responsibility arises out of A.R.S. Sec. 28-324(B), which makes such agencies jointly and severally liable with the driver of the rented vehicle "for damage" when the agency rents a car without providing liability insurance.^[11]

A.R.S. Sec. 28-4010 and 20-1123.01 do not anticipate situations in which there may be more than one primary or excess carrier, with equal or conflicting "other insurance" clauses.^[12]

The priority scheme set forth in A.R.S. Sec. 28-4010(B) does not apply to true excess/umbrella policies.^[13] True excess coverage provides coverage for a modest premium against catastrophic losses that exceed the limits of the underlying coverage.^[14] Umbrella coverages, almost without dispute, are regarded as true excess over and above any type of primary coverage, excess provisions arising in regular policies in any manner, or escape clauses.^[15]

In American Family Mutual Insurance v. Continental Casualty Co.,^[16] the court implicitly adopted the concept of horizontal exhaustion in the automobile liability insurance context. Both American Family and Continental Casualty issued automobile liability policies that provided both primary coverage and umbrella coverage, which was potentially applicable to the same motor vehicle accident in which a passenger was injured. Pursuant to A.R.S. Sec. 20-1123.01(B), the primary policy covering the vehicle is first in line to pay for the injuries to the passenger. The issue before the court was whether the same statute mandated that the umbrella policy covering the vehicle must also be exhausted before exhausting the separate primary policy covering the nonowner driver of the vehicle. The court concluded that the nonowner driver's primary liability coverage must be exhausted ahead of the owner's umbrella policy. The Arizona Court of Appeals in American Family Mutual Insurance Co. v. Continental Casualty Co. held that policies providing the same layer of protection must first be exhausted before excess or umbrella policies become involved to provide benefits. Thus, horizontal exhaustion must take place between policies providing the same layer of protection.

In American Family v. Continental,^[17] Continental argued that A.R.S. Sec. 20-1123.01(B) [identical to A.R.S. Sec. 28-4010] mandated that any insurance policy describing or rating an owned automobile, regardless of whether it was a primary or an umbrella policy, was required to pay ahead of insurance afforded by other policies which did not describe or rate the vehicle in question. On the other hand, American Family argued that the statute merely concerned excess "clauses" in motor vehicle policies, which limit the insurer's liability by distributing the loss among insurance carriers, and not excess or umbrella "policies," which provide additional layers of coverage for additional premiums.^[18] The Arizona Court of Appeals acknowledged that A.R.S. Sec. 20-1123.01(B) could be read as Continental Insurance Company had argued it. However, the court concluded that the statute must be given a sensible construction that accomplishes the legislative intent behind it.^[19] The court examined the language used, the context, subject matter, effects and consequences, as well as the spirit and purpose of the statute to determine its legislative intent.^[20] When the court examined A.R.S. Sec. 20-1123.01(B) from this context, the court concluded that the provision was enacted to address the conflict between policies that cover an insured individual using a nonowned vehicle and policies that insure the vehicle and whoever is driving it, each with language limiting coverage when "other insurance" covers the accident. The legislature enacted the statute to create a tie breaker between those policies providing the same layer of protection by establishing a presumptive rule as to who pays first.^[21] From this perspective, the court found that there was no reason to conclude that the legislature "even contemplated umbrella policies?true excess policies that provide a different layer of coverage?when it enacted Section 20-1123.01(B)."^[22] Therefore, the court held that the statute did not require a reversal of the trial court's ruling that the standard automobile policy issued by Continental Insurance Company, affording primary coverage, was required to pay first. American Family's obligation arose under the umbrella policy, which the trial court found to be purely excess coverage over any primary coverage.

An "excess" or "umbrella" insurance policy serves a different purpose than a primary policy. A "true" excess policy protects the insured "in the event of a catastrophic loss in which liability exceeds the available primary coverage."^[23] A primary policy, alternatively, provides coverage from "dollar one" for a given loss. This clear distinction can be muddied by the inclusion of an "other insurance" clause in an otherwise primary policy. However, the inclusion of such a clause will not convert a primary policy into a "true" excess policy. The underlying purpose of the primary policy remains the same and it must contribute to an insured's loss before "true" excess coverage attaches.

In State Farm Mutual Automobile Insurance Co. v. Bogart,^[24] the Arizona Supreme Court held that "other insurance" clauses in otherwise equal-level policies are "mutually repugnant" and therefore void.^[25] The Bogart decision, however, is applicable only in disputes "between two insurers that provide primary coverage for the same occurrence, one of which seeks to avoid all liability by reason of ... its 'other insurance' clause."^[26] Bogart says nothing about adjudicating disputes between a primary insurer and a "true" excess insurer. In fact, an "other insurance" clause in an otherwise primary policy cannot affect the rights of a "true" excess insurer.^[27]

The determination of whether a policy is a "true" excess policy is a question of law that requires analysis of the policy as a whole.^[28] In order to make this determination the court must look to the language of policy in light of the circumstances of each contracting party to determine the intent within the framework of an overall insuring scheme.^[29]

Under Arizona law, an insurance company owes no duty of good faith to co-equal insurer.^[30]

In Allstate Insurance Co. v. Universal Underwriters,^[31] the Arizona Court of Appeals examined A.R.S. Sec. 28-1170.01(A)(1) [now Sec. 28-4010(A)(1)] to determine whether the statutory garagekeeper's coverage priority required garagekeeper personnel to be professionally engaged in the business of the garagekeeper "at the time of the incident giving rise to the loss." In construing the statute, the court concluded that the garagekeeper's statutory priority applies to a situation where the person operating the vehicle is...