3.2 Other Insurance Clause

• Jurisdiction: Arizona

Other Insurance Clauses^[81]

The problems associated with determining policy priorities where there are competing "other insurance" clauses have been troublesome to the courts.^[82] "No field of insurance law has been so perplexing and productive of litigation as the battles between alleged excess carriers seeking contribution or escape from payment of losses . . . ."^[83] The interaction of two or more policies containing "other insurance" clauses creates a circularity, with each insurance carrier claiming that the other must pay first.^[84]

Insurance carriers are authorized to include within their insurance policies "other insurance" clauses. Under A.R.S. Sec. 28-4009(C)(7), a motor vehicle liability policy "[m]ay provide for the prorating of the insurance under the policy with other valid and collectible insurance." Insurance coverage is available and collectible if the carrier issuing the coverage is solvent and there is no valid policy exclusion or limitation applicable to the claim.^[85] Excess-escape type "other insurance" clauses have been held unenforceable in the UM and UIM context where they reduce mandatory coverage, and, by doing so, leave the insured partially uncompensated for his injuries.^[86]

The court in State Farm Mutual Automobile Insurance Co. v. Bogart,^[87] discussed the nature and purpose of "other insurance" clauses:

These clauses originated in property insurance and were initially inserted to discourage an insured from over-insuring against a particular loss. Sloviaczek v. Estate of Puckett, 98 Idaho 371, 372-73, 565 P.2d 564, 566 (1977). Thus, the idea of reducing an insurer's liability where there was "other insurance" covering the loss originally protected the insurer against fraudulent recovery. Id. Nevertheless, "other insurance" provisions came to be included in many liability policies even though the possibility of over-insurance inducing fraudulent claims was remote in such losses. Id. As automobile insurance policies began to provide protection beyond coverage for a specific insured and vehicle, multiple coverage situations became common. As a result, many losses are covered by more than one policy, thus triggering "other insurance" clauses which are now standard in most insurance policies.^[88]

"Other insurance" clauses fall into three general categories.^[89] These categories were delineated by the court in Bogart:

First is the excess clause which states that the insurer provides liability coverage only for amounts due after all other available insurance has been exhausted. Second is the pro rata clause, limiting the insurer's liability to a share of the loss to be determined by the proportion that the insurer's policy limit bears to the aggregate of available limits. Third are escape clauses, which provide that a policy which would otherwise cover the loss will afford no coverage at all in the event that there is other insurance available.^[90]

In Arizona, where two policies cover the same occurrence and both policies contain "other insurance" clauses, the courts have ruled that the clauses are mutually repugnant and must be disregarded. Each carrier will then be liable for a pro rata share of the settlement or judgment.^[91] This rule has been applied in excess clause versus excess clause situations, where the two clauses cancel each other out,^[92] and in excess clause versus excess-escape clause situations, where the competing clauses do not automatically cancel themselves out.^[93] However, a different result has been reached where umbrella coverage is involved.

In United Services Automobile Ass'n v. Empire Fire & Marine Insurance Co.,^[94] the court held that an excess "other insurance" clause was not mutually repugnant to the "contingent excess" clause contained in an umbrella policy. The facts of this case are illuminating: The insured, Robert Richards, borrowed an automobile owned by Roger Anderson, which was covered under two liability policies at the time of the accident. The underlying policy was issued by Security Mutual Casualty Co., which provided primary coverage on the vehicle up to $50,000. The second policy, issued by Empire Fire & Marine Insurance Co., was an umbrella policy providing excess coverage up to $250,000 after the underlying Security Mutual policy had been exhausted. When the accident occurred, Robert Richards was also covered as an omnibus insured under a policy issued to Mr. Richards' father by United Services Automobile Association. The USAA policy provided $100,000 coverage for Mr. Richards when he was driving a non-owned automobile.

Following an automobile collision, a personal injury and wrongful death action was brought against Mr. Richards. This lawsuit was settled for $135,000. Security Mutual conceded that it was the primary carrier and paid its policy limits of $50,000. A declaratory judgment action was filed to determine the relative liabilities of Empire Marine and USAA for the balance of the settlement. The trial court ruled that a hierarchy of coverage existed between the policies and that Empire Marine's umbrella policy was excess to USAA's policy. The trial court was affirmed on appeal.

On appeal, USAA contended that "each policy in question provides that it is excess to any other insurance, that the policies therefore conflict and that as a result the loss should be apportioned among the two insurers according to the respective policy limits."^[95] This contention was based upon the principle that where conflicting "other insurance" clauses are truly inconsistent, they are repugnant and may be disregarded and the loss apportioned.^[96] Empire Marine, on the other hand, argued that the language of the policies was not inconsistent because Empire Marine's policy did not come into effect until "deductions" for other insurance had been made. Empire Marine claimed that its policy provided "contingent excess" coverage, secondary to USAA's policy.

The court in USAA held that the "other insurance" clauses in the USAA and Empire Marine policies were not repugnant and that USAA was required to first contribute up to its policy limits to satisfy the settlement before Empire Marine was required to make any contribution toward the settlement.

Reviewing Empire Marine's contention that the policies were not inconsistent because Empire Marine's policy language provided for payment only after making "deductions" for other insurance (making its policy a "contingent excess" policy, as opposed to a mere "excess" policy like USAA's policy), the court noted that Empire Marine's interpretation did not address the argument raised by USAA that its excess clause, which stated that USAA's coverage was excess "over any other insurance," was broad enough to render USAA's coverage secondary. In essence, the clauses created a circularity in application, depending upon which policy was read first.^[97] The court found that the excess problem before it would not yield to "word-logic," and, therefore, the court interpreted the policies "in light of the circumstances of each contracting party to determine the intent within the framework of an overall insuring scheme."^[98] The court then stated:

The Empire policy provides so-called "umbrella" coverage, a form of insurance which fulfills the need to guard against a particularly large loss. Under no set of circumstances can Empire's coverage ever be primary insurance. The USAA policy was written as primary coverage for the Richards' automobiles. While it is true that it is excess insurance in this instance because Richards was driving someone else's automobile it necessarily contemplated a different and probably a greater risk than that covered by the Empire policy. What's more, since the USAA policy was issued to specific persons for primary limited amounts, USAA was in a better position to evaluate its risk than would be a purely excess carrier against whom no claims might be made even though its insureds had repeatedly incurred liability in amounts within their primary coverage.^[99]

Another illuminating case is Arizona Joint Underwriting Plan v. Glacier General Assurance Co.,^[100] where the court was asked to determine the priority of coverage among four insurance policies. The underlying action involved a medical malpractice wrongful death suit filed against two doctors, their professional corporation, a nurse employee of the professional corporation, and others. An offer of judgment in the amount of $335,000 was accepted by the plaintiff, and a joint and several judgment in that sum was entered against each defendant. The insurance carriers were: MICA (Mutual Insurance Co. of Arizona), which had issued two policies of professional liability insurance, each with a limit of $100,000 (one policy covered the doctors and the other policy covered the professional corporation and nurses); Glacier General Insurance Co., which issued a policy insuring only the nurses and had limits of $100,000; and AJUP (Arizona Joint Underwriting Plan), which issued an umbrella policy covering all the defendants for professional liability up to $1,000,000 above the warranted underlying insurance. The AJUP policy defined underlying insurance as "the...