CHAPTER 14 "OTHER INSURANCE" CLAUSES

• Jurisdiction: United States

A. Multiple Insurance Policies Covering the Same Loss

Every third-party liability policy contains an "other insurance" clause that attempts to control disputes when there are two or more policies insuring the same risk. The term "other insurance" is used in a special sense in insurance contracts. It describes the situation in which two or more policies of insurance cover the same risk in the name of, or for the benefit of, the same person. Difficulties arise when the policies have other-insurance clauses that conflict with each other.

Overlapping coverage for the same risk under concurrent policies are often found in three different contexts:

1. By Design

This may occur if, for example, when the insured purchases a general umbrella/catastrophe policy with specifically scheduled underlying coverages and also purchases multilayered excess coverage over specifically scheduled primary or self-insured coverage.

Each policy describes how each insurer would apply to a loss. For instance, ABC Insurance Company would agree to pay the first one million dollars of tort damages, DEF Insurance Company would agree to pay, after the first million is exhausted with payments of indemnity and/or legal fees, the next five million dollars of exposure, and GHI Insurance and JKL Insurance would agree to pay in similar increments until all available insurance is exhausted.

Each insurer would be specified in the various policies so that there would be no question of who owes what and when.

2. By Coincidence

Overlapping coverage can occur if, for example, a landlord is named as an "additional insured" of his tenant's policy and maintains separate coverage for himself; or if the non-owner driver of a vehicle is covered as a named insured under his own auto policy as well as under the permissive use clause of the owner's policy. In such situations, although not intended by the parties, multiple insurance policies are available to pay indemnity for a single loss.

3. Inadvertently

An inadvertent overlap may arise where there has been a switch from "occurrence" coverage to "claims made" coverage, and where a claim is made during the claims-made policy period on the basis of an act that took place during the occurrence policy period.

Consider, for example, the dilemma of the Supreme Court of Vermont, faced with three insurers with similar policy language, all which stated that none of the insurers would pay until the other paid. The court was faced with a tradition to fulfill the intent of the parties to the contracts and a need to determine a course of action by looking beyond the actual words of the contracts, since those words would destroy the actual intent of providing indemnity for a person injured by an uninsured motorist and a defense to the insured.¹

B. Excess Clauses

Excess clauses usually provide that an insurer's liability is limited to the amount by which the loss exceeds the coverage provided by all other valid and collectible insurance, up to the limits of the policy containing the excess clause. A typical example of an excess clause reads as follows:

Unless otherwise endorsed, this policy shall be excess over any other insurance whether prior or subsequent hereto, and by whomsoever effected, directly or indirectly covering loss or damage insured hereunder, and this Company shall be liable only for the excess of such loss or damage beyond the amount due from such other insurance, whether collectible or not, however, not exceeding the limits as set forth in the Declarations. ²

Courts seem loathe to enforce escape and excess clauses, since they tend to deprive an insured of all available coverages. Regardless, most excess policies are written as excess to a specified primary policy. Alternatively, however, a policy may be written as excess to an insured's retention. "‘The term "retention" (or "retained limit") refers to a specific sum or percentage of loss that is the insured's initial responsibility and must be satisfied before there is any coverage under the policy. . . .'"³ The insured may purchase other insurance to cover the [retention] unless the policy clearly requires...