CHAPTER 14

• Jurisdiction: United States

CHAPTER 14

“Other Insurance” Clauses

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 two or more 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, 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.

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 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.

3. Inadvertently

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

As you read the case below, consider the dilemma of the Supreme Court of Vermont, faced with three insurers with similar policy language, all of which stated that none of the insurers would pay until the other paid.

The court was faced with a need to fulfill the intent of the parties to the contracts. It became necessary to look 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.

State Farm Mut. Auto Ins. Co. v. Powers
732 A.2d 730 (Vt. 1999)

This declaratory judgment action involves a dispute regarding how to apportion damages among three insurance carriers providing uninsured/underinsured (UM) motorist coverage to a passenger injured in an automobile accident. The superior court determined, based on the insurers’ respective policy provisions, that the insurer providing coverage to the operator of the vehicle struck by the underinsured motorist was the primary insurer and thus was required to exhaust its policy limits before the other carriers were obligated to extend coverage. The principal issue on appeal is whether insurers may designate their UM coverage as primary or excess relative to other insurers providing such coverage, thereby establishing the order of payment among the insurers. We conclude that such policy provisions do not violate Vermont law, as long as they do not reduce the total UM coverage available to insureds. We also conclude, however, that the primary insurer in this instance was entitled to at least its pro rata share of an offset representing the sum received by the insured directly from the tortfeasor’s liability carrier. Accordingly, we reverse the superior court’s judgment.

The material facts are not in dispute. In August 1994, a vehicle driven by James Styles ran head-on into a vehicle driven by Darren Smith, injuring Eric Powers, who was a passenger in the Smith vehicle. After receiving the $25,000 policy limit from Styles’s liability carrier, Powers filed underinsured motorist claims with (1) Nationwide Insurance Company, which insured Smith; (2) Allstate Insurance Company, which insured Powers himself; and (3) State Farm Mutual Automobile Insurance Company, which insured the Powers family.

The personal automobile policy issued to Smith by Nationwide provided up to $25,000 in UM coverage for damages resulting from bodily injury to any person occupying the insured’s automobile. The policy’s UM coverage endorsement contained the following “other insurance” provision:

OTHER INSURANCE

If there is other insurance:

1. For bodily injury suffered by an insured while occupying a motor vehicle other than your auto, we will pay the insured loss not covered by other insurance.

2. Any amounts paid or payable by or for any liable parties will be apportioned pro rata to offset all available limits of Uninsured Motorist coverage.

3. Except as stated above, if there is other insurance similar to this coverage under any other policy, we will be liable for only our share of the loss. Our share is our proportion of the total insurance limits for the loss.

The personal automobile policy issued to Powers by Allstate provided up to $20,000 in UM coverage for bodily injury sustained by the insured as the result of an accident. The policy contained the following provision within its UM section:

OTHER INSURANCE

If there is other applicable similar insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a vehicle you do not own shall be excess over any other collectible insurance.

Two State Farm policies were issued to Eric Powers’s parents, with whom he resided at the time of the accident. Each of those policies provided $100,000 in UM coverage to the Powers family and contained the following provision regarding that coverage:

If There Is Other Coverage

3. If the insured sustains bodily injury while occupying a vehicle not owned by you, your spouse or any relative, this coverage applies:

a. as excess to any uninsured motor vehicle coverage which applies to the vehicle as primary coverage, but

b. only in the amount by which it exceeds the primary coverage.

If coverage under more than one policy applies as excess:

a. the total limit of liability shall not exceed the difference between the limit of liability of the coverage that applies as primary and the highest limit of liability of any one of the coverages that apply as excess; and

b. we are liable only for our share. Our share is that per cent of the damages that the limit of liability of this coverage bears to the total of all uninsured motor vehicle coverage applicable as excess to the accident.

The three carriers and Powers submitted Powers’s claim to arbitration pursuant to the insurance contracts. Following an arbitration hearing, Powers was awarded $175,000 in damages for his injuries. The carriers agreed that Powers was entitled to $150,000 in UM coverage—the $175,000 award less the $25,000 paid by the tortfeasor’s insurer. See 23 V.S.A. 941(e) (if payment is made under uninsured motorist coverage, insurer is entitled to recover to extent of payment from any person legally responsible for damages); § 941(f) (motor vehicle is underinsured to extent that its personal injury limits of liability at time of accident are less than limits of uninsured motorists coverage applicable to any injured party legally entitled to recover damages under said uninsured motorist coverage);Webb v. United States Fidelity & Guar. Co., 158 Vt. 137, 141-42, 605 A.2d 1344, 1347 (1992) (Vermont’s statutory underinsured motorist provision provides coverage that fills the gap between tortfeasor’s liability coverage and insured party’s underinsured motorist coverage).

The parties disagreed, however, on how to apportion their obligation to reimburse Powers. Nationwide contended that the three insurers should divide their debt to Powers in equal proportion to each carrier’s coverage limit. On the other side, State Farm and Allstate asserted that Nationwide was the primary carrier and thus should pay its policy limits of $25,000, after which they would pay the remainder of the debt on a pro rata basis. In accordance with their respective positions, Nationwide paid Powers $15,306, Allstate paid $11,364, and State Farm paid $113,636, leaving Powers $9694 short of the $150,000 in UM coverage to which he was entitled.

As a result of the disagreement, State Farm filed a complaint for declaratory judgment in superior court. The court ultimately granted summary judgment to State Farm and Allstate, ruling that Nationwide, as the primary carrier, was obligated to exhaust its $25,000 policy limit before State Farm or Allstate, as excess carriers, were required to make any payments toward the claim. On appeal, Nationwide argues that labeling any applicable UM coverage as excess unlawfully conditions the statutory requirement that each and every automobile insurance policy provide UM coverage, in violation of 23 V.S.A. § 941(a), and improperly affects UM coverage provided by other insurers, in violation of Monteith v. Jefferson Ins. Co., 159 Vt. 378, 618 A.2d 488 (1992). Nationwide contends that when UM coverage provided by multiple insurers exceeds damages, each insurer should pay its pro rata share, notwithstanding the existence of other insurance provisions purporting to establish primary or excess coverage.

I.

We reject Nationwide’s argument that labeling UM coverage as excess, in and of itself, violates Vermont law mandating UM coverage. Section 941(a) requires each and every automobile insurance policy delivered in Vermont to provide coverage for insureds who are legally entitled to recover damages from owners or operators of uninsured, underinsured, or hit-and-run vehicles. “No policy can be issued which reduces the amount of coverage mandated by statute.” Sanders v. St. Paul Mercury Ins. Co., 148 Vt. 496, 499, 536 A.2d 914, 916 (1987). Nevertheless, provisions that merely establish the priority of coverage among insurers without compromising coverage for insureds do not violate § 941(a). See Aetna Cas. & Sur. Co. v. CNA Ins. Co., 606 A.2d 990, 992-93 (Conn. 1992) (“other insurance” clauses establishing order of coverage between insurers are valid...