Chapter 3 - § 3.12 • PRIMACY OF LIABILITY COVERAGES — APPORTIONMENT OF COVERAGE WHERE EXCESS CLAUSES CONFLICT

• Jurisdiction: Colorado

§ 3.12 • PRIMACY OF LIABILITY COVERAGES — APPORTIONMENT OF COVERAGE WHERE EXCESS CLAUSES CONFLICT

§ 3.12.1—Conflicting Excess Clauses in Liability Policies Are Void as Mutually Repugnant — Owner's Policy Not Required by the No-Fault Act to Provide Primary Coverage

The No-Fault Act was intended to provide a financial safety net below which it would not let an accident victim fall. As long as this objective was satisfied, the Act was not intended to restrict freedom of contract by insurers. There was, therefore, no public policy bar to the existence of excess clauses in compulsory owner coverage under the No-Fault Act. However, conflicting excess clauses were void as mutually repugnant. Under minority rule, adopted by the court here, where conflicting excess clauses existed, both policies shared in the loss equally until the proceeds were exhausted. Guaranty National Insurance Co. v. Ohio Casualty Insurance Co., 580 P.2d 41 (Colo. App. 1978), rev'd on other grounds, 592 P.2d 397 (Colo. 1979).

Guaranty National Insurance Co. v. Ohio Casualty Insurance Co., 580 P.2d 41 (Colo. App. 1978), rev'd on other grounds, 592 P.2d 397 (Colo. 1979), involved a dispute between two insurance companies over which company was obligated to provide primary liability coverage for an automobile accident. The court of appeals concluded that the policies contained conflicting excess clauses, which were mutually repugnant, and that each company was obligated to cover the loss on an equal basis until the limit of its coverage was exhausted. However, in Ohio Casualty Insurance Co. v. Guaranty National Insurance Co., the supreme court reversed, concluding that one of the excess clauses was not applicable. Therefore, the supreme court did not address the issue of the proper method of apportionment where two or more applicable policies contain conflicting excess clauses.

The accident occurred when a car driven by Olive Jensen collided with a car driven by Christy Brost. Jensen was killed and several people in the Brost car were injured. Jensen's car belonged to G & J Specialties, d/b/a Budget Rent-A-Car. Jensen was transporting the car on behalf of G & J, and Guaranty National insured the car. Ohio Casualty insured Jensen's private auto and also provided non-owner coverage in certain circumstances. A dispute arose between the two carriers as to which policy should be required to cover Jensen's liability to Brost and her passengers and the liability for the collision damages.

The plaintiff, Guaranty National, asserted that Ohio Casualty's non-owner coverage was primary and that its policy was excess. The trial court, however, determined that Guaranty National's policy was primary. Guaranty National's principal argument on appeal was that both companies should be held equally liable, since the policies provided coverage on an equal footing.

Ohio Casualty argued that its policy did not apply, since its non-owner coverage specifically excluded situations in which the subject car was provided for the regular use of the named insured. However, the court of appeals held that under the record before it, Ohio Casualty had not met its burden of proving that this exclusion applied. The court also rejected Ohio Casualty's contention that there was no coverage because of a provision in its policy excluding coverage for the named insured while the person engaged in another's automobile business. The court held that G & J's business could not be interpreted as an automobile business. Thus, the court of appeals concluded that Ohio Casualty's policy was applicable to Jensen's use of the non-owned car. 580 P.2d at 44-45.

The court of appeals next addressed the effect of the policies' excess clauses. Each company's policy contained a clause limiting its liability for any occurrence to the amount that would remain unpaid after all other valid and collectible insurance was exhausted. The court of appeals rejected Ohio Casualty's contention that it should get the benefit of its own excess clause, since Guaranty National's excess clause was not applicable to this particular case. The court of appeals found that both excess clauses were applicable.

Ohio Casualty next argued that the public policy underlying the No-Fault Act required that Guaranty National's statutorily required owner coverage under (former) C.R.S. § 10-4-705 be deemed primary. However, the court of appeals concluded that there was nothing in the No-Fault Act that addressed the issue of primacy with regard to liability coverage:

It is our belief that the General Assembly intended, through the No-Fault Act, to provide a financial safety net below which it would not let accident victims fall. As long as this concern is satisfied, the Act was not intended to be a restriction on the insurance companies' prerogatives in the free marketplace to contract with their insureds for more extensive coverage (in the voluntary non-owner policies) or to design coverage which would be shared with other companies under certain circumstances (as here, with the excess clause on compulsory owner coverage). [Citations omitted.] We hold therefore that there is no public policy bar to the existence of excess clauses in compulsory owner insurance under the No-Fault Act.

580 P.2d at 46.

Having determined that the two policies were on an equal footing regarding excess coverage, the court of appeals had to decide how the loss should be apportioned. Guaranty insured G & J for up to $1,000,000 in liability, and Ohio Casualty provided liability coverage of only $25,000. In addressing this issue, the court of appeals indicated that it would follow the modern trend in dealing with conflicting excess clauses. The court held that both clauses were void as mutually repugnant. Id.

The court then addressed the issue as to how the two policies should be prorated. It identified two major approaches to this problem. It noted that the majority rule was that losses were prorated on the basis of the maximum coverage provided by each policy. If this rule were applied, Guaranty National would have to pay $20 for every dollar paid by Ohio Casualty. Under a newer minority approach, both companies were made to share equally in the loss until the lesser policy was exhausted. After comparing both approaches, the court of appeals held that the minority approach was more fair and adopted it here. 580 P.2d at 47. Thus, the court of appeals held that both companies should share in the loss equally until one of the policies was exhausted.

The supreme court reversed the judgment of the court of appeals because it found that under the peculiar language of the Guaranty National policy, Guaranty National's excess clause was not applicable to the facts of this case, while Ohio Casualty's was. The supreme court held that the language of the Guaranty National policy was ambiguous. This ambiguity in the insurance contract had to be construed against Guaranty National. 592 P.2d at 400. Therefore, the supreme court held that the trial court correctly concluded that Guaranty National had to provide primary coverage and that Ohio Casualty's policy was excess.

The supreme court pointed out that its "analysis of this case makes it unnecessary for us to address Ohio's contention that, under section 10-4-705, C.R.S. 1973, the insurer of the owner of an automobile is statutorily required to provide primary coverage when two insurance policies provide coverage for the same loss." 592 P.2d at 399, n. 3. Furthermore, the supreme court found that its holding obviated "any need to determine what would be the proper method of apportioning the coverage between Guaranty and Ohio if the policy of each insurer had contained a valid excess insurance clause." Id. at 400, n. 4. However, as will be shown below, in the later case of Allstate Insurance Co. v. Avis Rent-A-Car, 947 P.2d 341 (Colo. 1977), the supreme court adopted the same minority rule of apportionment originally applied by the court of appeals in Guaranty National v. Ohio Casualty. Likewise, the Avis court held that the No-Fault Act did not require that an owner's liability policy provide primary coverage.

§ 3.12.2—The No-Fault Act Imposes No Rules Regarding Primacy of Liability Coverage — Where Policies Contain Mutually Repugnant Excess Clauses, Liability Is Apportioned on an Equal Basis up to the Limits of Each Policy

A rental car company, as any other owner of a motor vehicle, was required under former C.R.S. §§ 10-4-705 and 10-4-706(1)(a) to have at least the statutory minimum

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