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 two or more policies have other insurance clauses that conflict with each other.

Overlapping coverage for the same risk under concurrent policies is 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.

Each policy describes how each insurer would apply to a loss. For instance, ABC Insurance Company would agree to pay the first $1 million 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 $5 million 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 is no question 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 the non-owned 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 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 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.

In State Farm Mut. Auto Ins. Co. v. Powers, 732 A.2d 730 (Vt. 1999), a declaratory judgment action involved 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 court wrote:

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.

Unless prohibited by statute or public policy, an insurer's liability is controlled by its policy provisions. Without using the words "primary" or "excess," the Nationwide policy expressly states that, for bodily injury suffered by an insured while occupying a vehicle not owned by the policyholder or spouse, Nationwide will provide coverage only to the extent that the insured's loss is not covered by other insurance.

The parties' policy provisions unambiguously establish a consistent method for prioritizing UM coverage—coverage is primary when the claimant is injured while occupying a vehicle owned by the policyholder and is excess when the claimant is injured while occupying a vehicle not owned by the policyholder. As the primary insurer, Nationwide must exhaust its policy limit before the excess coverage is tapped. To the extent that Nationwide's policy contains a separate provision purporting to pro rate its coverage with other "similar" coverage, that provision has no effect in these circumstances.

[P]ermitting Nationwide, as the primary insurer, to set off the amount obtained from the underinsured motorist neither precludes interpolicy stacking nor reduces the UM coverage available to Eric Powers.

Nevertheless, the court concluded that in this instance Nationwide is entitled to only its pro rata share of the offset. In light of Nationwide's "other insurance" provision the court apportioned credit for the tortfeasor's $25,000 payment on a pro rata basis in accordance with the method contained in Nationwide's brief, a method that has not been challenged by the excess insurers.

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. ¹

Courts seem loathe to enforce escape and excess clauses since they tend to deprive an insured of all available coverages.

In Bosco v. Bauermeister, 571 N.W.2d 509, 456 Mich. 279 (Mich. 1997) the Michigan Supreme Court was asked to determine the priority of coverage of several insurance policies, all of which admittedly provided coverage for the automobile accident that was the subject matter of the underlying lawsuit. The court concluded that a distinct difference exists between "true" excess insurance coverage and excess "other insurance" on the basis of the difference in policy types within the insurance industry, the premiums charged for and risks assumed by the policies, the language of the policies, and the reasonable expectations of all the contracting parties. This difference requires an excess "other insurance" policy to be exhausted before "true" excess insurance policies are required to contribute to a loss.²

The underlying suit, upon which this matter is based, began as a wrongful death action arising from a truck-bicycle accident in which fifteen-year-old Eric John Bosco was killed. Primary defendant Chris Bauermeister was driving the truck, which was owned by primary defendant Kenneth Cook. At the time of the accident, Bauermeister was acting in the course of his employment with Flint Canvas Company and Flint Tent & Awning, Inc. The case was tried before a jury, which found in favor of the Bosco estate and the eight persons entitled to recover for the death of the decedent. Damages of $1,044,903.25 were assessed in favor of the Bosco estate, with setoffs of $556,000 from no-fault funeral benefits and two prior settlements. The net verdict was $613,569.08.

After judgment was entered, plaintiff filed affidavits and writs of garnishment against two insurers: Auto-Owners and USAA. USAA voluntarily paid the $100,000 primary policy limit, and plaintiff's garnishment action continued with regard to Auto-Owners' and USAA's liability under their umbrella policies.

If there is other valid and collectible insurance which covers a loss also covered by this policy, ours will be excess. However, if the other insurance is written specifically to cover as excess over the Primary Insurance limits of liability shown on the Declarations, then we will pay only our proportionate share of the loss. [Emphasis added.]

This policy also contained a separate Michigan amendatory endorsement, which provided:

With respect to the Other Insurance Condition, this insurance will prorate with other similar insurance written excess of the same limits of underlying insurance. [Emphasis added.]

The Court of Appeals concluded that the three policies were responsible pro rata for the remainder of the liability, thereby also rejecting plaintiff's argument that the Frankenmuth policy was excess to the umbrella policies. Nothing in the Frankenmuth policy indicates that it was purchased to be excess to the Auto-Owners policy. Thus, the Court of Appeals correctly rejected the notion that the Frankenmuth policy was excess to the Auto-Owners and USAA umbrella policies.

However, the fact that a policy is issued as an umbrella policy at rates reflecting the reduced risk insured indicates the intent that the policy is excess over other excess policies.

The Frankenmuth policy excess provision was not written specifically to cover as excess over any primary policy. The USAA umbrella policy is a "true" excess policy written as excess specifically over the USAA primary policy and all other underlying insurance, including the Frankenmuth policy.

Only the existence of the Continental policy triggers the Frankenmuth policy's "coincidental" excess coverage clause. Its basic nature—a primary automobile policy—does not change. The Emcasco court contrasted an umbrella policy, which remained as such in all circumstances except under very limited circumstances in which the policy provided primary coverage, with a primary policy with the excess clause, which provided primary coverage under almost all circumstances.

Auto-Owners and USAA argued that policies like the Frankenmuth policy, which insure a specific risk, differ in kind from umbrella policies. This difference was recognized by this Court in Frankenmuth v. Continental, supra, which characterized umbrella insurance as "true" excess insurance

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