Judicial Scrutiny of 'Other Insurance' Clauses

Other Insurance Clauses

Other Insurance Clauses vary by insurer and policy. The three basic categories of “other insurance” clauses are:

1. The “pro rata” clause, which provides that an insurer will pay its share of the loss based on the ratio of its policy limits to the policy limits of any other “valid and collectible” primary insurance;
2. The “excess” clause, which provides that a primary insurer will pay its share of the loss only after exhaustion of any other “valid and collectible” primary insurance; and
3. The “escape” clause, which provides that an insurer will not pay any amount for loss to which other “valid and collectible” primary insurance is available. See, e.g., St. Paul Fire & Marine Ins. Co. v. American Home Assur. Co., 444 Mich. 560, 565, 514 N.W.2d 113, 115 (1994) (listing categories of 'other insurance' clauses); Couch on Insurance 3D, ' 219:4 (West 2012).

Under the majority approach, discussed below, a court typically attempts to harmonize the competing clauses in order to avoid the need to disregard them entirely. A policy with a “pro-rata” clause generally pays its entire limit when confronted with an “excess” or “escape” clause. See, e.g., Couch on Insurance 3D, ” 219:51 & 219.56 (West 2012). There is less agreement concerning the priority between an “escape” clause and an “excess” clause. However, as a general rule, a policy with an “escape” clause pays its entire limit first when confronted with an “excess” clause from another insurer. Couch on Insurance 3D, ' 219:53.

Lamb-Weston: The 'Minority Rule'

While many jurisdictions cannot be neatly labeled as “minority” or “majority,” generally speaking, some good examples of minority venues are Oregon, Alaska, New Mexico and Indiana. In the most prominent early case, Lamb-Weston, Inc. v. Oregon Automobile Ins. Co., 219 Or. 110, 341 P.2d 110 (1959), the Supreme Court of Oregon considered competing “excess” and “pro-rata” clauses in primary automobile liability policies.

The coverage dispute in Lamb-Weston arose out of an accident in which the brakes failed on a truck being driven to a repair shop. As a result of the brake failure, the truck crashed into a warehouse, causing property damage. The lessor of the truck, Lamb-Weston Inc., had dispatched the truck to the repair shop with knowledge of the faulty brakes. Lamb-Weston, Inc. settled its liability to the warehouse with a loan from its liability insurer, St. Paul Fire & Marine Ins. Co. (St. Paul), and sued Oregon Automobile Insurance Company (OAIC), which insured the owner of the truck, for contribution and a determination that Lamb-Weston, Inc., a lessor, was an additional insured. Lamb-Weston, Inc., 219 Or. at 113-114, 341 P.2d at 111-112 (1959)

The St. Paul policy contained a version of an “excess” clause, which provided: “If the Insured's liability under this policy is covered by any other valid and collectible insurance, then this policy shall act as excess insurance over and above such other insurance.” Id. at 119, 114.

The OAIC policy contained a version of a “pro-rata” clause, which read: “' if the insured has other insurance against a loss covered by this policy the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability stated in the declarations bears to the total applicable limit of all valid and collectible insurance against such loss ' .” Id.

The Oregon court was troubled by what it saw as arbitrary reasoning in the “other insurance” jurisprudence. The “pro-rata” clause in the OAIC policy required sharing by limits with other “valid and collectible insurance.” However, the “excess clause” in the St. Paul policy prohibited sharing with other “valid and collectible insurance.” According to the Oregon court: “[The majority rule's] reasoning appears to us completely circular, depending, as it were, on which policy one happens to read first. ' [T]he problem is little different from that involved in deciding which came first, the hen or the egg.” Id. at 122, 116.

Rather than modify the two clauses to give effect to the perceived intention of the insurers, the Lamb-Weston rule rejects both clauses and treats the overlapping primary policies as though they do not contain “other insurance” clauses at all: “In our opinion, whether one policy uses one clause or another, when any come in conflict with the 'other insurance' clause of another insurer, regardless of the nature of the clause, they are in fact repugnant and each should be rejected in toto.” Id. at 128, 119.

Almost since it was decided in June 1959, commentators have labeled Lamb-Weston the “minority rule.” Despite its “minority rule” label, Lamb-Weston garners a steady stream of adherents. And, in recent years, courts have rendered decisions whose logic is best described as “Lamb-Weston-like.” We discuss some of those Lamb-Weston-like decisions herein.

Application of the Majority Rule

Courts using a true “majority” approach attempt to harmonize differing “other insurance” clauses in overlapping primary insurance policies rather than disregard the clauses entirely. Jones v. Medox, Inc., 430 A.2d 488, 12 A.L.R. 4th 981 (D.C. Ct. App. 1981) (reconciling “pro rata” and “excess” other insurance clauses in overlapping primary professional liability policies by requiring “pro rata” clause policy to contribute up to its limits before “excess” clause policy is implicated). While there is some inconsistency among these as well, some so-called “majority” jurisdictions are Michigan, New York, Virginia, Wyoming, Kentucky and the District of Columbia.

For example, in St. Paul Mercury Ins. Co. v. Penn. Cas'y Co., the court applied a true “majority” rule to reconcile competing “other insurance” clauses in professional liability policies issued to a hospital and its directors by St. Paul Mercury Insurance Company (St. Paul) and Pennsylvania Casualty Company (PCC). St. Paul Mercury Ins. Co. v. Penn. Cas'y Co., 642 F. Supp. 180 (D. Wy. 1986).

The PCC policy contained a version of the “excess” clause, which provided: “The insurance afforded under this policy shall be excess over any valid and collectible insurance.” Id. at 182-183.

The St. Paul policy contained a version of the “pro rata” clause, which read: “A professional liability loss that's covered under this agreement may also be covered under other insurance. If this happens, we'll pay that portion of the loss which the limits of coverage under the agreement are of the total of all limits that apply. But we won't pay more than the limits of coverage under this agreement.” Id. at 182.

Noting that “neither party relied upon the existence of insurance coverage on the part of the other” in issuing the policies, the court reasoned that the competing “other insurance” clauses were best harmonized by permitting the PCC policy, which had an “excess” clause, to apply as excess to the St. Paul policy, which had a “pro rata” clause. Id. at 185 (“this Court will give effect to the intent of the insuring parties, who have contracted with the insured hospital as expressed by the language contained in the insurance policies”).

The “excess clause” contemplates that the policy will be excess “over any valid and collectible insurance.” An overlapping primary policy is “valid and collectible insurance.” Therefore, the “excess” clause can be enforced. As the Lamb-Weston court noted, the majority rule chooses to begin with the “excess clause” and, by doing so, does not give full effect to the “pro rata” clause, which requires sharing by limits.

Majority courts reason that it is more consistent with the expectation of insurers for a “pro-rata” clause, which contemplates some sharing with other insurance, to give way to an “excess clause,” which prohibits sharing. One could argue that the very existence of the majority rule has strengthened the expectation of insurers, who have for years drafted “other insurance” clauses with the majority rule in mind.

Spiro K. Bantis is a Partner based in the New York Office of London Fischer LLP and a member of its Insurance and Reinsurance Coverage Practice Group. He is an ARIAS-U.S. certified arbitrator and was previously General Counsel and Executive Vice President of Gulf Insurance Company. Daniel W. London is a Senior Associate in the firm. He is a former management and professional liability underwriter for Gulf Insurance Company and secondee to the claims department of a large insurer at Lloyd's of London.

Liability insurance policies typically contain an “other insurance” clause to describe an insurer's obligation when more than one insurance policy provides coverage to the same insured for the same loss. “Other insurance” clauses are unique within the liability policy because, unlike the rest of the policy, these clauses apply to the insurer's interaction with other insurers and not to the insurer's interaction with the insured.

On this much courts consistently agree: A primary policy with an “other insurance” clause dictates the sharing of liability vis-'-vis an overlapping primary policy with no “other insurance” clause. Typically, when identical clauses present an intractable conflict, each insurer is responsible for its proportional share of liability (usually measured in relation to its respective policy limits). However, when overlapping primary liability policies contain different “other insurance” clauses, approaches vary by jurisdiction and degrees of intellectual rigor.

In this article, we contrast the so-called minority approach to differing “other insurance” clauses with the approach generally described as the majority rule. We discuss a stubborn persistence toward the selective use of the minority rule in jurisdictions that have not adopted the minority approach in its entirety.

Other Insurance Clauses

Other Insurance Clauses vary by insurer and policy. The three basic categories of “other insurance” clauses are:

1. The “pro rata” clause, which provides that an insurer will pay its share of the loss based on the ratio of its policy limits to the policy limits of any other “valid and collectible” primary insurance;
2. The “excess” clause, which provides that a primary insurer will pay its share of the loss only after exhaustion of any other “valid and collectible” primary insurance; and
3. The “escape” clause, which provides that an insurer will not pay any amount for loss to which other “valid and collectible” primary insurance is available. See, e.g., St. Paul Fire & Marine Ins. Co. v. American Home Assur. Co. , 444 Mich. 560, 565, 514 N.W.2d 113, 115 (1994) (listing categories of 'other insurance' clauses); Couch on Insurance 3D, ' 219:4 (West 2012).

Under the majority approach, discussed below, a court typically attempts to harmonize the competing clauses in order to avoid the need to disregard them entirely. A policy with a “pro-rata” clause generally pays its entire limit when confronted with an “excess” or “escape” clause. See, e.g., Couch on Insurance 3D, ” 219:51 & 219.56 (West 2012). There is less agreement concerning the priority between an “escape” clause and an “excess” clause. However, as a general rule, a policy with an “escape” clause pays its entire limit first when confronted with an “excess” clause from another insurer. Couch on Insurance 3D, ' 219:53.

Lamb-Weston: The 'Minority Rule'

While many jurisdictions cannot be neatly labeled as “minority” or “majority,” generally speaking, some good examples of minority venues are Oregon, Alaska, New Mexico and Indiana. In the most prominent early case, Lamb-Weston, Inc. v. Oregon Automobile Ins. Co., 219 Or. 110, 341 P.2d 110 (1959), the Supreme Court of Oregon considered competing “excess” and “pro-rata” clauses in primary automobile liability policies.

The coverage dispute in Lamb-Weston arose out of an accident in which the brakes failed on a truck being driven to a repair shop. As a result of the brake failure, the truck crashed into a warehouse, causing property damage. The lessor of the truck, Lamb-Weston Inc., had dispatched the truck to the repair shop with knowledge of the faulty brakes. Lamb-Weston, Inc. settled its liability to the warehouse with a loan from its liability insurer, St. Paul Fire & Marine Ins. Co. (St. Paul), and sued Oregon Automobile Insurance Company (OAIC), which insured the owner of the truck, for contribution and a determination that Lamb-Weston, Inc., a lessor, was an additional insured. Lamb-Weston, Inc., 219 Or. at 113-114, 341 P.2d at 111-112 (1959)

The St. Paul policy contained a version of an “excess” clause, which provided: “If the Insured's liability under this policy is covered by any other valid and collectible insurance, then this policy shall act as excess insurance over and above such other insurance.” Id. at 119, 114.

The OAIC policy contained a version of a “pro-rata” clause, which read: “' if the insured has other insurance against a loss covered by this policy the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability stated in the declarations bears to the total applicable limit of all valid and collectible insurance against such loss ' .” Id.

The Oregon court was troubled by what it saw as arbitrary reasoning in the “other insurance” jurisprudence. The “pro-rata” clause in the OAIC policy required sharing by limits with other “valid and collectible insurance.” However, the “excess clause” in the St. Paul policy prohibited sharing with other “valid and collectible insurance.” According to the Oregon court: “[The majority rule's] reasoning appears to us completely circular, depending, as it were, on which policy one happens to read first. ' [T]he problem is little different from that involved in deciding which came first, the hen or the egg.” Id. at 122, 116.

Rather than modify the two clauses to give effect to the perceived intention of the insurers, the Lamb-Weston rule rejects both clauses and treats the overlapping primary policies as though they do not contain “other insurance” clauses at all: “In our opinion, whether one policy uses one clause or another, when any come in conflict with the 'other insurance' clause of another insurer, regardless of the nature of the clause, they are in fact repugnant and each should be rejected in toto.” Id. at 128, 119.

Almost since it was decided in June 1959, commentators have labeled Lamb-Weston the “minority rule.” Despite its “minority rule” label, Lamb-Weston garners a steady stream of adherents. And, in recent years, courts have rendered decisions whose logic is best described as “Lamb-Weston-like.” We discuss some of those Lamb-Weston-like decisions herein.

Application of the Majority Rule

Courts using a true “majority” approach attempt to harmonize differing “other insurance” clauses in overlapping primary insurance policies rather than disregard the clauses entirely. Jones v. Medox, Inc. , 430 A.2d 488, 12 A.L.R. 4th 981 (D.C. Ct. App. 1981) (reconciling “pro rata” and “excess” other insurance clauses in overlapping primary professional liability policies by requiring “pro rata” clause policy to contribute up to its limits before “excess” clause policy is implicated). While there is some inconsistency among these as well, some so-called “majority” jurisdictions are Michigan, New York, Virginia, Wyoming, Kentucky and the District of Columbia.

For example, in St. Paul Mercury Ins. Co. v. Penn. Cas'y Co., the court applied a true “majority” rule to reconcile competing “other insurance” clauses in professional liability policies issued to a hospital and its directors by St. Paul Mercury Insurance Company (St. Paul) and Pennsylvania Casualty Company (PCC). St. Paul Mercury Ins. Co. v. Penn. Cas'y Co. , 642 F. Supp. 180 (D. Wy. 1986).

The PCC policy contained a version of the “excess” clause, which provided: “The insurance afforded under this policy shall be excess over any valid and collectible insurance.” Id. at 182-183.

The St. Paul policy contained a version of the “pro rata” clause, which read: “A professional liability loss that's covered under this agreement may also be covered under other insurance. If this happens, we'll pay that portion of the loss which the limits of coverage under the agreement are of the total of all limits that apply. But we won't pay more than the limits of coverage under this agreement.” Id. at 182.

Noting that “neither party relied upon the existence of insurance coverage on the part of the other” in issuing the policies, the court reasoned that the competing “other insurance” clauses were best harmonized by permitting the PCC policy, which had an “excess” clause, to apply as excess to the St. Paul policy, which had a “pro rata” clause. Id. at 185 (“this Court will give effect to the intent of the insuring parties, who have contracted with the insured hospital as expressed by the language contained in the insurance policies”).

The “excess clause” contemplates that the policy will be excess “over any valid and collectible insurance.” An overlapping primary policy is “valid and collectible insurance.” Therefore, the “excess” clause can be enforced. As the Lamb-Weston court noted, the majority rule chooses to begin with the “excess clause” and, by doing so, does not give full effect to the “pro rata” clause, which requires sharing by limits.

Majority courts reason that it is more consistent with the expectation of insurers for a “pro-rata” clause, which contemplates some sharing with other insurance, to give way to an “excess clause,” which prohibits sharing. One could argue that the very existence of the majority rule has strengthened the expectation of insurers, who have for years drafted “other insurance” clauses with the majority rule in mind.

Spiro K. Bantis is a Partner based in the New York Office of London Fischer LLP and a member of its Insurance and Reinsurance Coverage Practice Group. He is an ARIAS-U.S. certified arbitrator and was previously General Counsel and Executive Vice President of Gulf Insurance Company. Daniel W. London is a Senior Associate in the firm. He is a former management and professional liability underwriter for Gulf Insurance Company and secondee to the claims department of a large insurer at Lloyd's of London.