Judicial Scrutiny of 'Other Insurance' Clauses

The Minority Approach: Application of Lamb-Weston-like Rules

Courts that have adopted Lamb-Weston's bright-line rule are indeed in the minority. See Werley v. United Svcs. Auto. Ass'n, 498 P.2d 112, 119 (AK 1972) However, courts continue to apply Lamb-Weston-like rules in select circumstances. See, e.g., Hoffmaster v. Harleysville Ins. Co., 441 Pa. Super 490, 657 A.2d 1274 (Pa. Sup. 1995); Penton v. Hotho, 601 So.2d 762, 766-769 (La. Ct. App. 1992). These courts often perceive a policyholder protection rationale in the simplicity of the Lamb-Weston rule. See Hindson v. Allstate Ins. Co., 694 A.2d 682, 685-686 (R.I. 1997) Accordingly, it may be unhelpful to simply characterize a particular jurisdiction as following the “minority” or “majority” approach. It is increasingly necessary to examine the particular competing “other insurance” clauses in context.

Application of Lamb-Weston For Select Conflicts

In Penton v. Hotho, a Louisiana appellate court applied the Lamb-Weston rule selectively to resolve competing “excess” and “pro-rata” clauses in professional liability policies. See, e.g., Hoffmaster v. Harleysville Ins. Co., 441 Pa. Super 490, 657 A.2d 1274 (Pa. Sup. 1995); Penton v. Hotho, 601 So.2d 762, 766-769 (La. Ct. App. 1992). These courts often perceive a policyholder protection rationale in the simplicity of the Lamb-Weston rule. See Hindson v. Allstate Ins. Co., 694 A.2d 682, 685-686 (R.I. 1997).

Dr. Hotho was insured by Louisiana Medical Mutual Ins. Co. (LMMIC) under a cancelled claims-made policy with an extended reporting period, and by The Medical Protective Company (MPC) under an overlapping claims-made policy issued after cancellation of the LMMIC policy. Id. at 763.

Like the PCC policy at issue in St. Paul Mercury Ins. Co., above, the LMMIC policy contained a version of an “excess” clause. The LMMIC clause provided: “The insurance available under this policy shall be excess over any other valid and collectible insurance.” Id. at 764

And like the St. Paul policy described above, the MPC policy at issue in Penton contained a version of a “pro-rata” clause. The MPC clause read: “When both this insurance and other insurance apply to the loss on the same basis ' the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability under this policy for such loss bears to the total applicable limit of all valid and collectible insurance against such loss.” Id.

Rather than modify the two clauses to give effect to the perceived intention of the insurers, the Penton court adopted the Lamb-Weston rule in treating the overlapping primary policies as though they do not contain “other insurance” clauses.

However, what is perhaps most interesting about the Penton decision is that Louisiana does not regard itself as a typical Lamb-Weston jurisdiction. As the Penton court noted, Louisiana courts will enforce “pro-rata” and “escape” clauses, but not “excess” and “escape” clauses or, following Penton, “pro-rata” and “excess” clauses.

California's March Toward Lamb-Weston (and Beyond)

In California, a destination has begun to appear in a march away from the majority rule, under which California courts have sought to harmonize competing “other insurance” clauses, toward a Lamb-Weston-like rule, which disregards “excess” and “escape” other insurance clauses on equitable grounds. See, e.g., Owens Pacific Marine, Inc. v. Insurance Co. of North America, 12 Cal. App.3d 661, 90 Cal. Rptr.826 (2d Dist. 1970) (following majority rule that, where overlapping primary policies contain competing “excess” and “pro-rata” other insurance clauses, the policy with the “pro-rata” clause must pay its limit before the policy with the “excess” clause is triggered); compare Fireman's Fund Ins. Co. v. Maryland Cas'y Co., 65 Cal.App.4th 1279, 77 Cal.Rptr.2d 296 (1998) (“excess” other insurance clauses disregarded where multiple primary insurance policies provided coverage to same insured for same loss but during multiple policy periods).

Edmondson Property Management v. Kwock presented the court with a relatively common “other insurance” dispute. Edmondson Prop. Mgmt. v. Kwock, 156 Cal.App.4th 197, 67 Cal.Rptr.3d 243 (5th Dist. 2007) review denied (2008). Edmondson Property Management (Edmondson) managed a residential building at which a child was injured. The child's guardians filed a personal injury lawsuit against Edmondson. The latter had liability insurance as an additional insured on a policy issued to the building owner by California Capital Insurance Company (Capital) and as the named insured on a policy issued by Farmers Insurance Group (Farmers). Edmondson Prop. Mgmt., 156 Cal.App.4th at 200, 67 Cal.Rptr.3d at 245.

The policy issued by Farmers contained an “excess” other insurance clause. According to the court, the policy issued by Capital did not contain any other insurance clause at all. Id. at 203, 247. Noting that “[t]he modern trend is to require contribution where there is the same level of insurance for the same risk, regardless of 'other insurance' language,” the Edmondson court concluded that “[p]ublic policy favors apportionment of loss among those who have contracted to insure against it and, as a result, equity overrides the terms of the insurance contract in these cases.” Id. at 203, 247-248. Thus, the “excess” other insurance clause in the Farmers policy would be disregarded even in the absence of any competing “other insurance” clause in the Capital policy. And the two primary policies would be required to contribute “50 percent for each party.” Id. at 209, 253. It is not clear whether the 50% apportionment approved by the court was a pro-rata apportionment by limits based on two policies with identical policy limits, or an equitable apportionment based on some other consideration.

Edmondson is a significant landmark in California's movement toward Lamb-Weston because it is the first reported California decision to apply a non-majority rule for primary policies covering the same policy periods. Earlier California cases were distinguishable because they applied a non-majority rule in cases with several policies spread over multiple policy periods. See, e.g., Fireman's Fund Ins. Co. v. Maryland Cas'y Co.; Century Surety Co. v. United Pacific Ins. Co., Travelers Cas'y and Surety Co. v. Century Surety Co., supra.

Edmondson may prove to represent a significant move beyond Lamb-Weston because the “excess” clause in the Farmers policy was disregarded even in the absence of a competing other insurance clause in the Capital policy. In this way, the Edmondson court strode past Lamb-Weston and earlier California cases that had given lip-service to the older rule that “an insurer's coverage terms will be honored if possible.” Travelers Cas'y and Surety Co., 118 Cal.App.4th at 159, 13 Cal.Rptr.3d at 528.

The Edmondson court rooted its decision solely in equitable terms: “['excess' and 'escape' clauses] are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.” Edmondson Prop. Mgmt., 156 Cal.App.4th at 203-204, 67 Cal.Rptr.3d at 248.

Federal District Courts tasked with interpreting California's “other insurance” jurisprudence may be struggling with the entirely equitable nature of the new rules. In California State Automobile Association Inter-Insurance Bureau v. Progressive Casualty Insurance Company, 2012 WL 1438835 (N.D.C.A. April 25, 2012), a district court was tasked with the interpretation of competing “other insurance” clauses in overlapping primary insurance policies.

The district court considered a dispute involving coverage for a personal injury arising out of a boating accident. California State Auto. Ass'n Inter-Ins. Bureau, 2012 WL 1438835 at *1. One primary policy contained a standard “excess” other insurance clause. A second overlapping primary policy contained an “other insurance” clause that was “excess” only for claims arising out of “watercraft.” Id at *2. Noting that the “modern trend is to require contribution where there is the same level of insurance for the same risk,” the court added, “this modern trend ' should only apply if there is an actual conflict between the two other insurance clauses.” Id at *3.

The district court found no conflict between a general “excess” other insurance clause and the more specific “excess” other insurance clause in the second policy. Because there was no conflict between the policies, the district court determined that principles of equity required the policy with the general “excess” clause to contribute its limits before the policy with the more specific “excess” clause was implicated. Id. at **3-4.

Conclusion

Courts continue to struggle with their approach to disputes over competing other insurance clauses in overlapping primary insurance policies. Those using a true “majority” approach attempt to harmonize different “other insurance” clauses in overlapping primary insurance policies rather than disregard the clauses entirely. However, courts attempting harmony sometimes strike a discordant note when efforts are made to discern common rules across jurisdictions.

The bright-line rule adopted by the Oregon Supreme Court in Lamb-Weston offers the promise for greater consistency but provides that consistency only by ignoring insurers' attempts to define their obligations to one another. California appears to be forging its own path, based on public policy considerations rather than principles of contract interpretation.

In this shifting landscape, it is increasingly important for underwriters, claims professionals and coverage lawyers to consider particular competing “other insurance” clauses in context of the jurisdictions, policies and underlying claims in which a dispute may arise. In relying on majority rules and long-held industry expectations, there is a risk of walking into a claim with the confidence of a lion only to discover a surprising rule that sends one out like a lamb (Weston).

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.

Editor's note: Last month, we began discussion of the ways in which different jurisdictions treat “excess insurance” clauses ' those that describe an insurer's obligation when more than one insurance policy provides coverage to the same insured for the same loss.

Jurisdictions that follow the majority approach seek first to harmonize the competing clauses, with a policy containing a “pro-rata” clause paying its entire limit when faced with an “excess” or “escape” clause. See, e.g., Couch on Insurance 3D, ” 219:51 & 219.56 (West 2012). And, in general, a policy with an “escape” clause pays its entire limit first when the other insurer's policy has an “excess” clause. Couch on Insurance 3D, ' 219:53.

As noted in Part One of this article, the most prominent early case espousing a minority view was Lamb-Weston, Inc. v. Oregon Automobile Ins. Co., 219 Or. 110, 341 P.2d 110 (1959), in which the Supreme Court of Oregon considered competing “excess” and “pro-rata” clauses in primary automobile liability policies. It concluded that “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.

The Minority Approach: Application of Lamb-Weston-like Rules

Courts that have adopted Lamb-Weston's bright-line rule are indeed in the minority. See Werley v. United Svcs. Auto. Ass'n , 498 P.2d 112, 119 (AK 1972) However, courts continue to apply Lamb-Weston -like rules in select circumstances. See, e.g., Hoffmaster v. Harleysville Ins. Co., 441 Pa. Super 490, 657 A.2d 1274 (Pa. Sup. 1995); Penton v. Hotho , 601 So.2d 762, 766-769 (La. Ct. App. 1992). These courts often perceive a policyholder protection rationale in the simplicity of the Lamb-Weston rule. See Hindson v. Allstate Ins. Co. , 694 A.2d 682, 685-686 (R.I. 1997) Accordingly, it may be unhelpful to simply characterize a particular jurisdiction as following the “minority” or “majority” approach. It is increasingly necessary to examine the particular competing “other insurance” clauses in context.

Application of Lamb-Weston For Select Conflicts

In Penton v. Hotho, a Louisiana appellate court applied the Lamb-Weston rule selectively to resolve competing “excess” and “pro-rata” clauses in professional liability policies. See, e.g., Hoffmaster v. Harleysville Ins. Co., 441 Pa. Super 490, 657 A.2d 1274 (Pa. Sup. 1995); Penton v. Hotho , 601 So.2d 762, 766-769 (La. Ct. App. 1992). These courts often perceive a policyholder protection rationale in the simplicity of the Lamb-Weston rule. See Hindson v. Allstate Ins. Co. , 694 A.2d 682, 685-686 (R.I. 1997).

Dr. Hotho was insured by Louisiana Medical Mutual Ins. Co. (LMMIC) under a cancelled claims-made policy with an extended reporting period, and by The Medical Protective Company (MPC) under an overlapping claims-made policy issued after cancellation of the LMMIC policy. Id. at 763.

Like the PCC policy at issue in St. Paul Mercury Ins. Co., above, the LMMIC policy contained a version of an “excess” clause. The LMMIC clause provided: “The insurance available under this policy shall be excess over any other valid and collectible insurance.” Id. at 764

And like the St. Paul policy described above, the MPC policy at issue in Penton contained a version of a “pro-rata” clause. The MPC clause read: “When both this insurance and other insurance apply to the loss on the same basis ' the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability under this policy for such loss bears to the total applicable limit of all valid and collectible insurance against such loss.” Id.

Rather than modify the two clauses to give effect to the perceived intention of the insurers, the Penton court adopted the Lamb-Weston rule in treating the overlapping primary policies as though they do not contain “other insurance” clauses.

However, what is perhaps most interesting about the Penton decision is that Louisiana does not regard itself as a typical Lamb-Weston jurisdiction. As the Penton court noted, Louisiana courts will enforce “pro-rata” and “escape” clauses, but not “excess” and “escape” clauses or, following Penton, “pro-rata” and “excess” clauses.

California's March Toward Lamb-Weston (and Beyond)

In California, a destination has begun to appear in a march away from the majority rule, under which California courts have sought to harmonize competing “other insurance” clauses, toward a Lamb-Weston-like rule, which disregards “excess” and “escape” other insurance clauses on equitable grounds. See, e.g., Owens Pacific Marine, Inc. v. Insurance Co. of North America , 12 Cal. App.3d 661, 90 Cal. Rptr.826 (2d Dist. 1970) (following majority rule that, where overlapping primary policies contain competing “excess” and “pro-rata” other insurance clauses, the policy with the “pro-rata” clause must pay its limit before the policy with the “excess” clause is triggered); compare Fireman's Fund Ins. Co. v. Maryland Cas'y Co. , 65 Cal.App.4th 1279, 77 Cal.Rptr.2d 296 (1998) (“excess” other insurance clauses disregarded where multiple primary insurance policies provided coverage to same insured for same loss but during multiple policy periods).

Edmondson Property Management v. Kwock presented the court with a relatively common “other insurance” dispute. Edmondson Prop. Mgmt. v. Kwock , 156 Cal.App.4th 197, 67 Cal.Rptr.3d 243 (5th Dist. 2007) review denied (2008). Edmondson Property Management (Edmondson) managed a residential building at which a child was injured. The child's guardians filed a personal injury lawsuit against Edmondson. The latter had liability insurance as an additional insured on a policy issued to the building owner by California Capital Insurance Company (Capital) and as the named insured on a policy issued by Farmers Insurance Group (Farmers). Edmondson Prop. Mgmt., 156 Cal.App.4th at 200, 67 Cal.Rptr.3d at 245.

The policy issued by Farmers contained an “excess” other insurance clause. According to the court, the policy issued by Capital did not contain any other insurance clause at all. Id. at 203, 247. Noting that “[t]he modern trend is to require contribution where there is the same level of insurance for the same risk, regardless of 'other insurance' language,” the Edmondson court concluded that “[p]ublic policy favors apportionment of loss among those who have contracted to insure against it and, as a result, equity overrides the terms of the insurance contract in these cases.” Id. at 203, 247-248. Thus, the “excess” other insurance clause in the Farmers policy would be disregarded even in the absence of any competing “other insurance” clause in the Capital policy. And the two primary policies would be required to contribute “50 percent for each party.” Id. at 209, 253. It is not clear whether the 50% apportionment approved by the court was a pro-rata apportionment by limits based on two policies with identical policy limits, or an equitable apportionment based on some other consideration.

Edmondson is a significant landmark in California's movement toward Lamb-Weston because it is the first reported California decision to apply a non-majority rule for primary policies covering the same policy periods. Earlier California cases were distinguishable because they applied a non-majority rule in cases with several policies spread over multiple policy periods. See, e.g., Fireman's Fund Ins. Co. v. Maryland Cas'y Co.; Century Surety Co. v. United Pacific Ins. Co., Travelers Cas'y and Surety Co. v. Century Surety Co., supra.

Edmondson may prove to represent a significant move beyond Lamb-Weston because the “excess” clause in the Farmers policy was disregarded even in the absence of a competing other insurance clause in the Capital policy. In this way, the Edmondson court strode past Lamb-Weston and earlier California cases that had given lip-service to the older rule that “an insurer's coverage terms will be honored if possible.” Travelers Cas'y and Surety Co., 118 Cal.App.4th at 159, 13 Cal.Rptr.3d at 528.

The Edmondson court rooted its decision solely in equitable terms: “['excess' and 'escape' clauses] are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.” Edmondson Prop. Mgmt., 156 Cal.App.4th at 203-204, 67 Cal.Rptr.3d at 248.

Federal District Courts tasked with interpreting California's “other insurance” jurisprudence may be struggling with the entirely equitable nature of the new rules. In California State Automobile Association Inter-Insurance Bureau v. Progressive Casualty Insurance Company, 2012 WL 1438835 (N.D.C.A. April 25, 2012), a district court was tasked with the interpretation of competing “other insurance” clauses in overlapping primary insurance policies.

The district court considered a dispute involving coverage for a personal injury arising out of a boating accident. California State Auto. Ass'n Inter-Ins. Bureau, 2012 WL 1438835 at *1. One primary policy contained a standard “excess” other insurance clause. A second overlapping primary policy contained an “other insurance” clause that was “excess” only for claims arising out of “watercraft.” Id at *2. Noting that the “modern trend is to require contribution where there is the same level of insurance for the same risk,” the court added, “this modern trend ' should only apply if there is an actual conflict between the two other insurance clauses.” Id at *3.

The district court found no conflict between a general “excess” other insurance clause and the more specific “excess” other insurance clause in the second policy. Because there was no conflict between the policies, the district court determined that principles of equity required the policy with the general “excess” clause to contribute its limits before the policy with the more specific “excess” clause was implicated. Id. at **3-4.

Conclusion

Courts continue to struggle with their approach to disputes over competing other insurance clauses in overlapping primary insurance policies. Those using a true “majority” approach attempt to harmonize different “other insurance” clauses in overlapping primary insurance policies rather than disregard the clauses entirely. However, courts attempting harmony sometimes strike a discordant note when efforts are made to discern common rules across jurisdictions.

The bright-line rule adopted by the Oregon Supreme Court in Lamb-Weston offers the promise for greater consistency but provides that consistency only by ignoring insurers' attempts to define their obligations to one another. California appears to be forging its own path, based on public policy considerations rather than principles of contract interpretation.

In this shifting landscape, it is increasingly important for underwriters, claims professionals and coverage lawyers to consider particular competing “other insurance” clauses in context of the jurisdictions, policies and underlying claims in which a dispute may arise. In relying on majority rules and long-held industry expectations, there is a risk of walking into a claim with the confidence of a lion only to discover a surprising rule that sends one out like a lamb (Weston).

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.