Managing Insurance Coverage from Multiple Insurers

The "Other Insurance" Issue

This first scenario is where a single-year loss implicates multiple lines of coverage. Consider the following: a general contractor (GC) faces a property damage liability claim from an owner. As a prudent insured, the GC notifies its customary first line of defense, its commercial general liability (CGL) insurer, to provide a defense. As knowledge of the claim evolves, it appears an element of pollution may be involved. The GC also places its pollution insurer on notice. Later, it's determined that the GC may have a professional liability exposure, so it tenders a claim to its professional liability insurer. Now assume that each insurer accepts coverage.

At first blush, this would seem to be an unmitigated success. However, this is precisely a scenario where less can be more. Although each insurer under the above facts has an obligation to defend their insured, how they share that defense can quickly become a source of debate—and possibly even litigation—between and among the insurers and the policyholder.

The first step ¹ of the analysis on who should be providing coverage is to consider the "other insurance" language in the policies. "Other insurance" clauses are designed to dictate priority of coverage when multiple policies are triggered for the same risk and for the same insured. The clause effectively defines the insurer's exposure when other insurance exists for a loss. The "other insurance" clause typically takes three forms: escape, excess, or pro rata. ² An escape clause renders its policy completely inapplicable if other insurance exists. An excess clause renders the policy excess to the other insurance. Finally, a pro rata clause provides that the two policies proportionally contribute to the loss (courts across the country take differing approaches to the pro rata calculation; some divide based on time on the risk, others by limits). ³

If the "other insurance" clauses can be read consistently together, courts will prioritize based on those terms. When "other insurance" clauses conflict, however, courts must determine how to apportion the loss between each policy. Consider the following examples of "other insurance" provisions.

General Liability Policy

This insurance is primary except when … this insurance is excess over any of the other insurance, whether primary, excess, contingent or on any other basis. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance … by equal shares…if any other insurance does not permit contribution by equal shares, we will contribute by limits. ⁴

Under these policy terms, when the general liability (GL) insurer is the only primary policy, it will pay the amount set forth in the declarations and insuring agreement. However, when another insurer is also primary, the GL insurer will contribute in equal shares with the other primary insurer. If the other primary insurer's policy does not allow contribution in equal shares, then the GL insurer will only contribute by policy limits.

Professional Liability—Errors and Omissions Policy

This Policy shall be excess insurance over any other valid and collectable insurance available to You, whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise, unless such other insurance is written only as a specific excess insurance over the Limit of Liability provided in this Policy. ⁵

Here, the professional liability policy is excess to any other valid and collectable insurance. In this case, the professional liability insurer has no duty to the policyholder until the other insurance is exhausted, unless the other policy is specifically designated as an excess policy to that professional policy.

Contractor's Pollution Liability Policy

This insurance is primary, and the Company's obligations are not affected unless any of the other insurance is also primary. If all of the other insurance permits contribution by equal shares, the Company will follow this method also.... If any of the other insurance does not permit contribution by equal shares, the Company will contribute by limit.... This insurance is excess where the Named Insured is an insured on a pollution liability policy for Covered Operation performed by or on behalf of the Named Insured at a specific job site and the pollution liability policy applies to a specific job site. ⁶

Under the terms in the contractor's pollution liability (CPL) policy, the insurer is primary, and its obligations do not change unless another policy is also primary. If multiple policies are primary, then the CPL policy will contribute in equal shares. If the policy language in the other insurance does not allow a contribution in equal shares, then the contractor's pollution liability policy (PLL) will contribute by limits. However, if the named insured is an insured on a PLL for a specific job site, then the CPL policy is excess.

In the above hypothetical, all three other insurance clauses would need to be analyzed. We can anticipate that the result would be that the PLL policy would be excess to the CGL and CPL policies, which would most likely share by equal shares. However, the specific facts and law (more so than discussed here) would need to be analyzed in greater detail.

In this scenario, the CGL and CPL policies likely could be reconciled, but that is not always the case. If the other insurance clauses cannot be reconciled, a court will deem them to be mutually repugnant. Most courts hold that where two policies conflict, and are indistinguishable in their meaning and intent, the clauses are considered mutually repugnant and must be disregarded. Courts often apportion loss payments among insurers on a prorated basis, based on the policies' respective limits. ⁷ Some courts hold that when other insurance clauses conflict, they must be completely disregarded, and the insurers must share equally in coverage. ⁸

The Allocation Issue

Now, consider a second scenario: a multiple-year loss that triggers coverage under policies spanning multiple years. Instead of a loss that triggers different lines of coverage in a single year, let's assume that the loss is a long-tail claim that triggers coverage under multiple years. Further, let's assume that the insured placed coverage under its CGL coverage with different insurers over the years. In this type of situation, courts will select one of two methods to apportion losses, either all sums or pro rata allocation.

Under an all sums approach, liability across multiple policy periods permits the insured to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits. ⁹ All sums allocation allows vertical exhaustion or "pick and spike" to access coverage under a specific policy (and any policies excess to that policy). ¹⁰ This method is beneficial to insureds because policyholders can avoid coverage gaps resulting from self-insured periods or from the commercial unavailability of an insurance product.

In contrast, under the pro rata approach, each insurance policy is allocated a pro rata share of the total loss representing the portion of the loss that occurred during the policy period. ¹¹ Pro rata shares of liability across multiple policy periods are often, although not exclusively, calculated based on an insurer's time on the risk, a fractional amount corresponding to the duration of the coverage provided by each insurer in relation to the total loss. ¹² In some jurisdictions, an insured will also be assigned a fractional amount in the calculation for those years in which it is uninsured or underinsured. ¹³

The pro rata approach, in reality, can result in a number of different calculations. An insurer may argue that the correct approach is to split the fees per insurer. Another insurer may argue that the split should be based on policy year. Finally, an insurer may argue that the total number of policies should be split based on the loss. Each of these calculations could result in the insurers arguing over who pays which percentage. Until this is resolved, the insurers may take the stance that they will only pay the limited percentage that they feel they owe, which could result in the insured holding the bag for the difference.

Practical Considerations and Strategies

There are several key practical considerations that an insured should keep in mind when dealing with claims that implicate multiple policies, as in the scenarios above. First, be proactive. Although this may appear to be a dispute among insurers, that dispute can have a practical impact on the policyholder in many ways: lack of clear control over the defense, a separate coverage litigation that requires the insured as a party and diverts resources and attention from the main case, and possibly undermining underwriting intent and relationships.

Second, the insured should seek advice early on a choice-of-law analysis as to which law will apply to the interpretation of the policies. All things being equal, a state that allows for an all sums approach will make the insured's arguments for full coverage from a particular insurer much easier, so the insured needs to strategically consider whether to bring suit to get the benefit of that law.

If the choice of law results in a pro rata application, the insured might strategically insist on having a "lead insurer" be selected. Conceptually, that "lead insurer" would be the insured's primary point of contact and be responsible for collecting the proportionate share from the other insurers and issuing the payments to the insured's defense counsel. At the same time, the insured should insist that the legal fees be run through only the "lead insurer's" billing system to avoid the fees being reduced multiple times.

Finally, to the extent that the insurers are unable to agree on the percentage of the defense fees that each owes, the insured should push for an interim agreement that results in the full defense fees being paid to limit the exposure to the insured while the insurers figure out the percentage each owes.

Another consideration to keep in mind when faced with "other insurance" clause conflicts is disagreement among insurers. Under ideal circumstances, all insurers will reach consensus to avoid duplication or a clash in strategies. Unfortunately, discord among insurers is sometimes inevitable. In such cases, a policyholder should push a primary policy to defend and indemnify it fully, as "other insurance" clauses are intended to provide a method of resolving conflict among insurers and not to be an impediment to the policyholder.

Ultimately, there is no substitute for long-range case-specific planning; unique facts and objectives require a unique strategy. Proper planning and proactive discussions with insurers can help to alleviate some of these concerns.

Acknowledgment

Many thanks to Phil Brown-Wilusz, coauthor of this article, and Ashley McWilliams, who assisted with research and finding policy language.