DO BOTH POLICIES APPLY?
Last week we discussed step one, which is to initially determine whether both policies would apply to the same loss. Today we are going to discuss step two, which is how to split the costs between the two policies.
Courts consider the following:
1. the nature of the claim;
2. the relation of the insured to the insurers;
3. the particulars of each policy; and
4. any other equitable contribution.
American Family Mut. Ins. Co. v. Regent Ins. Co., 288 Neb. 25, 42 (Neb. Supt. Ct. May 2, 2014.) As always, let’s go together to the case law for examples as to how this has been handled in the past.
The American Family case is quite recent and provides us with good instruction. There, a guest of a tenant at an apartment complex fell over a faulty railing. He was rendered a paraplegic. Regent insured the apartment complex owner. American Family insured the apartment management company. Both policies covered the loss. In addition, the management company was also a co-insured under the Regent policies. American Family settled the case with the injured guest for $3.5 million. It, in turn, brought the present contribution action against Regent for its fair share of the settlement.
The Nebraska Supreme Court affirmed the trial court’s apportionment. It ruled that “where two carriers have responsibility for a claim, the other insurance clause of each policy must be examined to determine whether there exists language which may govern the contribution each party should make.” Id., at 56-57. There, the American Family policy had a clause requiring a pro-rata contribution if that policy was considered primary. The Regent policy had an “excess insurance” clause, mandating that the Regent policy would be considered “excess” and secondary if there was another, applicable primary policy. “Where an excess clause and a pro-rata clause appear in concurrently effective policies, the pro-rata clause is usually disregarded and full effect is given to the excess clause, making the pro-rata policy the primary insurance.” Id., at 58.
In that situation, however, both policies had $1 million in coverage. The total loss was $3.5 million. Since this amount well exceeded each primary coverage limit, the court ruled that BOTH policies equally applied. Each had to contribute $1 million.
There were also two umbrella policies. The rule adopted by the majority of jurisdictions, including Nebraska, is that the excess insurance clauses in umbrella or excess policies are mutually repugnant. Insurers must share pro-rata in the proportion that their respective policy limits bear to the entire loss. Id., at 59. Thus, on the umbrella policies, Regent had to contribute to American Family in the amount of four ninths of the cost of payments to be made to the guest.
My goodness! This can be quite complex, can’t it! Let’s look at a few more cases to see if it helps you in understanding apportionment rules.
The Supreme Court of Washington, along with a few other states, follows the “maximum loss” doctrine on apportionment. In the case of Mission Ins. Co. v. Allendale Mut. Ins. Co., 95 Wash. 2d 464, 467, 626 P.2d 505, 507 (1981), the court stated that this rule is most equitable, fair and easy to administer, taking into account the premiums paid for higher coverage in one policy over another.
The Maximum Loss Doctrine states that “each company is to contribute equally until the limits of the smaller policy were exhausted, with any remaining portion of the loss than being paid from the larger policy up to its limits.” This is the minority rule. But it certainly is easier to apply.
The majority rule calls for Pro-Ration. The Nebraska Court did this in American Family, supra. Texas and other states follow this rule. For example, in Travelers Lloyds Ins. Co. v. Pac. Employers Ins. Co., 602 F.3d 677, 687 (5th Cir. 2010) applying Texas law, the court pro-rated the cost of defense and the amount of coverage between the two insurers. It mandated payment of an amount that was in proportion to the coverage each policy provided. “Since each provided an equal amount of coverage, each should share equally in the cost to defend and settle all claims.” Id.
Remember, these rules only apply when the loss occurs during the same policy period – concurrent coverage. For cumulative losses over time, such as an asbestos claim, the courts apply a “Time on the Risk” rule, in additional to pro-ration. The Time on the Risk rule also incorporates an analysis of the policies; however it looks at what policy covered what time period and it further allocates the damages based upon these factors as well.
BOTTOM LINE:
1. For a loss which involves concurrent insurance coverage, the majority of courts apply a pro-rata allocation of loss rule.
2. The insurer must pay for the loss in proportion to its amount of insurance coverage.
3. If they both have the same coverage amounts, the loss is split evenly.
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