In “Other Insurance” News: “Escape Clause” Beats “Excess Clause”

I know “other insurance” issues can be esoteric, but they are also increasingly important to insurance disputes.  They are so important that I did a CLE presentation recently that focused almost exclusively on the impact of the “other insurance” clause on deductibles and self-insured retentions (program materials can be found here).

The “other insurance” clause is the insurance policy provision that controls the priority of coverage between two or more policies that cover the same loss.  The clause is particularly important when dealing with additional insured claims, since the party seeking additional insured coverage is trying to get another insurance company to provide coverage, whereas that other insurer is trying to avoid coverage, or at least avoid having to provide primary coverage.

Other insurance disputes frequently occur between two insurance companies jockeying for position to be excess of the other policy.  In those situations, we as policyholder counsel can sit back and let the insurers fight it out.  Our client is protected either way.  But the issue can become critical for policyholders who are self-insured, or make use of large deductibles, fronted coverage, corridors, captives, or other self-insurance mechanisms.  This includes many companies that choose to reduce premiums by assuming large uninsured layers.  For these companies, losing an “other insurance” dispute means they have to pay the loss themselves.

So that brings us to the recent case of Amerisure Ins. Co. v. Old Republic Ins. Co., No. 8:12-cv-2652-T-30MAP, 2013 U.S. Dist. LEXIS 139251 (M.D. Fla. Sept. 27, 2013).  The Amerisure case arose out of an other insurance dispute between two insurers.  Amerisure insured Star Transportation Company, a company that operates tractor trailers.  Old Republic insured Ryder Truck Rental, which leased a tractor to Star.  Star owned the trailer.  The tractor trailer was in an accident, and Star and Ryder were both sued.  A dispute arose as to which insurer was responsible to defend and indemnify the companies, and in what priority.

As is frequently the case, Star and Ryder had entered into a contract (in this case a lease) governing indemnification and insurance rights between the parties.  The lease stated that Ryder would insure the tractor, and would name Star as an additional insured on its insurance.  The lease also stated that Ryder’s insurance would be “primary and not additional or excess over insurance otherwise available to either party.”

Ryder’s insurance policy with Old Republic stated in its “other insurance” clause that coverage for an unowned trailer attached to Ryder’s truck would be “excess over any other valid and collectible insurance the lessee/renter may have whether such coverage is on a primary, excess or contingent basis.”  The court referred to this type of other insurance clause as an “escape” clause or an “excess over excess” clause.

Amerisure’s policy for Star contained an other insurance clause which stated that its coverage for the trailer was “[e]xcess while it is connected to a motor vehicle you do not own.”  The court referred to this clause as an “excess” clause.

The court compared the language in the two other insurance clause, and, in a sort of rock-paper-scissors analysis, determined that the “escape” clause trumped the “excess” clause.  The court’s reasoning was that, while the Amerisure clause stated that it was excess, the Old Republic clause stated that it was “excess over excess”.  Perhaps next time Amerisure will write its policy to state that it is “excess over excess over excess, and it also calls ‘shotgun’.”

In my view (and I had nothing to do with this case, as I do not represent insurance companies), the judge got it wrong.  You can see how relying solely on the competing policy language can lead to arbitrary results, since each insurer is incentivized to put ever stricter “other insurance” language in its policies.  The additional insured has no control over the other insurance language found in a policy it did not purchase, and policyholders hardly ever negotiate over other insurance clauses.  So the result is a crapshoot of policy language.

At a minimum, the court should have found the two other insurance clauses to be mutually repugnant, and should have turned to equitable principles to determine the priority of coverage.  Ordinarily, that would mean each insurer would share the defense and indemnity costs 50/50.

In this case, however, the court should have found that the Old Republic coverage was primary because the lease agreement required Ryder’s coverage to be primary.  This was language that the parties negotiated among themselves, and this language, not the competing other insurance clauses, should have determined the risk allocation between the parties.  Contract language is something that parties can control, whereas the other insurance language largely is out of policyholders’ control.

Perhaps if Star was self insured, or had a large deductible on its policy, the court would have looked at it differently.  One can only hope so.  Other insurance disputes should not be a crapshoot, or a game of rock-paper-scissors.  They should be resolved first by honoring the agreement between the parties, and then with equitable principles in mind.