Insurance policies typically contain what are known as other-insurance clauses. Other-insurance clauses set forth a methodology for apportioning liability when multiple insurers have issued policies that provide coverage for a loss. There are three basic types of other-insurance clauses: pro-rata, escape, and excess. Deciding how different other-insurance clauses apply is like a game of rock-paper-scissors.
A pro-rata clause typically provides that each insurer will pay its proportional share of the loss based on total available policy limits. An escape clause provides that an insurer will have no liability to the insured when other insurance coverage is available. The excess clause provides that the insurer will be liable only after the exhaustion of the limits of any other applicable insurance. In cases where other-insurance clauses can be reconciled, the clauses will be enforced pursuant to their terms and conditions.
For instance, if two policies each contain pro-rata clauses, the insurers will share in the payment of a loss on a pro-rata basis based on the overall limits of the policies. If one policy contains a pro-rata clause and the other contains an excess clause, the policy with the pro-rata clause will be exhausted before the other policy is triggered.
Other-insurance clauses will not be enforced, however, if they conflict and cannot be reconciled. For instance, if there are two policies and each contains an excess other-insurance clause, neither clause will be enforced. In that case, each insurer will share equally in the payment of the loss until the limit of the smallest policy is exhausted.
The New Jersey Appellate Division addressed application of dueling other-insurance clauses in Foerster v. Meckel Enterprises, LLC, 2016 WL 5922746 (Oct. 12, 2016). The plaintiff in that case was injured when he slipped and fell on the bathroom floor of space leased by Robert S. Foerster Optician, Inc. (“RFO”). The space was leased from Meckel Enterprises, LLC and Ann Arbor Associates, Inc. (collectively, “Meckel”).
In accordance with the terms of the lease agreement, RFO obtained $1 million in insurance coverage, naming Meckel as an additional insured. That policy, which was obtained from Penn National Insurance, contained an excess other-insurance clause, which provided:
- If there is other insurance covering the same loss or damage, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.
- Business Liability Coverage is excess over any other insurance that insures for direct physical loss or damage.
Id. at *1.
Meckel also had its own insurance policy, which was issued by Citizens Insurance Company of America. That policy contained a hybrid, pro-rata excess clause. The clause provided:
This insurance is excess over:
* * *
2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.
* * *
c. When this insurance is excess over other insurance, we will pay only our share of the amount of the loss if any, that exceeds the sum of:
1) The total amount that all such other insurance would pay for the loss in the absence of this insurance;
* * *
e. Method of Sharing
* * *
If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer’s share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.
Id.
There was no question that there was coverage under both policies. The only question was how the two policies should contribute toward the loss.
Meckel claimed that Penn National’s other-insurance clause did not apply. According to Meckel, Penn National had to provide primary coverage and the Citizens policy was triggered only after coverage under the Penn National policy was exhausted. Penn National obviously made the opposite argument. The trial judge agreed with Penn National and Meckel appealed. On appeal, the Appellate Division affirmed.
Meckel argued that paragraph 2 of the Penn National other-insurance clause limited application of the clause to claims involving “direct physical loss or damage.” According to Meckel, the claim at issue involved bodily injury and not direct physical loss or damage. Thus, the Penn National other-insurance clause did not apply. The Appellate Division rejected that argument, noting that paragraph 1 of the other-insurance clause clearly stated that the Penn National policy provided excess coverage over “other insurance covering the same loss or damage.” Id. at *2.
The court then noted that the Citizens other-insurance clause called for pro-rata allocation when other primary insurance is available. The court failed to note, however, that the pro-rata allocation applies only when there is other excess coverage.
The court further noted that the Citizens clause provided that “[w]hen, as here, the other-insurance does not permit contribution by equal shares,” each insurer will contribute its proportional share of the loss based on total policy limits. Id. at *3. Once again, the court failed to note that this provision applies only when there is other excess coverage.
The court contrasted the Citizens clause with the Penn National clause, which did not call for a sharing of obligations. As noted by the court, under New Jersey law:
where one policy has an excess other-insurance clause and another policy on the same risk does not, the former policy will not come into effect until the limits of the latter policy are exhausted.
Id. (quoting W9/PHC Real Estate LP v. Farm Family Cas. Ins. Co., 407 N.J. Super. 177, 197 (App. Div. 2009)). The court concluded:
because the Penn National policy contains an excess other-insurance clause and the other-insurance provision in the Citizens policy provides for pro-rata sharing of the insurance obligation, the Penn National policy does not come into effect until the Citizens policy limits are exhausted.
Id. Therefore, the court affirmed the trial court’s ruling. The court essentially ruled that the Penn National clause was the rock to Citizens’s scissors.
The court appears to have misinterpreted the Citizens clause. There is no question that the Citizens clause was an excess other-insurance clause. Indeed, it clearly states that the Citizens policy “is excess over . . . any other primary insurance available to you.” Thus, the two clauses arguably should have cancelled each other out and the insurers should have shared in the loss. The court seemed a bit confused, however, by the pro-rata language in the Citizens clause, thereby mistaking the clause for a pro-rata and not an excess clause. The court seems to have missed the fact that the pro-rata language clearly provides that it applies only when there is excess coverage.
It should be noted that the court did not quote Citizens’s entire other-insurance clause. Based on the portion of the clause that was quoted, Penn National and/or Meckel could have argued that the Citizens clause was meant to apply only when there was “other primary insurance available.” Thus, it would have no application in this case because there was no other primary insurance. In other words, Citizens would have to provide primary coverage, which is the same result the court reached, albeit for a different reason. It does not appear, however, that anyone made the argument that the clause did not apply at all.
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