FINGER POINTING BETWEEN LIABILITY INSURERS AND “OTHER INSURANCE” PROVISION

Posted on November 10, 2024November 10, 2024 by David Adelstein

It’s not uncommon when liability insurers point the finger at each other relating to which insurer should be deemed primary, which insurer should be excess, or whether a pro rata contribution between insurers applies. Typically, this needs to be decided by the “other insurance” provision in the insurance policy that deals with overlapping insurance as well as case law in the governing jurisdiction.

This was the case in Gemini Insurance Co. v. Zurich American Insurance Co., 30 Fla. L. Weekly Fed. (11^th Cir. 2024). Both insurers provided liability coverage to a trucking company that got into an accident that resulted in the death of a person. Both carriers–Gemini and Zurich–disputed the amount each carrier owed to a settlement that Gemini funded.

In Florida, “where more than one insurer’s policy provides coverage for a loss,” as the parties agree is the case here, “it is appropriate to review the insurance contracts to see if the documents address the ‘ranking’ or contribution of other insurers.” That sort of “ranking” is usually accomplished through an “other insurance” clause. Florida law recognizes “three principal kinds” of “other insurance” clauses: (1) pro rata; (2) excess; and (3) escape or no liability. A pro rata clause limits an insurance company’s contribution to a proportion of the total loss based on the policy’s limit. An excess clause provides coverage only after other insurance limits are exhausted. And an escape or no liability clause provides that there is no coverage if there is another policy that covers.

***

“In Florida, where two insurance policies contain excess insurance clauses the clauses are deemed mutually repugnant and both insurers become primary and share the loss on a pro rata basis in accordance with their policy limits.”

Gemini Ins. Co., supra (internal citations omitted).

However, whether two policies are purely “excess” policies is not clear cut.

Zurich argued that the policies should contribute pro rata because its policy and the Gemini policy were both excess and, thus, deemed repugnant. However, the 11^th Circuit found this unconvincing based on language in Zurich’s “other insurance” provision because the Gemini policy’s “other insurance” provision provided it was a “pure excess” policy and Zurich’s “other insurance” provision contained pro rata language:

And in such a scenario, “courts give effect to the pure excess provision.” Id. (emphasis added). Helpfully for our purposes, State Farm’s “other insurance” clause in Ferris described itself — much like Zurich’s here — as applying “excess coverage.” Notwithstanding the label, Ferris deemed it a pro rata clause because of its “we will pay the proportion” language. That is language that Zurich’s policy also contains.

***

In sum, we have one Florida case, Ferris, that tells us that an “other insurance” clause containing the phrase “we will pay the proportion of damages payable as excess” means that the clause was pro rata, even though it also characterized itself as an excess clause. And we have Beane, which, in comparing two excess “other insurance” clauses, teaches that the phrase “[we] shall not contribute with such other insurance” carries with it special significance.

Turning back to the “other insurance” clauses at issue here, Zurich’s contains the “we will pay the proportion” phrase from Ferris and Gemini’s contains the “we shall not contribute” phrase from Beane. Considered together, we believe that Ferris and Beane counsel that Gemini’s policy is excess to Zurich’s.

Gemini Ins. Co., supra (internal citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

PRIORITY OF LIABILITY INSURANCE COVERAGE AND HORIZTONTAL AND VERTICAL EXHAUSTION

Posted on May 9, 2020May 9, 2020 by Edward Garber

Recently, I participated in a webinar involving the horizontal and vertical exhaustion of insurance coverage. Say what?

This pertains to the PRIORITY of liability insurance coverage and the interface between a general contractor’s (or upstream party’s) primary insurance and the subcontractor’s (or downstream party’s) excess insurance, particularly when the general contractor is required to be indemnified by the subcontractor and named as an additional insured under the subcontractor’s liability policies.

For instance, let’s assume the general contractor has a $2M primary policy and a $5M excess policy. Its subcontractor has a $1M primary and a $5M excess policy. The general contractor is an additional insured under the subcontractor’s policies and the subcontractor is required to contractually indemnify the general contractor. An issue occurs caused by the subcontractor’s negligence resulting in a $5M judgment against the general contractor and the subcontractor.

A. Horizontal Exhaustion

Under the horizontal exhaustion approach, the court will look primarily to the “other insurance” provision in the policies–specifically, the subcontractor’s excess policy–which will take precedence over the contractual indemnification language. Since the “other insurance” provision in excess policies typically state it is excess over the exhaustion of primary policies, under the horizontal exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from subcontractor’s primary policy;
2) $2M from general contractor’s primary policy; and
3) $1M from the general contractor’s excess policy and $1M from the subcontractor’s excess policy, as the excess policies share in coverage after the primary coverage is exhausted.

The general contractor and its insurers do not perceive this to be equitable as it dilutes the indemnification and additional insured requirement. Further, it results in the general contractor’s carriers subrogating to the rights of the general contractor to pursue a separate action against the subcontractor, which gets sent right back to the subcontractor’s excess insurer (as its primary insurance was exhausted) for reimbursement. Under the above example, the subcontractor’s excess insurer still had a remaining $4M in coverage to reimburse the general contractor’s primary and excess insurer. This is known as a circular chain of events because the priority of coverage under horizontal exhaustion invariably results in a separate subrogation claim for reimbursement.

B. Vertical Exhaustion

Under the vertical exhaustion approach, the court will look primarily to the contractual indemnification and additional insured language, irrespective of the “other insurance” provision in the excess policy, to avoid the circular chain of events with the general contractor’s carriers pursuing a separate subrogation claim. Under the vertical exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from the subcontractor’s primary policy; and
2) $4M form the subcontractor’s excess policy.

The subcontractor’s primary and excess policies would be exhausted BEFORE the general contractor’s primary policy comes into play. This is designed to avoid the the separate subrogation claim since the subcontractor’s insurance coverage is being exhausted first.

C. Priority of Insurance Coverage

The priority of insurance coverage can become a very significant consideration in sizable claims. There is a reason parties contractually negotiate insurance coverage in the contract. For this reason, during the contract negotiation, it is important to appreciate this consideration on the frontend. Consult with counsel and an insurance broker as to the following:

 The contractual indemnification language – make sure it is enforceable in your jurisdiction;
 The additional insured language and applicable insurance endorsements – make sure you get the right endorsement for ongoing and completed operations that covers issues wholly or partially caused by the subcontractor’s (or downstream party’s) negligence;
 The primary and noncontributory language and applicable endorsements in the primary and excess policy-this modifies the “other insurance” provision from a priority of coverage standpoint and you want this in both the primary policy and excess policy; and
 The “other insurance” language in the general contractor’s (or upstream party’s) policy — the objective is to maximize vertical exhaustion of coverage to avoid the circular chain of events discussed above so this may result in manuscript language to the general contractor’s “other insurance” language to reflects its priority.

Claims that involve or rely on construction insurance claim can become complex. But, insurance is crucial in order to properly assess risk, flow down risk, and manage risk. In order to evaluate associated risk, it requires consultation with lawyers and insurance brokers and understanding the type of claim exposure relative to the project, and maximizing value of insurance–primary and excess insurance–for which you are an additional insured.

QUICK NOTE:…OWNERS AND CONTRACTORS PROTECTIVE LIABILITY INSURANCE (OCP COVERAGE)

Posted on March 8, 2020March 8, 2020 by Edward Garber

Recently, I negotiated a contract that included Owners and Contractors Protective Liability insurance, otherwise known as “OCP” coverage, which is a project-specific policy. Thus, the policy limits are project-specific. Obtaining this OCP coverage includes discussion with a sophisticated insurance broker because the objective is always to ensure that there is insurance to cover a foreseeable or contractually assumed risk.

Many times, OCP coverage is procured by the contractor (listed as the designated contractor in the policy) for the owner, meaning the owner is the only insured on the policy. The contractor purchases this insurance for the owner, as an insured, to cover the contractor’s indemnification obligation to the owner. In a number of instances that I have dealt with OCP coverage it was largely because there was a concern with the additional insured endorsement of the contractor and/or its per occurrence limits.

OCP coverage applies to insure the owner from bodily injury and property damage claims (1) that arise out of the contractor’s operations performed for the owner at the project (e.g., vicarious liability) and (2) the owner’s actions or omissions in connection with its general supervision of the contractor’s operations. (See ISO CG 00 09 10 01) It applies to ongoing operations of the contractor as there is an exclusion in the policy for completed work. (See id.). It is not for completed operations.

The “Other Insurance” provision, different than in a CGL policy, provides that the OCP coverage is primary and “it will not seek contribution from any other insurance available to [the insured] unless the other insurance is provided by a contractor other than the designated contractor [contractor procuring policy or listed in the declaration]….” (See ISO CG 00 09 10 01).

It is always good practice, whether you are a contractor or an owner, to consult with your construction lawyer and insurance broker if you are considering OCP coverage as an extra layer of coverage. For more information on OCP coverage, this article is insightful. When it comes to insurance, the objective is to cover risks, whether foreseeable and/or assumed, so that there is the appropriate protection with respect to the project.

“OTHER INSURANCE” PROVISIONS TO LIMIT INSURER’S RISK

Posted on February 22, 2020February 22, 2020 by Edward Garber

Insurance policies often contain an “Other Insurance” provision to limit or control an insurer’s risk if another insurer covers the same risk / loss. See Pavarini Construction Co. (Se) Inc. v. Ace American Ins. Co., 161 F.Supp.3d 1227, 1234 (S.D.Fla. 2015) (“Other Insurance” provisions apply “when two or more insurance policies are on the same subject matter, risk, and interest.”). This is an important provision to insurers and may be modified by an endorsement to your insurance policy. It is designed to determine whether the policy, as discussed below, should serve as a primary policy or excess policy. It is important to understand this “Other Insurance” provision and its application because it will come up, particularly in a multi-party construction defect dispute.

An example of an “Other Insurance” provision in a commercial general liability (CGL), subject to any modification through an endorsement to the policy, may provide something to the effect:

4. Other Insurance

If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except when b. below applies. 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 the method described in c. below.

b. Excess Insurance

This insurance is excess over:

1. Any of the other insurance, whether primary excess, contingent, or on any other basis:

(a) That is Fire, Extended Coverage, Builder’s Risk, Installation Risk or similar coverage for “your work”;

2. Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

c. Method of Sharing

If all of the other insurance permits contribution by equal shares we will follow this method also. Under this approach, each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.

If any of the 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.

If a policy is deemed as excess coverage, than “liability attaches only after a predetermined amount of primary coverage has been exhausted.” Tudor Ins. Co. v. American Casualty Co. of Reading Pennsylvania, 274 F.Supp.3d 1278, 1283 (N.D.Fla. 2017) (quotation and citation omitted). Hence, the “Other Insurance” provision allows an insurer to limit or control its risk by turning the policy into an excess policy. Id. (when excess provision applies than limits of the primary policy need to first be exhausted).

When deciding the priority of coverage among multiple insurers, Florida courts generally rely on the language of the several policies, with careful attention to the other insurance clauses. Where two insurance policies contain conflicting excess other insurance clauses, those clauses cancel one another out…. [W]here a court must allocate between two policies at the same level that contain incompatible excess clauses, the majority rule is that the two excess clauses cancel each other out, and the loss is pro-rated between the two policies. The proper method of allocation is to disregard the other insurance clauses, treat the two excess insurers as co-excess insurers, and pro-rate the loss between the two policies.

***

Florida law recognizes an exception to the rule governing competing “Other Insurance” provisions where a right of indemnification exists between the parties insured under the respective policies of insurance, especially where … one of the policies happens to cover the indemnity obligation. In this circumstance, a clear majority of jurisdictions give controlling effect to the indemnity obligation of one insured to the other insured over the ‘other insurance’ or similar clauses in the policies of insurance. Florida cases have consistently recognized that where a loss is covered by two or more primary policies of insurance, the operation of an indemnification agreement between the common insureds has the result of shifting responsibility for the entire loss to the carrier for the indemnitor. [U]nder Florida law an indemnity agreement control[s] all the rights and obligations of the parties and their privies (the insurers), and the fact that the parties carried insurance did not ‘detract from or modify’ their indemnity agreement.

Amerisure Ins. Co. v. Auchter Company, 2017 WL 3601387, *24 (M.D. 2017) (internal quotations and citations omitted). See also Pavarini Construction Co. (Se) Inc., 161 F.Supp.3d at 1235 (“Courts disregard “Other Insurance” provisions where…there is a contractual right or indemnification.”).

THERE CAN BE AN “OTHER INSURANCE” EXCLUSION IN YOUR AUTOMOBILE POLICY

Posted on October 15, 2017October 15, 2017 by Edward Garber

There is exclusionary language in all insurance policies (as you know) that can operate to bar coverage. In a recent case example, a company performed maintenance and construction services and had a company automobile liability insurance policy. The policy, however, excluded from coverage automobiles where there was OTHER INSURANCE available that afforded SIMILAR COVERAGE. One of the company’s members got into an automobile accident with his personal vehicle which resulted in the company being sued in a personal injury action. The member had a personal automobile liability insurance policy that insured the vehicle. The company’s policy had significantly higher limits of insurance than the member’s policy.

Unfortunately, the Eleventh Circuit Court of Appeals held the company’s insurer was NOT required to defend or indemnify the insured-company in the personal injury action because of the exclusionary language in the company’s policy. In particular, the company’s policy did not apply because the member’s personal automobile liability insurance policy (other insurance) insured the same risk (afforded similar coverage); it did not matter that the limits of liability in the policies were different. (For more information on this case, click here.)

This case, although dealing with an automobile liability insurance policy, discusses exclusionary language in a policy that deals with other insurance available that provides the same or similar coverage (again, in this case the personal automobile liability insurance policy that covered the member’s vehicle applied which barred coverage under the company’s policy).

INTERACTION BETWEEN CGL INSURANCE, OCIP, AND SUBCONTRACTOR DEFAULT INSURANCE

Posted on November 14, 2015November 8, 2024 by Edward Garber

Here is a great opinion and insurance coverage dispute about the interaction between a CGL policy, and particularly one provided under an Owner’s Controlled Insurance Program, and a subcontractor default insurance policy / subguard policy.

In Pavarani Construction Co. v. Ace American Insurance Co., 2015 WL 6555434 (S.D.Fla. 2015), a general contractor constructed a high-rise condominium project. The general contractor and subcontractors were enrolled in the Owner’s Controlled Insurance Program (“OCIP”). This meant the general contractor and the subcontractors had the same CGL insurer. In addition, and outside of OCIP, the general contractor had subcontractor default insurance which is insurance a general contractor maintains to insure the risk of subcontractor default (and, really, catastrophic subcontractor default).

Post-construction, it was discovered that that the structural shell subcontractors the general contractor hired to (a) install the concrete masonry units and (b) the cast-in-place concrete, performed their work defectively. Specifically, reinforcing steel required to be installed within the concrete masonry units or cast-in-place concrete was omitted or improperly installed. These deficiencies resulted in excessive movement of building components. This movement caused stucco to debond, cracking in the walls, cracking of cast-in-place columns, beams, and shearwalls, and cracking in the mechanical penthouse enclosure on the roof that then resulted in water intrusion.

Upon discovering the deficiencies and/or resulting damage, the owner of the Project put the general contractor on notice. The general contractor notified its subcontractors. The general contractor (and subcontractors) sought indemnification under the CGL policy within OCIP. (Remember, with an OCIP policy, it is the same CGL insurer that covers all enrolled entities.) The CGL carrier, however, denied coverage. This resulted, applicable to the case, in the concrete masonry unit subcontractor defaulting on its subcontract because it was unable to perform repairs to its deficient work and cover the resulting damage without the CGL insurance proceeds. As a consequence, the general contractor submitted a claim to its subcontractor default insurance policy to recover money to fund the repairs that were in excess of $25 Million. The general contractor also worked out a deal with its subcontractor default insurance policy that it would pursue the CGL carrier for reimbursement.

The general contractor then sued the CGL insurer for indemnification by asserting a breach of contract claim and a declaratory relief claim against the insurer.

RESULTING DAMAGE

The insurer argued that there was no coverage because there is no coverage under the CGL policy for the general contractor repairing defective work. This is true, BUT “if the defective work causes damage to otherwise nondefective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the [mechanical] penthouse enclosure, and cracking in the critical concrete structural elements…[the general contractor] is entitled to coverage for the repair of that non-defective work.” Pavarani, supra, at *4. In other words, while repairing the defective work would NOT be covered, repairing damage resulting from the defective work WOULD be covered.

In discussing coverage for resulting damage, the court relied on a recent Eleventh Circuit Court of Appeals case, Carithers v. Mid-Continent Casualty Co., 782 F.3d 1240 (11^th Cir. 2015). This case is actually a very important case because it held “the complete replacement of defective subcontractor work may be covered when necessary to effective repair ongoing damage to otherwise non-defective work.” Pavarani, supra, at *4. (Please review the specifics of this case here). Basically, if replacement of potentially defective work is necessary to repair resulting damage, then such replacement of the defective work would be covered under the policy. For instance, if you had to remove (or rip-and-tear out) defective work in order to fix the resulting damage, then such removal would be covered.

Here, it was clear that the defective work caused resulting damage triggering the CGL policy’s obligation to indemnify the general contractor and applicable subcontractors.

“OTHER INSURANCE” PROVISION

The CGL policy contained an “Other Insurance” provision. This provision means that the policy will operate as excess (not primary) insurance over any other available insurance. This provision is in virtually every CGL policy and in many other types of insurance policies such as a subcontractor default insurance policy. The “Other Insurance” provision applies “when two or more insurance policies are on the same subject matter, risk and interest.” Pavarani, supra, at *5.

The CGL insurer argued that based on this “Other Insurance” provision, the general contractor’s subcontractor default insurance should operate as the primary insurance with it serving as any excess insurance. The court correctly dismissed this argument since a CGL policy and subcontractor default insurance policy insure completely different business risks. Besides, the subcontractor default insurance policy insures the general contractor for a subcontractor default and does not insure a subcontractor for its default.

Furthermore, the court held:

Courts disregard ‘Other Insurance’ provisions where, as here, there is a contractual right of indemnification between the parties insured by the relevant policy. Here, AWS [concrete masonry subcontractor] contracted to indemnify Plaintiff [general contractor] for damages resulting from its work and Defendant [CGL insurer] insured AWS [per OCIP] for claims of property damage. Therefore, Defendant cannot utilize the ‘Other Insurance’ provision to shift the loss.

Pavarani, supra, at *5 (internal citation omitted).

ATTORNEY’S FEES

Florida Statute s. 627.428 authorizes attorney’s fees against an insurer in an insurance coverage case. Since the general contractor (insured) prevailed, it was entitled to its reasonable attorney’s fees.