Avoiding Making Worthless Excess Policy Language
Liability insurance can be primary or excess. When multiple policies of insurance apply to a loss disputes over who owes what to the insured and in what proportion brings about litigation that resembles an Abbot & Costello comedy routine than interpretation of an insurance contract.
In Travelers Property Casualty Company Of America v. Xl Insurance America, Inc., Zurich American Insurance Company, Robert Bosch, LLC, Volkswagen Group Of America, Inc., CBS Radio, Inc., Of Detroit, Volkswagen Of America, Inc., et al, Court of Appeals of Michigan, 2017 WL 1033755, No. 329277, No. 329293 (March 16, 2017) the Michigan Court of Appeals was asked to determine who’s on first.
ACE Property & Casualty Insurance Company (“ACE”), and Allianz Global Risks US Insurance Company (“Allianz”) appealed the trial court’s order granting summary disposition to Ironshore Specialty Insurance Company (“Ironshore”).
Insurance companies dispute what portion of two automobile negligence settlements each of them should be required to pay. The underlying negligence actions arose out of a motor vehicle accident.
At the time of the accident, Volkswagen was insured under a primary policy issued by XL Insurance America, Inc. (“XL”), and an excess policy issued by Ironshore. Bosch was insured under a primary policy issued by Zurich American Insurance Company (“Zurich”) and an excess policy issued by Allianz. Finally, CBS Radio was insured by a primary policy issued by The Travelers Property Casualty Company of America (“Travelers”) and an excess policy issued by ACE. On March 31, 2014. Travelers sued for declaratory judgment action naming as defendants XL, Ironshore, Allianz, Zurich, Bosch, and Volkswagen. Thereafter, a plethora of cross-claims and third-party complaints were filed.
On August 11, 2014, the parties in the underlying negligence actions and several of the insurers in this declaratory action reached a settlement, the terms of which were sealed by the trial court. Allianz and ACE represent that as a result of the settlement, Zurich, Travelers, XL, Volkswagen, Bosch, CBS Radio, and Prainito were released and dismissed from the declaratory judgment action. There still remained, however, an undisclosed settlement balance to be satisfied by some or all of the three excess insurers, i.e., Allianz, ACE, and Ironshore.
The “other insurance” clause relevant to Ironshore’s coverage is markedly different from the ACE and Allianz policies. Indeed, an “other insurance” clause is not specifically written into the Ironshore policy. Instead, the nature of the “other insurance” clause applicable to the Ironshore coverage is discerned by reading the terms of both the Ironshore policy and the XL (primary) policy.
In their joint motion for summary disposition and in response to Ironshore’s motion, Allianz and ACE argued that because Ironshore’s policy included a pro-rata “other insurance” clause, and ACE’s and Allianz’s policies contained a “true excess” other insurance clause, the excess policies issued by ACE and Allianz provided secondary coverage to that of the Ironshore policy. Allianz and ACE asserted that Ironshore’s policy limits must be exhausted before ACE and Allianz would be required to pay.
By contrast, in its own motion for summary disposition and in response to ACE and Allianz’s joint motion for summary disposition, Ironshore argued that its policy coverage was specifically written to be excess whenever there was other collectible insurance. It further argued that the ACE and Allianz policies both stated that their “other insurance” clauses would not apply when the “other insurance” is written to be excess of their policies. Ironshore then reasoned that by operation of this language, the ACE and Allianz policies ceased to be excess under these circumstances and must be exhausted before Ironshore’s policy was exposed to liability.
After considering the language of the policies, and attempting to reconcile them, the trial court held that the ACE and Allianz policies were higher in priority than the Ironshore policy and, therefore, the coverage provided by those policies must be exhausted before Ironshore’s coverage was triggered. Accordingly, the court denied ACE and Allianz’s joint motion for summary disposition and granted summary disposition in Ironshore’s favor.
Insurance-contract language is given its ordinary and plain meaning and courts must give effect to every word, phrase, and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory. If the contractual language is unambiguous, courts must interpret and enforce the contract as written.
The language of the Ironshore policy, clearly and unambiguously evidences an intent that the policy will be “excess” over all other collectible insurance. When carefully examined, the policy language at issue does not even suggest the presence of conflicting provisions within the Ironshore policy. In the present case, the phrase “covers on the same basis” can only reasonably refer to circumstances where the competing coverage is also “excess.” The excess provisions of both of the competing policies are, for all intents and purposes, essentially at the same ‘layer.’ Under such circumstances, liability is to be apportioned on the basis of the policy limits.”
Because it appears that all three policies contain excess “other insurance” clauses, it would be natural to conclude that their obligations, therefore, would simply be proportionately shared. However, the additional language found in the ACE and Allianz “other insurance” clauses required the court to engage in further analysis. Considering the structure of the paragraphs, “this provision” clearly refers to the “this policy will apply excess of” clause. Consequently, based on the plain language of the contract, ACE’s and Allianz’s policies evidence an intent that their coverage would be “excess” to other valid and collectible insurance unless the “other insurance” is written to be excess of their policies.
Reconciling this additional language found in ACE’s and Allianz’s policies with the Ironshore policy the trial court did not err when it held that ACE and Allianz were first in priority. Because the Ironshore/XL policy was written to be excess of all other insurance coverage, and the ACE and Allianz policies provide that their “other insurance” clauses will not apply when the “other insurance” is written to be excess of their policies, it must be concluded that only the Ironshore “other insurance” clause is truly excess.
Accepting the ACE and Allianz interpretation causing Ironshore/XL to pay a pro rata share of the settlement, would render nugatory – worthless – the clear language of the Ironshore policy that its coverage is excess of all other collectible insurance.
Since courts must give effect to every word, clause, and phrase in a contract and must avoid rendering any part surplusage or nugatory the Michigan Court affirmed the trial court judgment.
The hardest work I ever took on was to rewrite a liability policy to make it clear and unambiguous. The writers of the three policies in this case also did the hard work. The claims people, however, tried to avoid the clear and unambiguous language of the policy and try to make a true excess clause nugatory. They ACE and Allianz policies could have avoided the result by eliminating the “other insurance” language that made it be excess of their policies.
This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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