Insurer v. Insurer — Both Lose, One Loses More Than Another

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When one insurer sues another trying to transfer the risk taken to the other both will probably lose because of the costs of defending or prosecuting the suit. In Admiral Indemnity Company v. Travelers Casualty and Surety Company of America, No. 11 Civ. 1158 (S.D.N.Y. 08/09/2012) Admiral Indemnity Company (“Admiral”) sued Travelers Casualty and Surety Company of America (“Travelers”), for declaratory judgment that Travelers is obligated to pay all or part of the costs Admiral incurred in defending 315 East 69th Street Owners Corporation (“Owners Corp.”) in a state court action. Owners Corp. was insured by both Admiral and Travelers. After the case was at issue Admiral and Travelers moved for summary judgment.

UNDISPUTED FACTS

In 2005, Owners Corp., a condominium association, purchased insurance from both Admiral and Travelers. Admiral issued Owners Corp. a commercial general liability insurance policy (“Admiral Policy”). The Admiral Policy covered “bodily injury,” “property damage,” and “personal and advertising injury” among other things. The Admiral Policy was an occurrence policy that applied to any occurrence “during the policy period.” “Occurrence” is defined by the policy as “an accident, including continuous or repeated exposures to substantially the same general harmful conditions.”

Travelers issued Owners Corp. Non-Profit Management and Organization Liability Insurance (“Travelers Policy”). The Travelers Policy provided Owners Corp. with directors and officers liability coverage. The Travelers Policy provided coverage on a “claims made” basis, for claims first made against the insured and reported to Travelers during the policy period or during a further three-year discovery period.

The policy periods for both the Admiral Policy and the Travelers Policy initially ran from February 1, 2005, until February 1, 2006. Both Travelers and Admiral issued identical successor policies for the period from February 1, 2006 until February 1, 2007.

Both the Admiral Policy and the Travelers Policy contain “Other Insurance” clauses.

Admiral seeks to hold Travelers liable for a share of the costs that Admiral has expended in the defense of a lawsuit that was brought in the New York State Supreme Court, entitled Gallup v. 315 East 69th Street Owners’ Corp., et al. (the “Gallup Action”). The occurrence that formed the basis for the Gallup Action occurred in March 2005. Stephen Gallup owned the penthouse apartment at 315 East 69th Street (“the Building”) including a greenhouse attached to the apartment.  Gallup had an agreement (the “Greenhouse Agreement”) with Owners Corp. that allegedly gave Gallup primary responsibility over the greenhouse, including maintenance and repair.

In or about March 2005, as the alleged result of ongoing repair work to the exterior of the Building undertaken by Owners Corp., Gallup’s greenhouse was damaged. Gallup and Owners Corp. spent months negotiating to resolve the damages issues.  The negotiations included an alleged Alteration Agreement between the parties. However, as a result of an impasse in negotiations, Gallup brought suit in state court in April, 2006 against Owners Corp. and others.

In May 2006 Travelers disclaimed coverage for the Gallup Action, explaining in a letter dated May 11, 2006, that all claims in the action fell within its Property Damage Exclusion. In a letter dated May 15, 2006, Admiral partially disclaimed coverage, citing exclusions in the Admiral Policy. Admiral disclaimed coverage as to all causes of action except the fifth (property damage), the ninth (faulty repairs by Steven Seplow), and the tenth (defamation against Steven Seplow). Recognizing that “the duty to defend is broader than the duty to indemnify,” Admiral agreed to defend Owners Corp. under the Admiral Policy for all claims in the Gallup Action.

Robert Buchert, Admiral’s Vice President-Liability Claims, submitted an affidavit swearing that while Admiral provided a defense for the entire action, “coverage only attached to the Gallup Fifth and Ninth cause of action, for recovery for water damage, and the Tenth cause of action, for defamation….”

ANALYSIS

Admiral conceded that, of the eleven alleged causes of action, its policy covered at least the fifth, ninth, and tenth causes of action. Based upon this admission, Admiral had a duty to defend the entire Gallup Action. Furthermore, Admiral is not entitled to any contribution from Travelers “notwithstanding the fact that [Travelers] would appear to have an obligation to indemnify [Owners Corp.] for a greater proportion of the causes of action, if successfully prosecuted.” Therefore, even if Travelers had been required to contribute if liability were found on any of the claims against Owners Corp. in the Gallup Action, that duty alone did not require it to share in the costs of defending against the claims during the litigation.

Admiral points to no case where a primary insurer was able to turn its responsibility for defense costs into excess coverage on a par with an excess insurer, after it had already incurred the obligation to pay for the defense costs of an ongoing litigation.

For the reasons explained above, Travelers’ motion for summary judgment was granted and Admiral’s cross-motion for summary judgment was denied.

ZALMA OPINION

“Other Insurance” clauses are less than reliable because of the actions of the courts over the years when competing other insurance clauses seem to contradict each other. In this case, as the trial court found, it mattered not because Admiral admitted it owed a duty to defend and could not pass its obligation to another insurer that had a reasonable defense to coverage — an exclusion — and was found to be excess.

Every third party liability policy contains an “other insurance” clause that attempts to control disputes when there are two or more policies insuring the same risk. The term “other insurance” is used in a special sense in insurance contracts. It describes the situation in which two or more policies of insurance cover the same risk in the name of, or for the benefit of, the same person. Difficulties arise when the two or more policies have other insurance clauses that conflict with each other.

Since other insurance clauses usually do not prescribe how defense costs should
be apportioned among insurers, courts have developed general allocation rules.
When only one of two insurers is held to provide coverage that insurer must bear
the entire burden of defense. Equity is the apparent intent of those courts who deal with the need to allocate defense costs when other insurance clauses fail to cover the issue.

Claims handlers should read their policies with an intention to find coverage not
an intention to avoid coverage. Whenever a claims handler finds he or she must
twist the language of a policy or use a creative interpretation of the language of
the policy, which should act as a warning to the claims handler or lawyer advising
the insurer that the conclusion is wrong. If there are two insurers and they cannot agree, it is prudent for the two insurers to reserve their rights, work together to protect the insured on an equal basis, and then submit the coverage issue to a court or arbitrator for resolution of who owes what part, if any, of the obligation to defend and indemnify the insured. If the two insurers worked together in this case — rather than taking a stand and suing in federal court, they could have avoided considerable expense and offending the insured.

For a detailed analysis of other insurance clauses see Zalma, Barry, “Insurance Claims: A Comprehensive Guide” published by Specialty Technical Publishers, http://www.stpub.com, Part I, Chapter 2.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.