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Competing Excess Clauses

Many, if not most, standard insurance contracts contain blanket limitations that
provide in substantive part: if the insureds liability under this policy is covered by any
other valid and collectible insurance, then this policy shall act as excess insurance over
and above such other insurance.i While such a clause has consistently been upheld in
standard commercial policies, courts are presented with a unique obstacle when multiple
primary policies insuring a single entity and containing excess clauses are trigged in
by a single claim. If read under a plain-meaning rule of contractual interpretation,
multiple primary policies containing excess clauses would rendered the double-insured
virtually uninsured because neither policy would respond until the other paid to its
applicable policy limits; thereby forcing the double-insured to incur the losses out of
pocket.ii As a result of this harsh outcome, most courts have declined to enforce the plain-
meaning of these competing clauses on public policy grounds.iii Instead, modern courts
will hold that competing excess clauses are mutually repugnant and effectively cancel
each other out; thereby forcing the court to apportion liability among the respective
insurers.iv

Pro Rata Liability

In relatively normal cases, the vast majority of courts will apportion liability on a
pro rata basis. Courts adopting this apportionment standard reason that pro rata
apportionment most closely conforms to the goal of contractual construction
ascertaining the true intent of the parties. More specifically, the pro rata apportionment
standard renders the result that the parties would have likely intended had they
anticipated a conflict between the policies excess provisions.v However, despite this
near uniformity and seemingly clear legal foundation, jurisdictions have spilt on the
actual method used to calculate each insurers pro rata share.vi

The majority of jurisdictions calculate pro rata liability based on the proportion of
each policys limit in relation to the total available under the applicable policies; known
as the policy limits approach.vii For example, in AMHS,viii the insured maintained two
general liability policies with respective limits of $1,000,000 and $16,000,000. After an
accident triggered both policies, the court determined that under the policy limits
approach, the $1,000,000 policy would be liable for 1/17 of the underlying damages and
the $16,000,000 policy would be liable for the remaining 16/17. Like the court in AMHS,
most courts will determine pro rata liability based on the following policy limits
formula:


( + )

Other jurisdictions have deviated from the traditional rule and instead divide
liability equally when neither policy specifies a method of apportionment.ix Under this
equal shares approach, each insurer is obligated to pay an equal share of the claim up to
the lesser policys limits.x After the lesser policy is exhausted, the remaining policy pays

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100% up to its applicable policy limit.xi For example, in North American, the insured
maintained two general liability policies with respective limits of $50,000 and
$2,000,000. After an accident triggered both policies, the court determined that under the
equal shares approach both policies were to pay of the claim until the $50,000 policy
was exhausted, at which point the $2,000,000 policy would pay 100% of the claim to its
applicable policy limits. Like the court in North American, courts applying equal shares
approach determine pro rate liability based on the following formula:

. + .

. + . > ( . )

Additionally, some California jurisdictions have fashioned equitable methods of


apportioning pro rata liability based upon the facts underlying each claim. Within these
jurisdictions, the trial court alone has discretion in selecting a method of allocating costs
amount insurers with the aim of producing the most equitable result.xii Thus, these case-
by-case determinations have resulted in a variety of equitable approaches for determining
pro rata liabilityrarely relied upon outside of California jurisdictions except when
justice so requiresincluding:

(1) The time on risk approach. Under this approach, apportionment is based
upon the relative duration of each primary policy compared to the period of
coverage during which the claim occurred.xiii Courts applying the time on
risk approach determine pro rata liability based on the following formula:

#
+ +

(2) The combined policy limit time on risk approach. Under this approach,
apportionment is based upon the duration of each primary policy multiplied by its
respective policy limit compared to the number of triggered policies.xiv Courts
applying the combined policy limit time on risk approach determine pro rata
liability based on the following formula:


( + + )

(3) The premiums paid approach. Under this approach, apportionment is based
upon the ratio of premiums paid to each carrier in the aggregate compared to each
respective policys premium.xv Courts applying the premiums paid approach
determine pro rata liability based on the following formula:


( + )

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Alternatives to Pro Rata Liability

It is important to note that while the modern pro rata standard (discussed above)
represents the vast majority of jurisdictions, some jurisdictions still apply varying
standards in interpreting competing excess clauses. While these alternatives are still given
effect by some courts, they have become largely disfavored due to their reliance upon a
relatively arbitrary determination of primary liability.xvi Instead, jurisdictions will only
rely upon these alternative standards when equity so requires.

One alternative to pro rate liability is the temporal standard in which primary
liability attaches to the policy bound first.xvii Under this standard, the policy bound first
assumes is liable claim up to policy its respective policy limit. After the first bound
policy is exhausted, the second bound policy is then responsible for the remainder of the
claim up to its respective policy limit; this temporal ordering continues until each policy
is exhausted. For example, in Gutnerxviii the insured carried policies that were trigged
when the companys in-transit freight was stolen. The court concluded that intent of the
insured was to impose primary liability on the first-bound policy and to impose excess
coverage on the subsequent-bound policy.

Similarly, some jurisdictions have adopted a specification standard in which


primary liability attaches to the policy that most specifically addresses the underlying
risk.xix Under this standard, the more specific and limiting a policy is, the more likely it
will be deemed primary. For example, in Trinity,xx the insured carried two insurance
policieshomeowners and automobile liabilitythat were triggered in response to an
automobile accident on the insureds property. As written, the homeowners policy would
respond to any accident occurring on the premises of the insured, whereas the automobile
liability policy would respond only to an accident arising out of the use of the vehicle.
The court concluded that the automobile liability policy was more specific than the
homeowner policys general language and as such equity required primary liability to
attach to the automobile liability policy.

Finally, in cases involving bailees or non-owner operators, some jurisdictions


have adopted a personal liability standard that turns on the common-law tort principle
of comparative negligence.xxi Under this standard, primary liability attaches to the policy
issued in favor of the insured primarily liable for the claim.xxii For example, in
Maryland,xxiii the owner of a freight company leased a vehicle from a transfer company.
During the term of the lease, both the freight company (lessor) and the transfer company
(lessee) carried liability policies on the vehicle. Both policies were triggered when an
employee of the freight company (lessor) stuck a third party with the vehicle. The court
concluded that because the lessee was primarily negligent, the primary liability attached
to the lessors policy. The lessees policy was only liable for the damages sustained
above the lessors policy.

i
Commonly referred to as an excess clause or other insurance clause. Some authorities may refer to the
provision as a subordination clause; while this is technically accurate, subordination clause is most
frequently used as a term of art in relation to mortgage transactions. See Blacks Law Dictionary,
subordination clause, 9th ed. (2009).

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ii
See Robert H. Jerry II & Douglas S. Richmond, Understanding Insurance Law, 5th ed., 689-82 (2012)
(discussing effect of literal reading of competing excess clauses in insurance contracts).
iii
Traditionally, courts construe ambiguities in favor of the insured because insurance providers are better
suited to sustaining the resulting loss. See id.
iv
See Oregon Auto Ins. Co. v. United States Fidelity & Guaranty Co., 195 F.2d 958 (9th Cir. 1952)
(establishing knock-out rule). When excess clauses are indistinguishable in intent and meaning, one
cannot readily choose between the two. Instead, the clauses must be held mutually repugnant and hence be
disregarded. Our conclusion is that such view affords the only rational solution to the dispute in this case
Id. at 960. See also Zurich Gen. Acc. & Liability Ins. Co. v. Clamor, 124 F.2d 717 (7th Cir. 1941)
(establishing modern rule for excess clause interpretation). [Excess clauses] in both policies can not be
utilized to eliminate the protection afforded thereby. To do so would relieve both of liability. A decision
must rest upon a construction of the language employed by the respective insurers. Id.
v
See Unsigned Note, Concurrent Coverage in Automobile Liability Insurance, 65 Colum. L. Rev. 319,
324-26 (1965).
vi
See id.
vii
See AMHS Ins. Co. v. Mut. Ins. Co., 258 F.3d 1090 (9th Cir. 2001) (articulating the majority rule for pro
rata liability). See also Galen Health Care, Inc. v. American Cas. Co., 913 F.Supp. 1525, 1530 (holding
policy would normally be pro rated based upon policy limits, but since loss exceeded combined policy
limits each insurer should pay 100% of policy limits); Continental Cas. Co. v. AETNA Cas. & Surety Co.,
823 F.2d 708 (2nd Cir. 1897) (Apportioning liability based upon policy limits, but recognizing strong
argument for alternative calculations).
viii
258 F.3d 1090 (9th Cir. 2001).
ix
See U.S. Fidelity & Guaranty Co. v. Alliance Syndicate, Inc., 676 N.E.2d 278 (1997); Continental Cas.
Co. v. Travelers Ins. Co., 228 N.E.2d 141, 145 (Ill. App. Ct. 1967) (holding equity requires that both
companied be on equal footing requiring an equal apportionment of the settlement which is with the limits
of the respective policies).
x
See North American Specialty Ins. Co. v. Liberty Mut. Ins. Co., 697 N.E.2d 347 (Ill. App. Ct. 1998).
xi
See id. at 348-50.
xii
Centennial Ins. Co. v. United States Fire Ins. Co., 88 Cal.App.4th 105, 112 (Cal. App. Ct., 2001).
xiii
See e.g. Firemans Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 1302-08 (Cal. App. Ct.,
1998); Stonewall Ins. Co. v. Palos Verdes Estates, 46 Cal.App.4th 1810, 1861-1654; Ins. Co. North America
v. Forty-Eight Insulations, 633 F.2d 1212, 1226 (6th Cir. 1980).
xiv
See Formula: Armstrong Worldwide Industries, Inc. v. Aetna Cas. & Sur. Co., 45 Cal.App.4th 1, 52-53.
xv
Insurance Co. of Tex. V. Employers Liability Assur. Corp., 163 F.Supp. 143, 147-151 (S.D.Cal. 1958).
xvi
See Oregon Auto Ins. Co. v. U.S. Fidelity & Guaranty Co., 195 F.2d 958 (9th Cir. 1952). See also Jerry
II & Richmond supra note 2 at 689-82.
xvii
See New Amsterdam Cas. Co. v. Hartford Acc. & Indem. Co., 108 F.2d 653 (6th Cir. 1940); Gutner v.
Switzerland Gen. Ins. Co., 32 F.2d 700 (2nd Cir. 1929) (holding first purchased policy liable to policy
limits at which point the second purchased policy assumes liability to policy limits).
xviii
32 F.2d 700 (2nd Cir. 1929).
xix
See Trinity Universal Ins. Co. v. Gen. Acc., Fire & Life Assur. Corp., 35 N.E.2d 836 (Ohio 1941);
Hartford Steam Boiler Insp. & Ins. Co. v. Cochran Oil Mill & Ginnery Co., 105 S.E. 856 (Ga. App. Ct.
1921).
xx
35 N.E.2d 836 (Ohio 1941).
xxi
See Maryland Cas. Co. v. Bankers Indem. Ins. Co., 200 N.E. 849 (Oh. App. Ct. 1935) (citing Penn. v.
Nat. Union Indem. Co., 68 F.2d 567 (7th Cir. 1934).
xxii
See id.
xxiii
200 N.E. 849 (Oh. App. Ct. 1935).