A Flush Beats a Straight and Excess Other Insurance Beats Pro Rata Other Insurance

W9/PHC Real Estate LP and Grubb & Ellis Management Services, Inc. v. Farm Family Casualty Insurance Co., N.J. App. Div. May 20, 2009

In a declaratory judgment action presented to the New Jersey Appellate Division, defendant Farm Family Casualty Insurance Company (Farm Family) appealed from an order directing it to reimburse W9/PHC Real Estate LP and Grubb & Ellis Management Services, Inc. for half of the defense costs and indemnification of a slip-and-fall suit for damages. Crabtree Landscaping and Turf Management, LLC (Crabtree), a company hired by plaintiffs to remove snow from their property, was also a defendant in that action. W9/PHC sought coverage as additional insureds under Crabtrees’s liability insurance policy with Farm Family.

In its opinion, the appellate division succinctly described the issue before it as follows:

This appeal presents the issue of the obligation to pay for a liability insurance claim and counsel fees where two insurers have conflicting “other insurance” clauses, one providing for “pro rata” payment, and the other for payment only when the other insurer’s limit is exhausted.

The W9/PHC maintained insurance with Zurich North American. The Zurich policy contained an other insurance clause that provided for contribution by equal shares if another policy also covered the risk, or contribution by limits if the other insurance did not permit contribution by equal shares. This is commonly referred to as a pro rata provision.

W9/PHC was an additional insured under the Farm Family policy, which contained an other insurance clause that provided for contribution only in excess of the amount covered by other insurance, whether collectible or not.

Following a slip and fall accident at W9/PHC building, W9/PHC sought coverage from Zurich and Farm Family. Farm Family denied coverage in part based on the assertion that it was excess to Zurich. In a declaratory judgment action, the trial judge ruled that the two other insurance clauses essentially cancelled each other out and both insurers had to contribute equally.

Farm Family appealed, causing the appellate division to weigh the other insurance clauses to determine if one clause was superior.

As the court explained, “other insurance” clauses generally fall into three categories: pro-rata, excess and escape. The court noted that where two carriers have responsibility for a claim, the other-insurance clause of each policy must be examined to determine whether there exists language which may govern the contribution each party should make. Universal Underwriters Ins. Co., v. CNA Ins. Co., 308 N.J. Super. 415, 417 (App. Div. 1998). 

First, the court noted that, in New Jersey, where the two policies in question each have an other-insurance clause stating that it is excess over any other policy, the provisions are “mutually repugnant,” and are disregarded. Cosmopolitan Mut. Ins. Co. v. Cont’l Cas. Co., 28 N.J. 554, 562 (1959).

In the event the other-insurance clause of each policy contains a pro-rata provision stipulating that each shall bear a proportion of the loss to the extent of the applicable insurance, then under New Jersey law, the policies are not mutually repugnant and each carrier must bear its respective proportionate share of the loss.

Lastly, as to the specific issue before the court in this matter, allocating loss among insurers where one policy has an other-insurance clause calling for a pro-rata sharing of the loss, while the other policy has an other insurance clause providing for excess coverage, the court held such a determination was essentially an issue of first impression in New Jersey.

The court began its analysis by noting that other jurisdictions had considered the issue of conflicting pro rata and excess other-insurance clauses. From that analysis, the court concluded that cases from other jurisdictions generally fell into two types. In the first type, the pro rata clause in one policy and the excess clause in the other are not held mutually repugnant and the policy containing the pro-rata provision must be exhausted first up to the policy limits. The court found this to be the majority rule. In the second type or minority view, commonly referred to as the Lamb-Weston rule (because it was developed in Lamb-Weston, Inc. v. Oregon Auto. Ins. Co., 341 p.2d 110 (Or. Ct. App. 1959)), all other-insurance clauses, escape, excess or pro rata, are treated the same. Thus, any conflict between such clauses is considered to be mutually repugnant and the loss is apportioned according to the limits of each policy. This approach has been deemed the minority view.

The New Jersey Appellate Division then decided to adopt the majority rule. In doing so the court held that, “In the absence of controlling precedent, the specific language of the policies should be applied, and given its ordinary meaning.” (citing Universal Underwriters Ins. Co. surpa, 308 N.J. Super. at 419).

As a result of that decision, the appellate court overturned the trial judge here who had ordered that Farm Family contribute an equal amount to the $115,000 settlement.

While arguments can certainly be made in favor of either the majority view or the minority view, the real benefit of this ruling is the clarity it brings to assessing the impact of dueling other-insurance clauses. Competing excess clause are “mutually repugnant” and therefore disregard. Two pro-rata clauses are enforceable and each carrier responds in accordance with its share. Finally, when faced with excess and pro-rata clauses, the excess trumps the pro-rata and the pro-rata policy must be exhausted first. Before going all in at a poker game, it helps to know if your hand is likely to be stronger than the other players. Likewise, a policyholder dealt coverage under multiple policies now knows how to play its hand when facing other-insurance clauses.

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