In Great Northern Insurance Co v Mount Vernon Fire Insurance Co, No. 97-7989, 1998 US App LEXIS 8413 (2d Cir May 1 1998), the US Court of Appeals for the Second Circuit certified a question to the New York Court of Appeals regarding the interpretation of the "other insurance" clause in a commercial general liability policy. The "other insurance" clause is a standard provision commonly found in commercial liability policies which typically comes into play when multiple insurance policies cover a single loss. It should apply only to disputes between insurance companies over how much each must pay for a particular loss. Great Northern gives New York's highest court the chance to confirm that "other insurance" clauses should not be employed to cut a policyholder's right to the full limit of an insurer's liability for a covered loss.
The "other insurance" clause purports to designate when an insurer's coverage is "primary" or "excess" with respect to other applicable coverage. The distinction alters the apportionment of responsibility among insurers covering the loss. Great Northern reveals what can happen to a policyholder who gets caught in the crossfire between insurers over these clauses.
The underlying action arose out of an accident that occurred when a carpenter, John Hlavaty, was injured while working on an apartment owned by Linn Howard Selby. Hlavaty claimed he was working as an independent contractor for the general contractor, William Monier Construction. Monier had a general liability insurance policy from Mount Vernon Fire Insurance and named Selby as an additional insured under that policy. Selby also had her own insurance, a standard homeowner's policy sold by Great Northern Insurance.
Although both Great Northern and Mount Vernon conceded that their policies covered the loss, they disputed how the loss should be apportioned between them. Both policies contained "other insurance" clauses. Great Northern and Mount Vernon agreed the Great Northern policy was excess with respect to the Mount Vernon policy. But they disagreed whether the Mount Vernon coverage was primary or excess to that of Great Northern.
The Second Circuit noted that if the Mount Vernon coverage is considered excess, the two policies would be excess to one another and the two "other insurance" clauses would cancel each other out. The insurance companies would then have to apportion the costs of defending and indemnifying Selby on a pro rata basis. If Mount Vernon's coverage is primary in relation to Great Northern's, Mount Vernon must pay up to the limits of its policy before Great Northern must pay.
In most respects, the Mount Vernon policy contained primary coverage but was excess in a few enumerated circumstances. The policy stated that it was excess over other insurance that provided "Fire, Extended Coverage, Builder's Risk, Installation Risk or similar coverage for 'your work'." Since the Great Northern policy was not fire, extended coverage, builder's risk or installation risk insurance, the Second Circuit stated that the disposition of the case depended on the meaning of the phrase "similar coverage for 'your work'" in the Mount Vernon policy.
Mount Vernon argued that the policies were "similar", and therefore excess to one another, because both covered tort claims by third parties arising out of the renovations to Selby's apartment. The federal district court judge agreed, ruling in favour of Mount Vernon. The Second Circuit, considering an appeal by Great Northern and Selby, deferred its decision because it was troubled by the phrase "similar coverage for 'your work'".
This case demonstrates that "other insurance" clauses simply provide a mechanism to apportion liability among insurance companies. They contain no provisions requiring that a share of the liability be assigned to the policyholder. The insuring agreement of the standard general liability policy provides that the insurer "will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence". The "all sums" language is not limited or qualified in any way. Unless the insurance policy contains an explicit clause requiring proration to the policyholder, allocation of liability to the policyholder is improper.
John H Kazanjian