One of the most difficult problems in evaluating complex insurance coverage matters is the relationship between multiple primary and excess policies. Determining the priority of policies can have a dramatic impact on the exposure under a particular policy - any shift of a primary policy to excess coverage (or vice versa) may significantly affect contribution levels, and can impose the bulk of a loss onto a different (and sometimes unexpected) insurer. Consequently, these priority issues are often contested, and can result in significant litigation.
Although there are basic judicial rules governing the priority of policies, the outcome in these disputes is often driven by the specific language of each insurance policy. Each policy usually contains its own specific terms governing how it will apply in such circumstances - and these terms and clauses often conflict with those contained in the other policies involved in the matter, as well as the trade contracts related to the underlying claim. Determining the "pecking order" among multiple insurance companies - with complex and often conflicting clauses - has been characterized as a court's "nightmare . . . filled with circumlocution." State Farm Fire & Cas. Co. v. LiMauro, 65 N.Y.2d 369, 492 N.Y.S.2d 534 (1985)(citing Carriers Ins. Co. v American Home Assur. Co., 512 F2d 360, 362).
The Appellate Division, First Department recently examined the priority issues surrounding a complex coverage matter involving additional insured claims for a construction site accident, in Bovis Lend Lease LMB, Inc. v. Great American Insurance Company, 2008 Slip Op. 3150 (1st Dep't, April 10, 2008).
Bovis Lend Lease involved a construction site accident, in which an employee of a subcontractor was killed in a fall down an elevator shaft in a New York City court building. The subsequent personal injury lawsuit involved claims against the City, owner, construction manager and general contractor. The insurer for those parties then sought to shift the financial responsibility to other insurance carriers. The resulting declaratory judgment action involved four primary insurers and two excess insurers, which had issued policies to three subcontractors.
The insurer for the City, owner and construction manager sought to shift the entire coverage burden to the primary and excess insurers for the employer. They argued that the construction contract required the employer to maintain primary liability insurance of $5 Million - and because the employer's primary liability insurance only had a limit of $1 Million, its excess coverage should also apply on a primary basis (to make up the full $5 Million) before the policy issued for the City, owner and construction manager was implicated. The trial court agreed.
On appeal, the Appellate Division disagreed, recognizing the basic rule that priority issues are determined by the insurance policies themselves, and not necessarily by the construction contract:
the extent of coverage (including a given policy's priority vis-Ã -vis other policies) is controlled by the relevant terms, not by the terms of the underlying trade contract that required the named insured to purchase coverage.
The Court went on to apply the general principle that each policy must be evaluated in terms of its purpose - that is, whether it applies on a primary or excess basis. That determination:
turns on consideration of the purpose each policy was intended to serve as evidenced by both its stated coverage and the premium paid for it, as well as upon the wording of its provision concerning excess insurance.
In its 18-page decision (replete with footnotes) evaluating the priority of coverage, the Court examined the policy language of the various policies. The Court specifically examined the primary policies involved, finding that they did not operate on an excess basis.
The Court also disagreed with the trial court, and found that the employer's excess policy operated only on an excess basis - the policy was titled an "Umbrella Liability Policy" and contained a clause indicating that it was "excess over any other insurance, whether primary, excess, contingent or on any other basis, except such insurance as is specifically purchased to apply in excess of this policy's Limit of Insurance." The Court concluded that the policy was intended to constitute "the final tier of insurance for any liability it would cover, but for any insurance specifically purchased to apply in excess of its limits."
As such, the Court concluded that the priority dispute required the primary policies to be exhausted before the excess policies were implicated. Once those primary policies were exhausted - including the employer's primary liability policy, the general contractor's primary liability policy, and the owner's general liability policy (in that order) - the excess policies of the employer and general contractor would share in any remaining loss.
The Bovis Lend Lease LMB decision highlights the complexities involved in determining priority issues in insurance coverage matters. Fortunately, it also signals the Courts' willingness to undertake the review and analysis necessary to resolve priority disputes - and to provide guidelines to help others navigate the "nightmare" of determining which primary and excess insurance policies apply to large losses.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.