“Tail-End” of the “Other Clause”

The Ouroboros also symbolizes an unsolvable circular argument that appears to have no beginning and no end – like the debate over whether the proverbial chicken preceded the original egg. In insurance law, one of the most vexatious of these problems has been conflicting “other insurance” clauses.

The authorities are agreed that where an insured holds more than one policy of insurance that covers the same risk, it may never recover more than the amount of the loss. On the other hand, under ordinary circumstances, the insured is entitled to select the policy under which it will claim indemnity, subject to any conditions to the contrary.

The insurer of the policy, in turn, is entitled to contribution from all other underwriters that had covered the same risk. This doctrine of “equitable contribution” is founded on the principle that it is only fair that the insurers sharing co-liability should also share the burden on a pro-rated basis.

The warm and fuzzy appeal of pro-rated equitable contribution takes a beating when insurers discover the existence of another valid policy that may apply to indemnify the insured. At this point, the insurer drafts a pointed letter to legal counsel querying why in the world it would ever consider a contribution when there is another insurance company just dying to assume the defense and honor the claim. While this may seem unreasonable, it is entirely in keeping with the clear intent of the “other insurance” clause of the policy.

Since this other policy ordinarily contains an “other insurance” clause as well, another lawyer will receive instructions to fight to the death in the defense of the second policy. This leads to the unfortunate result of both companies denying coverage on the basis that the insured has bought too much (or overlapping) insurance and is accordingly entitled to none. The Ouroboros is born.

CANADIAN APPROACH

While judges across Canada have ruled in hundreds of cases involving “other insurance” clauses, the Supreme Court of Canada has not previously considered the problem in any definitive sense. Accordingly, the lower courts have adopted a number of approaches to solving the problem, often without much consistency. The Supreme Court of Canada has now articulated what it considers to be the appropriate “Canadian” approach in the recent decision of Family Insurance Corp. v. Lombard Canada Ltd. (2002 S.C.J. No. 49, 2002 SCC 48).

The facts of this case are quite straightforward. In March of 1996, the plaintiff was injured in a fall from a horse. She sued the owner of the stable as well as the owner of the horse. Her claim was eventually settled, with the quantum of damages set at $500,000. The stable owner was insured at the time of the accident by the Family Insurance Corp. under a homeowner’s policy with $1 million limits. She was also insured by Lombard Canada under a commercial general liability policy (CGL) for $5 million. Although Lombard initially denied liability, both insurers conceded that the claim potentially fell within both policies.

Unfortunately, both policies contained “other insurance” clauses that declared the policies to be “excess coverage” to any other insurance coverage held by the insured. While the two clauses differed slightly, they both essentially set out that if there was other insurance which applied to a loss or claim, the policy would be considered excess insurance and the insurer would not be liable until the underlying limits were used up. Each insurer relied on its “other insurance” clause as a means of shielding itself from primary liability.

Justice McEwan of the British Columbia Supreme Court found each insurer to be primary and held that each should contribute equally to the loss. Lombard appealed, arguing that the trial judge erred in finding Lombard to be a primary insurer.

In reaching his decision, the trial judge noted that the wording of the two clauses was not identical. Accordingly, he tried to determine whether the two clauses could be reconciled by determining the intent of the two insurers as revealed by the content of their respective policies. He noted that the Family Insurance policy was worded so that the test for liability was “whether the other policy would function as the primary insurance if the appellant’s policy did not exist.”

Lombard argued that its policy was excess even to excess policies, so that even if Family Insurance met its own definition as an excess insurer, then the Lombard policy would still be excess to it. Justice McEwan rejected this theory as representing circular reasoning, and it is hard to disagree. He then attempted to come up with a method to apportion liability between the two insurers. He noted that the Lombard policy provided a formula for sharing liability whereas the Family policy was silent on the issue. He noted that without an agreement between the parties, Lombard’s formula could not bind Family.

Applying an “independent liability approach” he held that the “other insurance” clauses cancelled each other out. As both “other insurance” clauses were inoperative, each policy could be regarded as providing primary coverage, so that each insurer was required to contribute equally to the applicable limits of each policy or until none of the loss remained.

CONTRACT CONNECTION

On appeal, the British Columbia Court of Appeal took note of the higher coverage provided by the Lombard policy, the broader net of coverage and its availability to a group. It concluded that since the underwriting considerations were different, the Family Insurance policy provided the primary coverage while the Lombard policy provided excess coverage.

The Supreme Court of Canada, however, considered the reasoning of Justice McEwan with approval and restored his initial decision. In overturning the B.C. Court of Appeal, it held that where the contest is only between the insurers, there is no basis for referring to surrounding circumstances or looking outside the policy. This is based on the fact that there is no privity of contract between the insurers (in other words, both have a contract with the insured but not with each other).

The court found both policies to be clear and unambiguous, and the insurers’ intentions unequivocal. The Family Insurance Co. intended to provide primary coverage unless other valid insurance was available, in which case, it intended to provide only excess coverage. Lombard Canada, however, intended to provide primary coverage unless other valid insurance was available – in which case, it intended to provide only excess coverage regardless of the type of coverage provided by the other insurer.

The court determined, however, that the insurers’ intentions, expressed unambiguously in the policies, gave rise to a “circular reasoning” that did not resolve the problem of which policy provides primary coverage. In other words, if the plain intentions of the “other insurance” clauses were given effect, there would be no coverage at all.

In the face of these irreconcilable intentions, the Supreme Court of Canada set out to determine the most equitable means of resolving the dispute, respecting both the intentions of the parties and the right of the insured to recover fully. They began by considering the increasingly popular “Minnesota approach”. This approach, adopted in some American jurisdictions considers the “closeness to the risk”. In Minnesota, the courts look to the primary risks on which each insurer’s premiums are based and the primary function of each policy in order to determine “total policy insuring intent” of the insurers.

The Supreme Court of Canada noted that in the U.S., the Minnesota approach has been criticized as an exercise in “hair-splitting” and “semantic microscopy”. Some commentators have denounced it as promoting uncertainty and increased litigation. Not unreasonably, the court decided that this was not a tradition that should be adopted in Canadian jurisdictions.

The Supreme Court of Canada found that in effect, the Minnesota approach resulted in the preference and endorsement of the intentions of one insurer over another. T hey went on to observe that this result did not accord with either the principles of equitable contribution or the intentions of both insurers. The court ruled that the better approach was one that recognizes that the parties involved have not contracted with each other, so that their subjective intentions are irrelevant. Although the intentions of the insurers govern the exercise of interpretation, the focus of the examination is to determine whether the insurers intended to limit their obligation to contribute, by what method, and in what circumstances vis–vis the insured.

The Supreme Court of Canada considered that this approach respects both the intentions of the insurers and the insured’s contractual right to full indemnity. It held that the “independent liability” approach was the fairest way to apportion liability and the only method consistent with the principles of equitable contribution. Where the competing policies cannot be read in harmony, the conflicting clauses should be treated as mutually repugnant and inoperative. Accordingly, both policies provide the insured with primary coverage, so that each insurer is independently liable to the insured for the full loss. Where liability is shared among insurers covering the same risk, the loss is borne equally by each insurer until the lower policy limit is exhausted, with the policy with the higher limit contributing any remaining amounts.

EQUAL BURDEN

In the absence of limiting intentions, or where those intentions conflict, the principles of equitable contribution demand that parties under a coordinate obligation to make good the loss must share that burden equally. It is important to understand that this obligation to contribute equally up to the policy limits is irregardless of any sharing formula that may be incorporated into the policy.

The Supreme Court of Canada in this instance appears to have concluded that when faced with a knot, the simplest solution is to cut it straight up the middle. The decision in Family Insurance vs. Lombard Canada will be good news for some insurers locked in a dispute with another carrier, and bad news for others. While the ruling that the insurers should contribute equally may seem to be a simplistic solution to the age old problem of conflicting “other insurance” clauses, it may end up saving the industry millions of dollars in unnecessary litigation and lead to a new era of cooperation between insurers.

On the other hand, as you read this article, somewhere in Canada a claims examiner and a lawyer are corresponding, trying to find a way to distinguish this decision in their ongoing dispute. The Ouroboros may be in bad shape, but it may be premature to assume that it is deceased.