When two or more insurers’ policies potentially cover a single loss, “other insurance” questions can arise. Over the years, courts have developed a number of rules of the road to apply when multiple policies potentially cover the same loss. But these principles govern the obligations and responsibilities between the insurers, and not between the insurers, on the one hand, and the policyholder, on the other hand. These principles were well-illustrated in a recent case out of the Southern District of South Carolina in which Judge Henry Herlong held that the possible application of another policy of insurance did not entitle an insurer to a pro rata apportionment of its loss payment to its insured. The case provides a good example from which to consider the insurer’s rights and obligations are in these situations. Judge Herlong’s November 7, 2017 Opinion in the case can be found here. The Wiley Rein law firm’s November 17, 2017 post about the decision on its Executive Summary blog can be found here.
Michelin North America suffered an $8 million loss in its retirement plan due to fraudulent activities of plan fiduciaries. Its Pension and Welfare Fund Fiduciary Dishonesty insurer had issued a $5 million to the company. MNA submitted the retirement plan loss to the insurer. The insurer conceded that its policy covers the loss. However, the insurer did not pay its full $5 million limit. Rather the insurer argued that another policy also applied concurrently to the loss, and that under the “other insurance” clause in its policy it was entitled to apportion its liability for the loss with the other insurer and to pay only its pro rata share of the loss. On this basis, the insurer paid only MNA about $2.5 million, rather than its full $5 million policy limit. MNA filed an action against the insurer for breach of contract and seeking a judicial declaration of coverage. The parties filed cross-motions for summary judgment.
The other insurance policy that the MNA insurer argued applied concurrently to the loss was a policy issued to Compagnie General Des Etablissements Michelin (CGEM), a related entity to MNA. The CGEM policy is written in French and subject to French law. The MNA insurer attached a copy of the CGEM policy to its summary judgment motion, along with an English translation.
The November 7, 2017 Opinion
In his November 7 opinion, Judge Herlong granted MNA’s motion for summary judgment and denied the insurer’s motion, holding that the “other insurance” clause in its policy had no impact on MNA’s right to recover the policy limits for a loss that exceeds the policy limit.
Judge Herlong opened his analysis by noting that as a general matter, when two insurance policies provide concurrent coverage and contain competing “other insurance” clauses, the loss is prorated according to their respective policy limits.
However, Judge Herlong noted, “other insurance clauses govern the relationship between insurers; they do not affect the right of the insured to recover under each concurrent policy.” He added that “inter-insurer loss allocation by way of ‘other insurance’ clauses never permits allocation of a loss to the insured.”
The insurer, Judge Herlong, is “essentially asking the court to resolve a dispute between it and another insurance company that is not a party to this action.” In order to address the insurer’s “other insurance” contentions, the court would have to determine if there is coverage under the CGEM policy, the amount of the coverage, and the apportioned amount between the two policies.
Moreover, the judge added, the other insurance clauses govern relationships between the two carriers, and “have no impact on MNA’s right to fully recover under [the insurers’] policy.” The court added that if the CGEM policy covers the loss, then the insurer “could potentially pursue a claim for equitable contribution directly against” the CGEM insurer.
In summary, the court said, this case involved disputed issues regarding the applicability of the CGEM policy that cannot be decided without the presence of the CGEM insurer. Moreover, resolution of the disputed issues involving the CGEM policy are not necessary to resolve this case, as there is no dispute that MNA’s insurers policy provided coverage for MNA’s loss. The “other insurance” clause “has no impact on MNA’s right to recover the policy limits for a loss that exceeds the policy limits.”
The best place to start thinking about this case is the point on which Judge Herlong ended up; that is, the “other insurance” question has nothing to do with the question of whether or not MNA’s insurer was liable for MNA’s loss. The fact is, MNA paid its premium and its insurer accepted the premium to cover exactly this kind of loss. The “other insurance” clause has no effect on the insurer’s obligations to its policyholder. The MNA insurer may have rights it may be able to try to enforce against another insurer, but nothing about that fact diminishes its obligation to its policyholder.
There are alternative approaches MNA’s insurer might have taken in these circumstances. I want to stress that in reviewing these alternatives I am not finding fault with any of the actions or decisions that were taken or made on the insurer’s behalf here. I am not fully aware of all of the circumstances that may have driven the MNA insurer’s decisions here. My only objective is to point out that there were alternatives.
The first and most obvious approach MNA’s insurer might have taken here, if it truly believed that CGEM’s policy applied concurrently to the loss, is that it could have paid its full policy limits to MNA and then it could have pursued its claim for equitable contribution against CGEM’s insurer. If the MNA insurer had taken this approach, it would have had the significant virtues of having MNA’s insurer fully honoring its acknowledged contractual obligations under its policy, and, even more importantly, it would have relieved MNA from the vexation and expense of having to sue its insurer simply to secure the benefits of the insurance for which it paid the premium. Indeed the lawsuit MNA was forced to file here was particularly complicated involving as it did not only the interests of third-parties not present in the case but also involving complicated foreign language and foreign insurance principles.
While it could be argued that the better course here would have been for MNA’s insurer to pay the loss under its policy and then to pursue CGEM’s insurer for prorated contribution, the unattractive feature of this approach from MNA’s insurer’s perspective is that it would have forced the insurer to go out of pocket for money that it thought another insurer rightfully owes. My own view on this issue is that even if forced to go out of pocket this way, the insurer would not be paying any more that its policyholder was entitled to receive and it would not be paying any more than it was required to do based on the premium the insurer accepted to take on the possibility of this kind of risk.
Another alternative was available to MNA’s insurer here; while this other alternative would not have relieved MNA from having to file a lawsuit it arguably should not have had to file, it would at least resulted in having all of the parties together in a single proceeding so that the various interests could be addressed.
That is, MNA’s insurer could have taken advantage of the process of permissive joinder under Rule 20 of the Federal Rules of Civil Procedure and joined CGEM’s insurer as a defendant to the proceeding before Judge Herlong. While I still think the better course would have been for MNA’s insurer simply to pay MNA’s loss and then to pursue its own claim against CGEM’s insurer in a separate proceeding, MNA also could have joined the lawsuit that MNA filed. To be sure, there may well have been procedural issues that prohibited MNA’s insurer from joining the other insurer, but those procedural issues are hardly MNA’s problem.
Another thing about the possibility of the joinder of CGEM’s insurer — there obviously were a lot of issues involved in this case that could not be resolved without CGEM’s insurer being present and involved in order to address the extent to which MNA’s insurer was entitled to a pro rata apportionment of the MNA’s loss.
For example, what is the relationship between MNA and CGEM and how does that relationship affect the question of whether CGEM (and by extension its insurer) were liable for MNA’s loss? What coverage does the CGEM policy provide and how does that coverage affect the extent of the availability of coverage for MNA’s loss? Does the CGEM policy also have an “other insurance” clause and does it operate the same way as the clause in MNA insurer’s policy? How do French insurance policy coverage principles affect the interpretation of these questions? Given all of these questions, it was always going to be difficult for the court to even consider the defenses MNA’s insurer was relying upon in the absence of the involvement of CGEM’s insurer. Which really makes me wonder why MNA’s insurer thought it could get Judge Helong to address these issues without CGEM’s insurer in the court.
Again, I want to stress that I am not finding fault with anyone here. My only goal is to point out that in this dispute, as is so often the case, there arguably were alternative approaches the carrier involved might have taken that would have ensured that the policyholder received the full benefit of the policy for which it paid without requiring the policyholder to have to fight for its rights, and there were alternative approaches that could avoided the need for the policyholder to even be involved in this litigation.