A coverage dispute can sometimes become so complex that a host of issues have to be litigated. For instance, in a recent dispute between two insurers, the 5th U.S. Circuit Court of Appeals was tasked with addressing issues related to a loss-valuation clause, the absurd-result concept, the voluntary payment doctrine, other insurance clauses and allocation of a loss.
Southern Ins. Co. v. Affiliated FM Ins. Co. [1] involved a loss for a building affiliated with the University of Southern Mississippi (USM). The property was owned by USM, but was leased to the USM Alumni Association (Association). The lease required the Association to obtain insurance “against claims for…property damage,” with USM to be listed as an additional insured. The Association obtained the policy with Southern Insurance Company (Southern) but failed to list USM as an additional insured.
In addition to the Association’s policy, the property at issue was also insured by USM’s insurer, Affiliated FM Insurance Company (Affiliated), blanket policy. USM’s policy listed USM as a named insured but failed to list the Association as an insured. The Southern policy and Affiliated policy both contained competing “other insurance” clauses, stating that their coverage obligations would be excess to other insurance policies.
In February 2013, a tornado damaged the property. Affiliated insurer did not initially pay for damage to the house because another policy covered the damages. In response, Southern cited the two policies’ competing other insurance provisions and asserted that coverage should be shared on a pro-rata basis. In response, Affiliated cited the lease, which required the Association to procure coverage. Furthermore, Affiliated noted that the Association was not an insured under its policy, so it had no duty to cover property damages suffered by the Association.
The Association submitted a claim for personal-property damage of nearly $80,000 and building-repair damage of more than $3 million. Southern paid the personal-property claim, but denied the building-repair claim under the theory that USM was liable for the repair and maintenance of the building and filed a declaratory judgment action seeking a ruling stating that it was not liable for the building-repair damage. Southern also posited that if its policy did afford building-repair coverage, its obligations needed to be pro-rated with Affiliated.
In response, Affiliated counterclaimed that its policy was excess to Southern’s policy. Thereafter, Affiliated paid the claim for the building-repair claim and reserved the rights to pursue recovery of the payments from the Association and Southern. Southern filed a dispositive motion, citing its policy’s valuation clause, which stated that the valuation for loss or damage is “[n]othing if others pay for repairs or replacement.” Southern argued that Affiliated’s voluntary payment of repair costs foreclosed recovery from it.
The 5th Circuit provided the following rulings on these coverage issues:
- Valuation Clause: The court stated that a contract interpretation of Southern’s valuation clause “leading to an absurd, harsh or unreasonable result…should be avoided….” The court ruled that “[p]ermiting [Southern] to deny coverage because it was the university’s responsibility to make repairs, or because [the Association’s] inaction caused another insurer to step in and pay for them, essentially allows it to agree to insure the house without assuming any risk.” The court also noted policy reasons as to why Southern’s position should be rejected. Of note, the court reasoned that if it allowed Southern to value the claim at zero because of the valuation clause, this would lead to a result in which insurers who covered the same risk would be incentivized to enter into a “stare-down,” wherein each would be incentivized to deny coverage first.
- Voluntary Payment Doctrine: The court defined the voluntary payment doctrine as “a payment made without compulsion, fraud, mistake of fact, or agreement to repay a demand which the payor does not owe, and which is not enforceable against him.” The court held that Affiliated’s payment was not voluntary, had it not paid, the floodgates would have opened to potential liability against it. Because Affiliated had a duty to provide coverage to USM, it did not make a voluntary payment.
- Competing Other Insurance Clauses: The court ultimately held that a Mississippi court would likely rule that the competing “other insurance” clauses were mutually repugnant because both purportedly were excess to each other – even though the competing “other insurance” clauses were found in policies issued to multiple insureds.
- Allocation: The court held that, under Mississippi law, when other insurance provisions are mutually repugnant, the loss must be allocated on a pro-rata basis pursuant to policy limits.
This decision shows the complexity of a loss when there are multiple insurers involved and competing policy language complicating the coverage analysis. This case provides insight on how a court may rule on coverage disputes when a given loss is covered by two different insurers who have issued policies to two different policyholders.