Who owns primary coverage?
Agents and underwriters have a major role in … making
insureds aware of possible gaps. These insurance professionals
should be aware of exposures when seeking out and vetting … submissions.
By Bruce D. Hicks, CPCU, CLU
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry-expert contributors to Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from The Rough Notes Company’s digital solutions. The contributors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
Paraphrasing an adage, one never knows the insurance journey that may begin with the first steps toward handling risk. Our featured case, Great West Casualty Co. v. Nationwide Agribusiness Insurance Co., et al. pits a primary and an excess insurer against each other. It begins with a tractor-trailer colliding with the side of an SUV; the driver of the smaller vehicle did not survive.
The vehicle that caused the accident was insured by two carriers and they were sued by the estate of the deceased SUV driver. There were two liability policies available to respond to the suit. The first was issued by Great West Casualty, covering the tractor for $1 million. The second policy, protecting the trailer, was issued by Nationwide Agribusiness Insurance Co. and had a limit of
$2 million.
No problem related to the underlying accident existed. The insurers agreed that their respective policies were obligated to respond to the lawsuit and provide compensation. The issue was which company owed primary coverage. Besides involving separate insurers with different limits, the situation had other complications. The tractor was operated by a motor carrier but was leased from another company. The trailer was owned by a separate company. A Trailer Interchange Equipment Use Agreement was in place and both policies contained different Other Insurance provisions.
In the actual case, the appellate-level decision ended with an order for the two companies to respond to the loss and to pay what was due to the deceased’s estate on a pro rata basis (matching their respective policy limits). The obligation to the estate was resolved, but only after protracted litigation. It was against the preference of the insurance companies.
Generally, all parties are served best when an insurance arrangement is simple and effective. Of course, simplicity may not be practical due to vehicle use, vehicle/equipment ownership, and added contractual considerations. However, in the face of greater complexity, the objective of providing reliable coverage remains critical.
Aligning coverage would be an excellent way to avoid problems and efforts should be made to find a single carrier to handle the power unit and trailers. The next best alternative is for parties to be aware of coverage features and limitations that exist among participating carriers. Agents and underwriters have a major role in coverage alignment or, at least, in making insureds aware of possible gaps. These insurance professionals should be aware of exposures when seeking out and vetting motor carriers’ submissions.
As is the case with all lines of business, applications contain questions that, if properly answered and followed up on, reveal a picture of a given risk’s acceptability. If not, have supplemental sources (such as risk surveys) been used to flesh out a risk? Various surveys include sections on automobile exposures, including hired/borrowed and non-owned situations that, when applicable, require details that identify areas that need additional investigation. They also require details on various contract arrangements.
When an insurer is aware of another insurer’s participation on a risk, this may lead to a review of each other’s coverage forms. Such reviews would, at least, provide a forewarning of possible coverage complications.
While lawsuits all include discovery periods, that is not an ideal time for insurance companies who share coverage responsibility to secure information that should already have been known. Further, lawsuits generally supplant other alternatives that may have resolved problems at considerably less cost.
For instance, in our featured case, both insurers became aware of the Trailer Interchange Equipment Use Agreement. During litigation, the two parties argued over whether the agreement qualified as an insured contract. A closer examination, performed more thoroughly prior to deciding to sue, may have clarified that the agreement did not meet the definition of an insured contract. The added expense of determining this point could have been minimized or avoided if the issue had been decided earlier.
If the insurers had paid enough attention to the insurance exchange agreement, it could have triggered mutual reviews of their other insurance clauses that might have resulted in deciding not to participate with each other or, possibly, accepting that a collision claim would result in their having to respond as if they were both primary insurers.
Another alternative that the insurers could have considered was mediation. This process is similar to arbitration. However, rather than merely resolving disputes’ financial amounts, mediation’s focus is to answer whether coverage is due (or in our featured case who is obligated to respond).
The insurers could have voluntarily agreed to having representatives put forth their positions to a qualified mediator (disinterested third party) for a decision. They also could have agreed to binding or non-binding mediation. The latter would, if necessary, let them take any continued disagreement to litigation, as a last rather than first resort.
The author
Bruce D. Hicks, CPCU, CLU, is an Indiana-based insurance coverage expert. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and most recently served on its International Interest Group Committee and as Chair of its Publications Committee.
