What is an other insurance clause?
How does it affect an insured’s compensation rights or claim?
What happens when several policies cover the same loss?
We will look at what it means to have an other insurance clause, its definition, how it can affect the insured rights, how insurance companies perform loss-allocation among themselves, the types of other insurance clauses, how courts interpret them, examples and more!
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What is an other insurance clause
An other insurance clause is a contractual clause found in insurance policies where the insurers attempt to allocate or limit their liability when another insurance policy may provide coverage for the same loss.
In other words, in the event of a loss or claim triggering multiple insurance policies, the other insurance clause is used to apportion the liability among the insurers involved.
For example, claims under general liability policies may be handled by the insurer on a primary basis, meaning that it is the primary insurance policy that will cover the loss.
In other cases, certain types of events may trigger multiple insurance policies and coverages in a competing fashion.
To resolve the dilemma of which policy should handle the claim or loss, the insurance companies include a provision called the “other insurance clause” to deal with potential policy coverage conflict.
The insurance companies allocate responsibility using the other insurance provision resulting from a loss or event triggering their liability.
The other insurance clause is relevant to the extent that more than one policy covers the same loss and either policy can potentially cover the loss if the other ones did not.
Other insurance clause definition
According to IRMI, an other insurance clause can be defined as:
A provision found in both property and liability insurance policies establishing how loss is to be apportioned among insurers when more than one policy covers the same loss
Essentially, the other insurance clause provides for a mechanism for insurance companies to share losses resulting from the same event or “same loss”.
Insured rights
It’s important to note that the other insurance clause is a contractual provision governing the insurance companies’ liability and relationship among themselves.
As a result, conflict or disputes arising from the other insurance provision should not lead to the preclusion of coverage to the insured or the inability of the insured to be indemnified for an eligible loss.
As such, it is well established that the insured’s claim should take priority over the insurers’ dispute over the risk and liability allocation disputes resulting from conflicting other insured clauses.
Fundamentally, insurance companies are bound by the principle of indemnity and must pay for the insured’s claim.
Under the principle of indemnity, an insurance carrier must not profit from the loss of an insured.
This principle mitigates the moral hazards resulting from insurance companies engaging in frivolous or unreasonable disputes in an attempt to avoid compensating the insured on technicalities that do not involve the insured.
With this objective in mind, an insured will not need to ensure the same property twice or pay significantly more premiums for double insurance.
Types of other insurance clauses
There are four types of other insurance clauses:
- Pro rata other insurance clause
- Excess other insurance clause
- Escape other insurance clause
- Excess-escape other insurance clause
An other insurance pro rata clause is a provision requiring the insurance companies to cover the losses on a pro-rated or shared basis.
Under a pro rata other insurance provision, each insurance company will be liable for a percentage of the total loss equivalent to the ratio of each of their policy limits to the sum of all the policy limits combined.
An other insurance excess clause is a contractual provision where a policy will cover losses in excess of what the other policy (primary policy) has covered.
In some cases, the excess clause provision application can lead to the insurer effectively not having primary coverage if all triggered policies have excess clauses.
In some states, to avoid this situation, the law will apply a prorated other insurance rule to ensure the insurer gets primary coverage and not harmed by the conflicting excess other insurance clauses.
An other insurance escape clause is one where an insurance company does not cover or assume liability for the loss rendering the policy inapplicable.
An other insurance excess-escape clause, an insurer will pay for the excess of what the primary insurance covers but will not pay if the primary coverage is equally or more than its coverage.
Other insurers provision elements
To assess an “other insurance” case, you’ll need to ask yourself the following questions:
- Are there different policies covering the same loss?
- Do the applicable insurance policies contain an “other insurance clause”?
- What is the scope of the other insurance provision?
- What are the applicable laws in the event of a potential conflict between policies and insurers?
Let’s look at insurance with other insurance provisions and see how they work.
Same loss
The first step is to assess if there is insurance coverage for the “same loss”.
Typically, you have the same loss when:
- The insurance policies cover the same property
- The policies ensure the same insurable interest
- The policies insure the same risk
- The policies protect the same parties
Depending on your state, the local rules may be different, so it’s important to specifically look at your domestic laws.
Competing other insurance clauses
The second step is to look at the competing other insurance clauses when the insurers cover the same loss.
The way the other insurance clause is drafted is important as it will allow the insurers the possibility to determine and allocate liability for the same loss.
Generally, the standard provisions approved by the Insurance Services Office (ISO) are used.
In some cases, the insurance company may have drafted their own contractual provision or included wording in consideration of the policy issued.
Court interpretation
When competing insurance policies cover the same loss and were the other insurance clauses conflict, the U.S. courts will use the following methods to resolve the conflict:
- Consider the parties’ intent (generally leading to the application of the pro rata rule)
- Consider the other insurance clauses to be “mutually repugnant” leading to the rejection of both clauses (generally leading to the insurance companies assume losses on a pro-rated basis)
Here are the possible scenarios and outcomes in assessing the other insurance clauses:
- One policy is pro rata and the other is excess (pro rata policy will be primary and the excess will cover the excess loss)
- One policy is pro rata and the other is escape (pro rata policy will pay for the entire loss and the escape policy will not apply)
- One policy is excess and the other is escape (the courts will consider the parties’ intent or consider the clauses to be mutually repugnant)
Other insurance clause example
Commercial property insurance
Let’s assume that you own a boutique selling computers to consumers.
You rent your commercial space from the landlord who included an obligation for you to have the building insured under your commercial property policy.
You also have a standard general liability policy where you named your landlord as an additional insured.
In the event of damages caused to the building, you have two policies that can potentially cover the same loss.
In these two policies, you have the property insurance policy with a pro rata other insurance provision and the commercial general liability having an excess clause.
As a result, the commercial property policy will be considered as the primary policy and pay for the loss first and the commercial general liability policy will be considered as the excess and pay for losses in excess of what the primary policy did not cover.
Errors and omissions insurance
A company has contracted commercial general liability insurance with one insurer and errors and omissions insurance with another insurer covering its professional liability.
The errors and omissions policy contains an “other insurance clause” indicating that will be considered as an excess policy to any other insurance.
The commercial general liability provides coverage for defamation whereas the E&O provides coverage for other causes of action against the company such as errors resulting in a breach of contract.
In the event of a claim filed against the company for defamation and breach of contract due to errors and omissions, both policies will apply.
The “other insurance clause” will not take effect as the policies cover different risks.
In the event of a lawsuit or claim regarding defamation and breach of contract, both insurance companies may end up with a prorated responsibility.
They both have an active duty to cover the insured under their policy and at the same time they will not want to be accountable for the entire defense cost.
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