As legal advisor to policyholders, we are frequently asked which insurance policy can cover a particular loss. Sometimes the answer is not just one, but many.
How a claim can be covered by more than one policy
There are several circumstances in which more than one policy can respond to a given claim.
For example, in accordance with a contract between companies A and B, company A may have made company B a “additional insuredOn a policy taken out by company A. A claim against company B can thus be covered both by B’s own policy and by that taken out by A. The same contract may require that A provide B with a certificate of insurance identifying A’s policy. This may allow B to provide notice directly to A’s insurance company as well as to B’s insurance company. Depending on the requirements of the contract between A and B, as well as the language of the policy and the law in some jurisdictions, B may even be allowed to target its offer to A’s insurer as the only one to cover the claim, leaving B’s own policy largely untouched.
Another possibility is that Company X has taken out more than one policy for itself that potentially covers the same loss. For example, an architectural or engineering firm typically purchases both commercial liability insurance (CGL) and professional liability (PL) insurance (also known as errors and omissions (E&O)). . Depending on the allegations and all the facts that can be proven about something wrong at work, both policies may cover the claim. This is especially likely if a lawsuit alleges only general negligence rather than professional negligence, even though much of Company X’s work can be considered professional in nature. Company X should consider informing both its CGL and PL insurers.
How multiple insurance policies can interact to cover a claim
When more than one policy can cover a given loss, another issue is how the policies interact to determine which insurance company pays what portion or in what order. Many policies are indeed anticipating this situation.
In our previous example for Companies A and B, their contract may require that A’s policy be “primary and non-contributory”. A’s policy, if it complies with this requirement, will likely have an endorsement that says, in effect, that it will cover B up to the dollar limit of A’s policy, and B’s policy does not. to contribute unless A’s insurer has paid its entire limit.
An insurance policy may also contemplate the existence of another policy by including an “other insurance” clause. This clause comes in one of three main varieties.
A so-called “pro-rata” clause states that multiple insurance policies will contribute simultaneously, perhaps in equal or pro rata amounts depending on the dollar liability limits in the respective policies.
A “deductible” provision states that the policy becomes a deductible, paying only after the other policy has been fully paid and only to the extent that the loss exceeds the limit of the other policy.
An “escape” clause indicates that the policy will not provide coverage, allowing that insurer to completely escape liability if there is another policy that covers the same loss.
It is important to take into account the “other insurance” provisions of all triggered policies. One can imagine that they could come into conflict. For example, if two policies have “excess” clauses, it is obviously impossible for each policy to operate beyond the other. In this situation, applicable state law usually provides a default rule for both policies to share the loss, with neither exceeding the other.
Take away food
When considering which policy may cover a claim, consider the possibility that more than one policy will apply. It is at least worth looking at more than one policy, including various types, seemingly different policy periods, or even those purchased by other companies. While it may seem daunting to analyze or strategize on the availability of coverage under more than one policy, it’s usually a good deal to have.