This material was originally presented by the author at the Insurance Law Continuing Legal Education Seminar sponsored by the New Hampshire Trial Lawyers Association on May 13, 2005.

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I. OVERVIEW

A. Excess and umbrella liability insurance coverage issues primarily involve relationships between and among insurance carriers and their policies.

B. This area of insurance law is relatively unregulated. I.e., the wording of the provisions in an insurance policy with respect to when and to what extent coverage will be provided is not set by regulation or statute to the same extent that other areas of insurance law may be.

C. Nonetheless, when approaching a question involving this area it is still important to analyze any statutes which may be applicable that may effectively change the provisions of the policy or policies with which you are concerned.

1. For example, in Liberty Mutual Ins. Co. v. Home Ins. Indemnity Co., 116 N.H. 12 (1976), the owner of an automobile left it at a garage for repairs. A garage employee was injured while the automobile was being operated by a fellow employee. The operator was deemed to be an insured of both the owner's family automobile policy and of the garage insurance issued to his employer. The owner's insurer denied coverage on the basis of an exclusion which provided that the policy would not apply, "'to bodily injury to any fellow employee of the insured injured in the course of his employment if such injury arises out of the use of an automobile in the business of his employer.'" Id., at 14. The court held that the exclusion was effective to prevent coverage under the policy itself (Id., at 15); however, New Hampshire's financial responsibility law at the time required that coverage of at least $15,000 would be available to "an operator of the insured vehicle with the express or implied consent of the [named] insured." Id., at 17. Under the circumstances, the court held that extra contractual coverage in the amount of $15,000 was available from the owner's insurer. The court further held that the owner's insurer and the garage's insurer must both provide primary coverage for the accident and would have a joint obligation to defend the driver. Id., at 18 (order on motion for rehearing).

2. On the other hand, in a case involving uninsured motorist coverage, the policy issued to the owner of the vehicle was held to be excess over the operator's personal automobile policy because the financial responsibility law did not address the excess/primary question with regard to that type of coverage. Ellis v. Royal Ins. Co., 129 N.H. 326, 338 (1987). That case involved a commercial vehicle which was being operated by the employee of the owner at the time of the accident and a collision with an underinsured motorist. Both companies had clauses which stated that their coverage would be excess over other insurance. Id., at 336-337. In an opinion which analyzed in detail the two insurance contracts as a whole, the court found that the owner's policy was excess and the driver's policy was primary. Id., at 338. For a more recent decision concerning the application of an "other insurance" clause in the underinsured motorist context, see State Farm Mut. Automobile Ins. Co. v. Holyoke Mut. Ins. Co., 150 N.H. 527, 533 (2004) (Clause in passenger's own auto policy making it excess over insurance issued to the vehicle's owner was given effect).

D. Questions involving the division of responsibility between excess and primary insurance coverage can be divided into two different categories:

1. Questions involving insurance policies which are normally primary policies and are meant to be excess policies only under certain circumstances.

2. Issues concerning policies which are normally intended to provide excess coverage only. These are commonly referred to as "umbrella" or "catastrophe" policies.

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II. EXCESS INSURANCE (NORMALLY PRIMARY)

A. Most insurance policies have "other insurance" clauses which define the insurer's responsibilities in the event the insured has other insurance available to him or her. Assigning responsibility in specific cases, particularly when such clauses conflict, however, has caused one court to comment that "[p]robably in no field of law is there more confusion among the courts as to the proper rule to be followed than in the field of excess insurance."Ins. Co. of Texas v.Employers Liability Assurance Corp., 163 F. Supp. 143, 145 (1958).

B. Such clauses may be divided roughly into three categories.

1. "Escape" Clauses, which typically provide that, in the event of other insurance, the insurer will have no liability.

a. An example of an "escape" clause may be found in the case of American Employers' Ins. Co. v. Liberty Mutual Ins. Co., 93 N.H. 101 (1944). At the time of the accident which gave rise to the litigation, an automobile was being operated by an employee of its owner. The operator also had his own personal automobile insurance policy. The operator's own policy applied to the operation of any other automobile by him but "'only if no other valid and collectible insurance is available,'" Id., at 102. The court upheld such a clause as valid.

b. See also American Home Assurance Co. v. Fish, 122 N.H. 711 (1982). ("'[Insurer] shall not be liable to make any payment in connection with any claim made against the insured . . . which is insured by another valid policy . . ..'" Id., at 713.

c. Courts have also recognized a so-called "super escape" clause which "specif[ies] that even other insurance that labels itself 'excess' will be primary." See United States Fidelity and Guar. Co. v. Hanover Ins. Co., 632 N.E.2d 402, 404 (Mass. 1994).

2. "Excess" Clauses, which indicate that the policy will provide only excess insurance over any other insurance.

a. Such clauses are now typical in automobile policies. They normally indicate that when the insured is operating another automobile, or a temporary substitute, the policy "'shall be excess insurance over any other valid and collectible insurance.'" National Grange Ins. Co. v. Gervais, 106 N.H. 36, 38 (1964). The insurance typically "follows the vehicle" as opposed to the driver. This is consistent with New Hampshire's statutory financial responsibility scheme. RSA 259:61 II; 264:14, I. That is, the liability insurance issued for a particular vehicle is required to be primary. Although there is no statutory requirement that the other insurance provide excess coverage, ⁽¹⁾ automobile insurance policies typically so provide. For other examples of "excess" clauses, see The Town of Stoddard v. Northern Security Ins. Co., Inc., 718 F. Supp. 1062 (D.N.H. 1989) (comparing a comprehensive general liability policy with a public official's and employee's liability policy) and Allstate Ins. Co. v. Roberts, 109 N.H. 108 (1968) (comparing two automobile insurance policies and a garage policy).

3. "Prorata" Clause. Such provisions typically limit the insurer's liability to a share of the loss when there is other coverage available. This category may be further subdivided as follows:

a. "Pure" Prorata Clause. Such policies generally state, "that if the insured has other insurance against a loss covered by the policy the company shall not be liable for a greater proportion of such loss than the applicable limit of liability stated in the declaration bears to the total applicable limit of liability of all valid and collectible insurance against such loss." Case v. Fidelity and Cas. Co., 105 N.H. 422, 427 (1964). Companies with such policies are regarded as providing primary coverage and each will share equally in the cost of defense. Id.

b. "Equal Shares" Clause. Policies with such clauses typically provide that the insurers (if there are two of them) will contribute equally until the coverage of the lesser policy has been exhausted. See Commercial Union Assurance Cos. v. Aetna Casualty & Surety Co., 455 F. Supp. 1190, 1194-1195 (D.N.H. 1978) (comparing a comprehensive automobile liability policy with a comprehensive general liability policy).

C. In comparing policies which have differing (or contradictory) "other insurance" clauses, courts will usually follow normal contract interpretation rules and consider the policy as a whole in rendering a decision. Ellis, 129 N.H. at 337.

1. An "excess" clause will usually prevail over an "escape" clause. See American Home, 122 N.H. at 714. See also Mission Ins. Co. v. United States Fire Ins. Co., 517 N.E. 2d 463, 465 (Mass. 1988).

2. Other courts have stated that excess clauses will be given preference over "prorata" clauses and that where either excess or escape clauses appear in both policies, they will be declared mutually repugnant. Id.

3. New Hampshire's Supreme Court has used a less mechanical approach and has examined both policies very carefully to determine the respective liabilities. See e.g. Ellis, 129 N.H. at 338. In Ellis, two "excess" clauses were compared and the court gave preference to the one which it felt "[related] most clearly to the matter at issue . . .." Id. More recently, however, our Supreme Court has used a more formulaic treatment of conflicting excess clauses as mutually repugnant. See Universal Underwriters Ins. Co. v. Allstate Ins. Co., 134 N.H. 315, 318-19 (1991) and Peerless Ins. v. Vermont Mut. Ins. Co., 151 N.H. 71, 74 (2004). Under such circumstances, "each insurer [will] be liable for its pro rata share of any settlement or judgment based upon the policy limits and share equally in defense costs." Id.

D. Most cases dealing with an interpretation of "other insurance" clauses arise from automobile accidents.

1. As indicated before, automobile policies typically provide that the driver's policy will be excess over the vehicle owner's policy, if they are different. See National Grange, 106 N.H. at 38.

2. Atypical policies however, must be read very carefully and their wording compared before jumping to a conclusion on the division of responsibilities between and among insurance companies. See e.g. Liberty Mutual, 116 N.H. at 15 and Ellis, 129 N.H. at 335-338.

E. Other insurance policies, whose wording is not as standardized as those of automobile policies must always be read very carefully because many primary/excess questions may arise with them as well.

1. Most businesses carry both "commercial general liability" insurance and a "workers' compensation and employer's general liability" policy. Under the standard wording of such policies, liability for the injury or death of an employee is first addressed by the workers compensation carrier. The CGL policy would normally provide excess coverage only. See Royal Globe Insurance Companies v. Graf, 122 N.H. 978, 980 (1982). See also CNA Ins. Co. v. Hartford Ins. Co., 129 N.H. 243, 248 (1987).

2. Whenever businesses cover different risks with different policies, there may be some overlap and an occasion to determine the relative priorities of coverage available. See for example, Town of Stoddard, 718 F. Supp. at 1063-1066.

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III. UMBRELLA OR CATASTROPHE POLICIES

A. Such policies are designed to provide excess coverage only under normal circumstances. It is regarded as "a unique form of coverage unlike any other form of excess coverage. It is excess over any other coverage and it does not contribute with any other excess coverage for prorata contribution purposes." CNA Ins. Co., 129 N.H. at 247. They are designed to be "'sold at comparatively modest cost to pick up where primary coverages end [and are] almost without dispute . . . regarded as true excess over and above any type of primary coverage, excess provisions arising in regular policies in any manner, or escape clauses.'" Id., at 248, quoting from 8A J. Appleman and J. Appleman, Insurance Law and Practice, §4909.85, at 452-454 (rev. ed. 1981). See also United Services Automobile Association v. Wilkinson, 132 N.H. 439, 448 (1989).

B. Prior to 1991, because of their uniqueness, umbrella policies were not considered to be "motor vehicle liability insurance policies" within the meaning of New Hampshire's financial responsibility law and were therefore not required to provide uninsured or underinsured motorist coverage by RSA 264:15. Wilkinson, at 446. After the Supreme Court's decision in Wilkinson, however, the Legislature amended RSA 264:15 to provide that umbrella policies must "also provide uninsured motorist coverage equal to the limits of liability purchased, unless the named insured rejects such coverage" 1991 N.H. Laws 330:2.

C. Occasionally, the courts must compare two umbrella policies. If both policies have similar "excess only" language, the courts may declare them to be mutually repugnant and require both insurers to contribute equally on an excess basis. See Mission Ins. Co., supra. In Mission, one policy entitled "Umbrella Liability Insurance" was issued to the lessor of a vehicle involved in an accident. Another policy entitled "Commercial Comprehensive Catastrophe Liability Policy" was issued to the vehicle's lessee. Both policies contained "other insurance" clauses which indicated "that the coverage they provide is excess of all 'other valid and collectible insurance . . . available to the insured' unless such other insurance is specifically intended to be excess of themselves."Id., 517 N.E. 2d, at 464. The court stated the dilemma to be that "[i]f both of these clauses are given effect, each insurer would seek to defer to the other leaving no coverage for a loss each has been compensated to recompense."Id., at 467. It was to avoid that result that the court ultimately declared the clauses to be mutually repugnant and directed that both insurers must contribute. Id.

D. There are certain characteristics that are typical of umbrella or catastrophe type policies and which set them apart from normally primary policies.

1. Most indicate that they have only a limited, if any, duty to defend the insured. See e.g., Raymond v. Monsanto Co., 329 F. Supp 247, 248-249 (D.N.H. 1971).

2. Such policies typically contain a schedule of underlying coverages. See CNA Ins. Co., 129 N.H. at 247. Failure to maintain coverages in the amounts specified will result in the policyholder becoming, in essence, self-insured for those amounts.

3. Umbrella policies typically provide for a broad range of coverages in order to provide the "peace of mind" that is their major selling point. These policies will often provide primary coverage in areas that are not typically covered by standard policies.

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IV. ISSUES OF INTEREST

A. Duty of Care. One issue that arises frequently in matters involving the interplay of primary and excess carriers is whether and to what extent a duty of care is owed by the primary insurer to the excess insurer.

1. It is clear that a liability insurer owes a duty of care to its insured who may be exposed to the possibility of a verdict in excess of the policy limits. See Dumas v. State Farm Mutual Automobile Ins. Co., 111 N.H. 43 (1971).

2. A 1971 case from the United States District Court for the District of New Hampshire implied that the same duty of care would be owed by a primary insurer to the excess carrier. Raymond, 329 F. Supp. at 250. However, the Supreme Court of New Hampshire later made it clear that there is no relationship between the excess carrier and the primary carrier which would give rise to such a duty. Allstate Ins. Co. v. Reserve Ins. Co., 116 N.H. 806, 808 (1976).

3. Allstate, however, did hold that the excess carrier would have the same rights as the insured, under an assignment clause in its contract, and would thus be able to bring a Dumas action against the primary carrier for a negligent failure to settle within the policy limits or for other negligent actions. Allstate, 116 N.H., at 808.

4. This appears to be the majority view and, in most respects, there would be no practical difference between the duties owed by the primary insurer to its insured and to an excess carrier.

5. However, there are nonetheless some circumstances which could result in a difference. For example, an excess insurer which is subrogated to the rights of the insured, by assignment or otherwise, is also subject to any defenses that the primary carrier could raise against the insured. In a Michigan medical malpractice case, the primary carrier insured the doctor defendant up to $200,000. Also providing coverage was an excess policy providing liability insurance up to $1,000,000. Under the terms of the primary policy, that carrier controlled the defense and retained counsel to represent the doctor. Interrogatories were propounded in the normal course. The doctor refused to answer them, resulting in a default judgment being entered against the doctor. Subsequently, the defendant died. The matter was eventually settled for $350,000. The primary insurer contributed $190,000 to the settlement, the defendant's estate contributed $10,000, another defendant contributed $25,000 and the excess carrier contributed the remaining $125,000. The excess carrier later brought suit against the primary carrier alleging negligence in several respects in its handling of the underlying suit, in allowing the matter to go into default and in failing to take any action to have the default removed, thereby resulting in the necessity of a settlement in excess of the primary limits. The court declined to allow the excess carrier to maintain a direct action against the primary carrier and indicated that it must proceed only as the subrogee of the insured. Commercial Union Ins. Co. v. Medical Protective Co., 393 N.W. 2d 479, 486 (Mich. 1986). Since it was the insured's own actions which lead to the default in the first place, a defense on that basis would be available to the primary carrier. Id., at 483.

6. Another issue concerns whether the primary carrier may pay its policy limits, withdraw from defense of the insured, and leave the excess carrier exposed. Raymond held that the primary carrier could not do so. Id., at 250-251. The court cited the case of Sutton Mutual Ins. Co. v. Rolph, 109 N.H. 142 (1968) in support of its ruling; however, the Raymond decision did not include an analysis of the pertinent provisions of the primary policy concerning this issue. The Sutton court, on the other hand, indicated that its decision holding that the insurer was not relieved of the duty to defend by paying the policy limits was dependent upon an analysis of the policy language. Id., at 143. With a differently worded policy (and probably some unusual circumstances, since a settlement normally requires a release of the insured), a primary insurer may have the ability to settle a lawsuit for its policy limits, thereby relieving itself of the obligation to defend the case any further. Since, under New Hampshire law, an excess carrier, as subrogee of the insured, has no greater rights than the insured (Allstate Ins. Co., 116 N.H. at 808), presumably, the excess carrier would be in no better position than the insured to enforce a duty to defend under such circumstances. See, for example,Loy v. Bunderson, 320 N.W. 2d 175 (Wis.1982). In that case, under a rather complex arrangement, the primary carrier settled for 40% of its policy limit, leaving the excess carrier fully exposed under its policy, but only with respect to amounts in excess of the primary carrier's policy limits and not greater than the excess carrier's policy limit. The insured driver was released from all liability up to the amount of the primary carrier's policy limit. Id., at 179-180. The court saw "no fundamental unfairness in this agreement." Id., at 185.

B. The excess carrier's duties in the event of the primary carrier's insolvency.

1. In the absence of statute, whether an excess carrier has an obligation to "drop down" and become primary is dependent upon an analysis of the policy language. If the language is ambiguous, it will be construed in favor of the insured. If the policy indicates that the insurance will be excess over underlying insurance and all other collectible insurance it may be considered ambiguous and construed in favor of the insured forcing the carrier to "drop down" and become primary for the purpose of providing indemnity coverage. See Gulezian v. Lincoln Ins. Co., 506 N.E. 2d 123, 126 (Mass. 1987). The Gulezian court, however, did not find the provisions concerning the duty to defend to be ambiguous and held that there was no duty to defend assumed by the excess carrier under the circumstances. Id.

2. Other courts, however, have held that the term "other valid and collectible" insurance referred only to any insurance the insured carried in addition to the underlying insurance specified in the policy; therefore, under such circumstances, the excess carrier would not have to "drop down" and become primary. See Mission National Ins. Co. v. Duke Transportation Co., Inc., 792 F.2d 550, 554 (5th Cir. 1986) construing Louisiana law. See also Molina v. United States Fire Ins. Co., 574 F.2d 1176, 1178 (4th Cir. 1978) (insured was required by the terms of the excess policy to maintain collectible underlying insurance).

C. Following the form

Many large companies purchase umbrella insurance in "layers." For example, a manufacturer may decide to be self-insured for the first million dollars and purchase further protection in the form of various umbrella policies which are then "stacked" on top of each other to provide, sometimes, tremendous amounts of coverage. It is common for the policies which provide succeeding layers of coverage to contain language which indicate that they will "follow the form" of the first umbrella policy. This situation can result in some interesting problems. For example, the case of Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 829 (6th Cir. 1988), concerned such a situation. Ford Motor Company was self-insured for products liability for up to $2,000,000. The first layer of umbrella coverage was provided by Northbrook, with other insurers together providing a second layer of excess coverage. All of the succeeding layers beyond Northbrook were "form following policies" which "followed the insuring agreements, conditions, and exclusions of the Northbrook policy." Id., at 831. The Northbrook policy excluded liability for punitive or exemplary damages "[e]xcept insofar as coverage is available to the Insured under the underlying insurances, set out in the attached schedule . . .."Id. Ford's self-insurance was listed in the schedule of underlying policies of the Northbrook policy. Therefore, the court ruled that Northbrook was required to provide coverage for punitive and exemplary damages to Ford and all of the succeeding layers would likewise be required to provide such coverage. Id., at 834.

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Notes