DCSA Case Law Update
In an effort to keep our members informed of recent legal developments, DCSA will publish monthly Case Discussions highlighting Texas federal and state decisions or legal topics DCSA believes will impact the San Antonio defense bar. If you are interested in authoring a Case Discussion on a recent Texas decision or legal topic and having it published on the DCSA website, please contact Peter Rush (firstname.lastname@example.org) or Whitley Zachary (email@example.com), who will be happy to work with you.
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Case Law Update, March 8, 2017:
Scottsdale Insurance Co. v. Steadfast Insurance Co., Civ. No. H-16-0273, 2017 WL 661520 (S.D. Tex. Feb. 17, 2017)
In this case, the Federal District Court for the Southern District of Texas resolved a dispute between two liability insurance carriers concerning priority of coverage where multiple policies existed on both primary and excess levels to fund an underlying settlement.
The underlying lawsuit precipitating the coverage dispute was filed on behalf of a five-year-old boy who was seriously injured when he fell into a swimming pool at the CityView Place Apartments. CVP Holdings, LLC owned the CityView Place Apartments, but the apartments were managed by Kaplan Management Company, Inc. The injured boy’s father sued both CVP Holdings and Kaplan for negligence and premises liability. Scottsdale Insurance Company assumed the defense of both defendants and settled the underlying lawsuit for $1,950,000. The dispute among the parties in Scottsdale concerned how the settlement was to be allocated among the insurance policies available to cover the loss.
Scottsdale was the primary insurer for CVP Holdings under a commercial general liability policy that provided $1,000,000 in per “occurrence” limits and gave Scottsdale the right and duty to defend suits against CVP Holdings. The Scottsdale CGL Policy contained an “other insurance” provision indicating the Scottsdale CGL Policy would provide primary insurance coverage “unless any other insurance is also primary.” If two such primary policies existed, each policy would pay a pro rata share of the covered damage in relation to each policy’s limits of liability. Scottsdale also insured CVP under an excess liability policy providing coverage above and beyond the $1,000,000 limit of insurance afforded under the Scottsdale CGL Policy. This Excess Policy also contained an “other insurance” clause indicating that: "If there is any other collectible insurance available to the insured . . . that covers a loss that is also covered by this Policy, this Policy will apply in excess of, and shall not contribute with, such insurance. This Condition I. does not apply to any insurance policy purchases specifically . . . to apply in excess of this Policy." Kaplan qualified as a an “insured” under both Scottsdale Policies as both afforded “insured” status to “real estate managers.”
Steadfast Insurance Company insured only Kaplan under a commercial general liability policy featuring a $1,000,000 per “occurrence” limit, which also gave Steadfast the right and duty to defend any suit against Kaplan. The Steadfast Policy, like the Scottsdale Policies, contained an “other insurance” clause that provided, in relevant part, “[t]his insurance is primary except where there is other insurance applying on a primary basis.” In such an event, the Steadfast Policy would be treated as excess insurance. The Steadfast Policy also contained an endorsement providing the Steadfast Policy would be excess over any other valid and collectible insurance as to Kaplan’s liability “arising out of [Kaplan’s] management of property for which [Kaplan was] acting as real estate manager.”
Both parties filed motions for summary judgment in support of their respective positions as to how the $1,950,000 settlement amount would be allocated among the Scottsdale and Steadfast Policies. Scottsdale argued the “other insurance” provisions within the Scottsdale CGL Policy and Steadfast Policy conflicted, which would therefore require each Policy to contribute both defense costs and indemnity payments on a “pro rata” basis pursuant to the Supreme Court of Texas’s seminal Hardware Dealers Mutual Fire Insurance Co. v. Farmers Insurance Exchange decision from 1969. Additionally, Scottsdale argued that the “excess” other insurance clause contained within the Scottsdale Excess Policy rendered that Policcy fully subordinate to the Steadfast Policy, requiring that Steadfast’s Policy’s limits be exhausted before the Scottsdale Excess Policy would be required to contribute.
On the other hand, Steadfast contended, in relevant part, that the endorsement granting Kaplan “insured” status rendered the Steadfast Policy excess to both the Scottsdale CGL and Excess Policies. In other words, Steadfast claimed that its owed no obligation under its Policy until both Scottsdale Policy limits were exhausted. Alternatively, Steadfast argued that, at the very least, the Scottsdale CGL Policy should be first exhausted and, subsequently, the Steadfast Policy and Scottsdale Excess Policy would contribute to fund the remainder of the settlement on a pro rata basis as both Policies were excess.
In rendering its decision, the Scottsdale court first discussed Texas law regarding conflicting “other insurance” clauses, recognizing that such situations arise when “more than one policy covers the same insured and each policy has an ‘other insurance’ clause which restricts its liability by reason of the existence of other coverage.” Under the Supreme Court of Texas’s Hardware Dealers decision, where two insurance policies feature “other insurance” clauses that conflict or that are not reconcilable, the clauses are ignored and the policies are applied to the loss on a pro rata basis based on the limits of liability for each policy.
The court then addressed how the settlement amount would be allocated among the Policies at issue. The court correctly determined that, because the Scottsdale CGL Policy specifically designated “real estate managers” such as Kaplan as “insureds,” the Steadfast Policy would not be treated as “other primary insurance” under the Scottsdale CGL Policy’s “other insurance” provision. As such, Steadfast would not share in defense costs (which were solely borne by the Scottsdale CGL Policy) and the Steadfast Policy would not be implicated until the $1,000,000 limits of the Scottsdale CGL Policy were exhausted.
Secondly, the court went on to determine whether the Steadfast Policy or the Scottsdale Excess Policy would come next in the priority of coverage. The court flatly rejected Steadfast’s argument that its Policy was excess to the Scottsdale Excess Policy. In doing so, the Court relied on precedent from the 14th District Court of Appeals, which recognized the distinction between “dedicated excess or umbrella policies” (such as the Scottsdale Excess Policy) and policies written as primary but rendered excess by the existence of other insurance (such as the Steadfast Policy). This appellate precedent stands for the proposition that such dedicated excess or umbrella policies “are regarded as true excess over any type of primary coverage, including excess provisions arising from primary policies.” These excess or umbrella policies cover different types of risk and, as the court noted, often require a significantly reduced premium based upon the limited exposure. Based on this analysis, the court ultimately determined that, while the Scottsdale CGL Policy should be exhausted before the Steadfast Policy, the Steadfast Policy would nevertheless be next in line to fund the settlement. The Scottsdale Excess Policy would therefore only be implicated by the exhaustion of both the Scottsdale CGL Policy and Steadfast Policy’s limits.
The court’s resolution of the “other insurance” issues appears to both respect the long-standing Hardware Dealers precedent and acknowledge the reality that dedicated excess or umbrella policies and primary policies should not be treated uniformly in evaluating priority of coverage.