Insurer Obligated to Pay Full Policy Limits on Loss Despite Potentially Concurrent Policies With Competing “Other Insurance” Clauses

A federal court in South Carolina has held that an insurer breached its contract with its insured by not paying the full policy limits even though its policy included an “other insurance” clause and there was another insurance policy that potentially covered the same loss.  Michelin North America, Inc. v. Federal Ins. Co., No 6:17-1599 (Nov. 7, 2017).  In so holding, the court noted that the dispute between the two insurers (only one of which was a party to the case), as to the appropriate proration of the insured’s loss has “no impact” on the insured’s right to fully recover under the one insurer’s policy.

The insured, a manufacturing company, discovered that it had suffered a loss to its employee welfare benefit plan in excess of $8 million due to fraudulent activities of the plan’s fiduciaries.  The insured sought coverage for this loss from its insurer, which had issued a Pension and Welfare Fund Fiduciary Dishonesty Plan with a limit of liability of $5 million.

The insurer agreed that its policy covered the loss suffered by the plan, but also determined that a policy issued by another insurer to a related entity responded to the loss as well.  Relying on the “other insurance” clause in its policy, the insurer took the position that it was only responsible for a pro-rata share of the insured’s loss and only paid out to the insured about half of its $5 million policy limit.  The insured brought a declaratory judgment and breach of contract action against its insurer, seeking payment from the insurer of the remaining policy limits.

On competing dispositive motions, the court found in favor of the insured.  The court acknowledged that, under South Carolina law, concurrent insurance exists if separate policies insure (1) the same entity; (2) against the same risk; (3) to the same object; (4) absent some express intent to the contrary; and generally, when two policies provide concurrent coverage and contain competing “other insurance” clauses, the loss is prorated according to their respective limits.  However, the decision that the insurer was only required to pay a pro rata sum under its policy would require the court to determine if there was coverage under the other policy, the amount of that coverage, and the apportioned amount between the two policies “in a case where the other insurer is not before [the] court.”  The court explained that “other insurance” clauses govern the relationship between the insurers and do not affect the right of the insured to recover under each concurrent policy.  The remaining disputed issues between the insurers, according to the court, was not necessary to resolve the case at bar, and regardless, could not be decided in the litigation before it without the presence of the other insurer.