Overlapping Coverage, Divergent Case Law

Overlapping insurance coverage raises complicated issues for insurers, insureds, and the courts. This article discusses certain tensions among New York cases discussing “other insurance” in the duty to defend context, as brought to the fore by two recent decisions of the First Department of the New York Supreme Court, Appellate Division: Fieldston Property Owners Association, Inc. v. Hermitage Insurance Company, Inc., 873 N.Y.S.2d 607 (N.Y. App. Div. 2009), decided on Feb. 26, 2009, and Sport Rock International, Inc. v. American Casualty Company of Reading, PA, Case No. 603080/05 (hereinafter, Sport Rock), decided on May 12, 2009.

'Other Insurance'

“Other insurance,” as explained in one leading treatise, “describes the situation in which two or more policies of insurance cover the same risk in the name of, or for the benefit of, the same person.” Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage Disputes ' 11.01. When such overlap occurs, courts interpret the language of the insurance contracts at issue and apply developed conflicts rules to sort out the allocation or priority of coverage. Id. Under one of these rules, a policy containing an “excess” other insurance clause (one providing that the insurer's liability is limited to the amount by which a loss exceeds coverage provided by other valid and collectible insurance) is held to provide secondary coverage vis-'-vis an overlapping policy that contains a “pro rata” other insurance clause (i.e., a clause providing that if other insurance exists, the insurer will pay its pro rata share of the loss, generally calculated as the proportion of its policy limits to the aggregate limit of all valid and collective insurance). Id. at ” 11.02[a], 11.02[b], 11.03[d][1][A]. In this article, we refer to this majority rule as the “pro rata vs. excess rule.”

In New York, while courts have generally agreed on several settled propositions of “other insurance” law, including the applicability of the pro rata vs. excess rule, some panels have reached opposite conclusions on quite similar facts. Most recently, in Fieldston, the First Department held that two insurers should each pay their equitable share of the costs of defending two underlying actions, declining to apply the pro rata vs. excess rule. In Sport Rock, however, another First Department panel declined to follow Fieldston and applied the standard rule, holding that a policy with an excess other insurance clause would not be triggered until coverage under a policy with a pro rata other insurance clause was exhausted. These two decisions have exposed certain inconsistencies in how ostensibly settled principles of other insurance law have been applied in New York. These conflicts may eventually have to be resolved by the Court of Appeals.

Sport Rock Background

In Sport Rock, the First Department addressed the question of whether the costs of defending an insured in a personal injury action should be allocated between two primary liability insurers or be borne solely by one of the two insurers. Order at 2. The underlying action arose from an injury suffered by a health club patron who fell while using the club's artificial rock-climbing wall. Id. Sport Rock International, Inc. had sold the wall-climbing equipment, which included a safety harness manufactured by Petzl America, Inc., to the club. Id. at 2-3. After the club settled with the plaintiff, the underlying suit proceeded against Sport Rock and Petzl on the theories that Petzl's harness design was defective, that Petzl failed to include sufficient warning labels on the harness, that Sport Rock negligently installed the wall-climbing system, and that features of the system other than the Petzl harness were also defective. Id. at 3, 6-7.

Sport Rock was a named insured under a commercial general liability policy issued by Evanston Insurance Company, which policy covered damages paid as a result of bodily injury and gave Evanston the right and duty to defend Sport Rock against any suit seeking such damages. Id. Sport Rock was also covered during the relevant period as an additional insured under a vendor's endorsement to the CGL policy issued to Petzl by American Casualty Company of Reading, PA, which policy likewise covered bodily injury and provided American the right and duty to defend its insured. Id. at 4. After the underlying action was initiated, Evanston tendered Sport Rock's defense to American, which, while acknowledging its obligation to provide coverage to Sport Rock as an additional insured, refused to pay the full defense costs and, based on its own assessment of the proportion of claims related to the Petzl harness, offered to cover only 10% of Sport Rock's defense costs. Id. at 6-7.

Sport Rock and Evanston thereafter filed suit for breach of contract and for a declaration that American was obligated to provide primary coverage for both defense and indemnification while Evanston was obligated to provide excess coverage only. The trial court declared that American had an obligation to defend Sport Rock, but declined to declare that Evanston's coverage was excess to American's for any purpose, finding that “the Evanston policy remained primary for those claims not within the vendor's endorsement” to the American policy.

The Sport Rock Majority Opinion

The First Department first observed that the duty to defend is broader than the duty to indemnify and that, if any of the claims against an insured arguably arise from covered events, an insurer is required to defend the entire action, even if the lawsuit may also involve claims that are not covered. Id. at 8-9 (citing, inter alia, Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443 (2002)). Where the same risk is covered by two or more policies, each of which was sold to provide the same level of coverage, the court found that it must compare the policies' respective “other insurance” clauses to determine priority, or alternatively allocation, of such coverage. Id. at 10.

The court therefore looked to the language of the two policies' other insurance clauses. The Evanston policy provided: “When you are added to a manufacturer's or distributor's policy as an additional insured because you are a vendor for such manufacture[r]'s or distributor's products ' [the] Other Insurance [clause of this policy] is amended by the addition of the following: 'The coverage afforded the insured under this Coverage Part ' will be excess over any valid and collectible insurance available to the insured as an additional insured under a policy issued to a manufacturer or distributor for products manufactured, sold, handled or distributed.'” Id. at 5 (first internal quotation omitted). The American policy, on the other hand, stated that, if other primary insurance is available, “we will share with all that other insurance by the method” provided elsewhere in the policy, namely, either by equal shares or in proportion to policy limits, depending on what the other insurance permits. Id.

The court found that the Evanston policy contained an excess clause, while the American policy contained a pro rata clause. Id. at 11. The court then applied the “well established” principle under New York law that “where one of two concurrently applicable insurance policies contains an excess 'other insurance' clause and the other contains a pro rata 'other insurance' clause, the excess clause is given effect, meaning that the coverage under the policy containing the excess clause does not come into play, and the carrier's duty to defend is not triggered, until the coverage under the policy containing the pro rata clause has been exhausted.” Id. at 11-12. The majority observed that this is the rule in the majority of jurisdictions.

Applicable Precedent: Firemen's

The Sport Rock court noted that it followed the rule set forth in the First Department's 1996 decision in Firemen's Insurance Company of Washington, D.C. v. Federal Insurance Company, 233 A.D.2d 193 (N.Y. App. Div. 1996). In that case, one insured was covered both by a general liability policy issued by Firemen's and a directors' and officers' liability policy issued by Federal. The Firemen's policy provided “that it is primary unless another policy is also primary,” while the Federal policy provided that “it is excess where the loss is covered by another policy.” Id. at 193. The court affirmed the trial court's determination that the Federal policy should be considered excess, while Firemen's should be required to defend the entire complaint as a primary insurer. Id. The court further held that Firemen's obligation extended to the entire complaint because it had potential indemnity obligations for at least some claims.

Implications of Sport Rock and Firemen's

The implication of these cases seems clear: An insurer with a policy including a pro rata other insurance clause will be obligated to pay all the costs of defending an action, before an insurer with a policy covering the same risk but including an excess other insurance clause will begin to incur coverage obligations. Nonetheless, the Fieldston decision demonstrates that while this rule appears well settled, there remains uncertainty within the First Department concerning whether and how the rule should be applied in a given case.

Fieldston Background

In Fieldston, the court held that two insurers, Hermitage Insurance Co. and Federal Insurance Co., should each pay their equitable share of the costs of defending two underlying actions. In the underlying actions, which arose out of essentially the same set of facts, the plaintiffs asserted 29 claims alleging various wrongful acts and statements by directors and officers of Fieldston Property Owners Association, Inc. 873 N.Y.S.2d at 608. Hermitage had issued a CGL policy providing coverage for “bodily injury,” “property damage,” and “personal and advertising injury,” while Federal had issued a Directors and Officers Liability Policy covering various “Wrongful Acts” and specified “offenses,” including defamation, wrongful entry and eviction. Id. at 608-09. Hermitage took the position that only one of the eight claims in the first action and one of the 21 claims in the second action, each for injurious falsehood, might trigger its defense obligations. Id. at 609. Federal, however, took the position, based on the principle cited above, that its D&O policy was excess to the Hermitage policy and that Hermitage was obligated to defend all claims, including those falling outside the scope of its coverage. Id. Hermitage subsequently undertook the defense of the actions subject to a full reservation of rights. Ultimately the first action was entirely dismissed and certain causes of action, including the claim for injurious falsehood, were dismissed in the second action. At that point, Hermitage demanded that Federal assume the defense of the action and Federal complied. Id.

In two declaratory judgment actions, the insurers filed various motions and cross-motions for summary judgment, with Hermitage seeking reimbursement either in full or alternatively on an equitable basis for the defense costs it had paid. In the first of the cases, the trial court held in relevant part that Hermitage “was the primary insurer and Federal the excess insurer” based on the other insurance clause in Federal's D&O policy, while the court in the second action denied cross-motions for summary judgment, holding that neither party had shown as a matter of law whether the Federal policies were excess to the Hermitage policy. Hermitage appealed from both orders.

The Fieldston Decision

The First Department again faced the issue of an insurer's obligation to pay the full cost of defending an action where the overlapping policy of another insurer contains an excess other insurance clause. Notably, the court found that the other insurance clause of the Federal policy was “identical” to Federal's excess other insurance clause in the Firemen's case, providing: “If any Loss arising from any claim made against the Insured(s) is insured under any other valid policies prior or current, then This policy shall cover such Loss ' only to the extent that the amount of such Loss is in excess of the amount of such other insurance whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise, unless such other insurance is written only as specific excess insurance over the limits provided in th[is] policy.” Id. at 611, 614. Nonetheless, the First Department explicitly “refuse[d] to follow [its] decision in Firemen's as it is not supported by the plain language of the 'other insurance' clause in that case.” Id. at 614. According to the court, the other insurance clause by its terms only applied where a loss was insured under both the Federal policy and another “valid policy.” Id. at 611. The court explained that only losses relating to the injurious falsehood claims were insured under the Hermitage policy, while all other losses, including defense costs, relating to the 27 other causes of action were insured only under the Federal policy. Id. Thus, the court found that, with the “possible exception” of the injurious falsehood claim, the Federal and Hermitage policies did not “provide concurrent coverage as they [did] not insure against the same risks.” Id.

A Critical Footnote

In a footnote, the court explained the reasoning that appears to have caused it to diverge from the Firemen's line of cases: “To the extent Federal argues that the risks of loss relating to the causes of action that fall outside the scope of the CGL policy are 'insured under' that policy because Hermitage is required to defend against them, that argument is meritless. The broad obligation to defend claims outside the scope of an insurer's coverage is an incident of the insurer's contractual obligation to provide a defense for other claims that are or may be within the policy ' and is a duty owed to the insured that is imposed for the benefit of the insured ' not a coinsurer. Risks that an insurer must defend against on account of this broad duty are not thereby converted into risks that are covered by its policy.” Id. at 611 n.1.

Applicable Precedent: Abax

The Fieldston court relied on the First Department's decision in Fireman's Fund Insurance Co. v. Abax, Inc., 12 A.D.3d 277 (N.Y. App. Div. 2004). In its brief, two-paragraph opinion in Abax, the court reversed the trial court's determination that Zurich American Insurance Group had to pay the full costs of defending a personal injury action against the insured while Fireman's Fund would be treated as an excess insurer by virtue of the other insurance clause in the policy it sold to the same insured. Id. at 277-78. Although the Abax court did not provide the policy language in its opinion, the Fieldston court, having reviewed the Abax record, stated that the Fireman's policy provided that “[i]f there is other insurance covering the same loss or damage under this policy ' we will only pay for the amount of covered loss or damage in excess of the amount due from that other insurance.” Fieldston, 873 N.Y.S.2d at 612. The Abax court held that each insurer should pay half of the defense costs because the excess other insurance clause was “contained in the property section of [Fireman's] policy” and thus did not “apply to this liability claim” for personal injury. Id. at 278.

Attempting to Harmonize the Opinions

The question therefore arises whether Firemen's and Sport Rock, on the one hand, can be reconciled with Fieldston and Abax on the other. The opinions in Sport Rock offer some thoughts on this subject. The majority opinion authored by Justice David Friedman found that Abax was distinguishable because, in that case, the other insurance clause appeared only in the property damage section of the policy, not in the liability coverage section. Sport Rock at 11. If this is the case ' and it is difficult to discern any other meaning from Abax ' then, as the Sport Rock majority noted, Abax really has no bearing on the vitality of Firemen's, or, for that matter, on the issue involved in Fieldston. As for Fieldston, the majority opinion in Sport Rock recognized that Fieldston “may be read to address the situation presented here” and, to that extent, the Sport Rock court declined to follow it, “recognizing that any conflict ultimately will have to be resolved by the Court of Appeals.” Id. at 26.

The concurring opinion in Sport Rock by Justice David B. Saxe (joined by Justice James M. Catterson) took the majority to task for “unnecessarily” challenging the validity of Fieldston. According to the concurrence, Sport Rock could easily have been resolved under settled law, since it was clear that the Evanston and American policies both covered the same risk, namely, bodily injury and only in such a case does the rule concerning giving effect to an excess other insurance clause apply. Id. at 34. The concurrence noted that the crux of Fieldston was that the insurers there had not insured the same risk; as characterized by the concurrence, a general liability policy covered the injurious falsehood claim while the D&O policy covered “claims for interference with property rights.” Id. at 35.

The concurrence's attempt at reconciling the decisions is not entirely satisfying. Did Hermitage and Federal in the Fieldston case really insure such distinct risks? The Hermitage policy covered “bodily injury,” “property damage,” and “personal and advertising injury,” while the Federal policy covered “wrongful acts” and “offenses,” including defamation, wrongful entry, and eviction. Fieldston, 873 N.Y.S. 2d at 608-09. While the policies are not quoted in detail in the opinion, it does appear that the risks covered overlapped to some extent. With respect to the specific claims asserted in the underlying actions, the court itself noted that coverage overlapped with respect to the injurious falsehood claim.

'The Same Risk'

So what, in the First Department, does constitute “the same risk” under two policies for other insurance purposes? While some courts appear to have been influenced by the generalized description of the risk covered by a given policy (i.e., “bodily injury,” “property damage,” etc.) ' the Sport Rock concurrence, for example, describes the overlapping risk in that case as “the risk of the bodily injury alleged in the complaint” ' their analysis appears to focus more on the issue that ultimately is of greatest concern to both insurers and insureds: the obligation to indemnify for losses arising out of the specific causes of action asserted in the underlying action.

Here, the differing postures of the relevant underlying actions have led the courts to divergent results. In Fieldston, the court noted several times that Hermitage's policy only potentially covered few (indeed, only two of 29) causes of action in the underlying suits. The Fieldston opinion evinced notable concern that requiring Hermitage to defend all causes of action, while permitting Federal “to be a free rider,” would be inequitable. Fieldston, 873 N.Y.S.2d at 611, 613. While it is unclear what critical mass of overlapping claims would have, in the court's view, balanced the equities, plainly the Fieldston court considered an overlap of only two of 29 claims insufficient to trigger the pro rata vs. excess rule.

In Sport Rock, although the court did not explicitly state how many causes of action were potentially within the scope of American's coverage and how many were not, the trial court's opinion indicates that at least four of the eight claims asserted in the underlying case were potentially within the scope of American's coverage. Sport Rock Int'l, Inc. v. Am. Cas. Co. of Reading, Pa., No. 0603080/2005, 2007 WL 2815478 (N.Y. Sup. Ct. Aug. 22, 2007). On these facts, the court ultimately applied the pro rata vs. excess rule. One might be inclined to conclude that, consistent with Fieldston, the court considered approximately four of eight claims to be a sufficient ratio of overlapping claims to trigger the rule. But this was not the analysis explicitly adopted by the court, which simply followed Firemen's, which, in turn, appeared to consider the existence of even one cause of action implicating overlapping coverage to be sufficient to give effect to an excess other insurance clause.

As a leading commentator on insurance law has observed, it “is generally held that in order for an other insurance clause to operate in the insurer's favor, there must be both an identity of the insured interest and an identity of risk,” however, the “rule that the risks be identical in order for an 'other insurance' clause to apply does not mean that the total possible coverage under each policy be the same, but merely that with respect to the harm which has been sustained there be coverage under both policies.” 15 Couch on Insurance 3d ' 219:14. More specifically, the treatise continues: “As a rule, general policies prorate with specific policies and, hence, constitute 'other insurance.' Such is the case because, while it is necessary for both policies to insure the same person for the same risk ', it is not necessary for both policies to cover the identical field. For the purposes of an 'other insurance' clause, it is sufficient that both policies provide overlapping coverage for the risk involved.” Id. ' 219:17.

The lack of any qualifying language in the last sentence quoted above from Couch could suggest that any amount of overlap ' even with respect to just one claim ' is sufficient to trigger an excess other insurance clause. If this is the case, then Firemen's was correctly decided and Fieldston was incorrectly decided. Sport Rock was correctly decided not because it involved two CGL policies covering bodily injury, but because at least one claim was covered by both policies.

On the other hand, Couch's observations do not foreclose the possibility that a more substantial overlap should be required to trigger an excess other insurance clause, such that Firemen's must be read more narrowly. If that is the preferred rule, then Fieldston rightly required equitable contribution where the coverage afforded under two distinct types of policies overlapped with respect to only two of the 29 underlying causes of action. Such a rule, however, would lead to considerable uncertainty for insurers, since the duty to defend would depend more on the specifics of how the underlying complaint was drafted than on the policy language and facts giving rise to the underlying loss.

Conclusion

The present schism in the First Department jurisprudence regarding other insurance clauses would present an interesting question for the Court of Appeals to address. Indeed, applications for leave to appeal to the Court of Appeals were filed on Aug. 3, 2009 in the Fieldston case and on Aug. 10, 2009 in Sport Rock. The Court of Appeals therefore may soon have the opportunity to provide needed guidance on the respective roles of the types of policies involved, those policies' descriptions of covered risks, and the amount of overlap of covered causes of action required with respect to application of other insurance principles.

Lynn K. Neuner, a member of this newsletter's Board of Editors, is a partner with Simpson Thacher & Bartlett LLP in New York. She specializes in complex coverage cases representing insurers. William G. Ferullo is an associate at the firm. They can be reached at [email protected] and [email protected].

Overlapping insurance coverage raises complicated issues for insurers, insureds, and the courts. This article discusses certain tensions among New York cases discussing “other insurance” in the duty to defend context, as brought to the fore by two recent decisions of the First Department of the New York Supreme Court, Appellate Division: Fieldston Property Owners Association, Inc. v. Hermitage Insurance Company, Inc. , 873 N.Y.S.2d 607 (N.Y. App. Div. 2009), decided on Feb. 26, 2009, and Sport Rock International, Inc. v. American Casualty Company of Reading, PA, Case No. 603080/05 (hereinafter, Sport Rock), decided on May 12, 2009.

'Other Insurance'

“Other insurance,” as explained in one leading treatise, “describes the situation in which two or more policies of insurance cover the same risk in the name of, or for the benefit of, the same person.” Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage Disputes ' 11.01. When such overlap occurs, courts interpret the language of the insurance contracts at issue and apply developed conflicts rules to sort out the allocation or priority of coverage. Id. Under one of these rules, a policy containing an “excess” other insurance clause (one providing that the insurer's liability is limited to the amount by which a loss exceeds coverage provided by other valid and collectible insurance) is held to provide secondary coverage vis-'-vis an overlapping policy that contains a “pro rata” other insurance clause (i.e., a clause providing that if other insurance exists, the insurer will pay its pro rata share of the loss, generally calculated as the proportion of its policy limits to the aggregate limit of all valid and collective insurance). Id. at ” 11.02[a], 11.02[b], 11.03[d][1][A]. In this article, we refer to this majority rule as the “pro rata vs. excess rule.”

In New York, while courts have generally agreed on several settled propositions of “other insurance” law, including the applicability of the pro rata vs. excess rule, some panels have reached opposite conclusions on quite similar facts. Most recently, in Fieldston, the First Department held that two insurers should each pay their equitable share of the costs of defending two underlying actions, declining to apply the pro rata vs. excess rule. In Sport Rock, however, another First Department panel declined to follow Fieldston and applied the standard rule, holding that a policy with an excess other insurance clause would not be triggered until coverage under a policy with a pro rata other insurance clause was exhausted. These two decisions have exposed certain inconsistencies in how ostensibly settled principles of other insurance law have been applied in New York. These conflicts may eventually have to be resolved by the Court of Appeals.

Sport Rock Background

In Sport Rock, the First Department addressed the question of whether the costs of defending an insured in a personal injury action should be allocated between two primary liability insurers or be borne solely by one of the two insurers. Order at 2. The underlying action arose from an injury suffered by a health club patron who fell while using the club's artificial rock-climbing wall. Id. Sport Rock International, Inc. had sold the wall-climbing equipment, which included a safety harness manufactured by Petzl America, Inc., to the club. Id. at 2-3. After the club settled with the plaintiff, the underlying suit proceeded against Sport Rock and Petzl on the theories that Petzl's harness design was defective, that Petzl failed to include sufficient warning labels on the harness, that Sport Rock negligently installed the wall-climbing system, and that features of the system other than the Petzl harness were also defective. Id. at 3, 6-7.

Sport Rock was a named insured under a commercial general liability policy issued by Evanston Insurance Company, which policy covered damages paid as a result of bodily injury and gave Evanston the right and duty to defend Sport Rock against any suit seeking such damages. Id. Sport Rock was also covered during the relevant period as an additional insured under a vendor's endorsement to the CGL policy issued to Petzl by American Casualty Company of Reading, PA, which policy likewise covered bodily injury and provided American the right and duty to defend its insured. Id. at 4. After the underlying action was initiated, Evanston tendered Sport Rock's defense to American, which, while acknowledging its obligation to provide coverage to Sport Rock as an additional insured, refused to pay the full defense costs and, based on its own assessment of the proportion of claims related to the Petzl harness, offered to cover only 10% of Sport Rock's defense costs. Id. at 6-7.

Sport Rock and Evanston thereafter filed suit for breach of contract and for a declaration that American was obligated to provide primary coverage for both defense and indemnification while Evanston was obligated to provide excess coverage only. The trial court declared that American had an obligation to defend Sport Rock, but declined to declare that Evanston's coverage was excess to American's for any purpose, finding that “the Evanston policy remained primary for those claims not within the vendor's endorsement” to the American policy.

The Sport Rock Majority Opinion

The First Department first observed that the duty to defend is broader than the duty to indemnify and that, if any of the claims against an insured arguably arise from covered events, an insurer is required to defend the entire action, even if the lawsuit may also involve claims that are not covered. Id . at 8-9 (citing, inter alia, Town of Massena v. Healthcare Underwriters Mut. Ins. Co. , 98 N.Y.2d 435, 443 (2002)). Where the same risk is covered by two or more policies, each of which was sold to provide the same level of coverage, the court found that it must compare the policies' respective “other insurance” clauses to determine priority, or alternatively allocation, of such coverage. Id. at 10.

The court therefore looked to the language of the two policies' other insurance clauses. The Evanston policy provided: “When you are added to a manufacturer's or distributor's policy as an additional insured because you are a vendor for such manufacture[r]'s or distributor's products ' [the] Other Insurance [clause of this policy] is amended by the addition of the following: 'The coverage afforded the insured under this Coverage Part ' will be excess over any valid and collectible insurance available to the insured as an additional insured under a policy issued to a manufacturer or distributor for products manufactured, sold, handled or distributed.'” Id. at 5 (first internal quotation omitted). The American policy, on the other hand, stated that, if other primary insurance is available, “we will share with all that other insurance by the method” provided elsewhere in the policy, namely, either by equal shares or in proportion to policy limits, depending on what the other insurance permits. Id.

The court found that the Evanston policy contained an excess clause, while the American policy contained a pro rata clause. Id. at 11. The court then applied the “well established” principle under New York law that “where one of two concurrently applicable insurance policies contains an excess 'other insurance' clause and the other contains a pro rata 'other insurance' clause, the excess clause is given effect, meaning that the coverage under the policy containing the excess clause does not come into play, and the carrier's duty to defend is not triggered, until the coverage under the policy containing the pro rata clause has been exhausted.” Id. at 11-12. The majority observed that this is the rule in the majority of jurisdictions.

Applicable Precedent: Firemen's

The Sport Rock court noted that it followed the rule set forth in the First Department's 1996 decision in Firemen's Insurance Company of Washington, D.C. v. Federal Insurance Company , 233 A.D.2d 193 (N.Y. App. Div. 1996). In that case, one insured was covered both by a general liability policy issued by Firemen's and a directors' and officers' liability policy issued by Federal. The Firemen's policy provided “that it is primary unless another policy is also primary,” while the Federal policy provided that “it is excess where the loss is covered by another policy.” Id. at 193. The court affirmed the trial court's determination that the Federal policy should be considered excess, while Firemen's should be required to defend the entire complaint as a primary insurer. Id. The court further held that Firemen's obligation extended to the entire complaint because it had potential indemnity obligations for at least some claims.

Implications of Sport Rock and Firemen's

The implication of these cases seems clear: An insurer with a policy including a pro rata other insurance clause will be obligated to pay all the costs of defending an action, before an insurer with a policy covering the same risk but including an excess other insurance clause will begin to incur coverage obligations. Nonetheless, the Fieldston decision demonstrates that while this rule appears well settled, there remains uncertainty within the First Department concerning whether and how the rule should be applied in a given case.

Fieldston Background

In Fieldston, the court held that two insurers, Hermitage Insurance Co. and Federal Insurance Co., should each pay their equitable share of the costs of defending two underlying actions. In the underlying actions, which arose out of essentially the same set of facts, the plaintiffs asserted 29 claims alleging various wrongful acts and statements by directors and officers of Fieldston Property Owners Association, Inc. 873 N.Y.S.2d at 608. Hermitage had issued a CGL policy providing coverage for “bodily injury,” “property damage,” and “personal and advertising injury,” while Federal had issued a Directors and Officers Liability Policy covering various “Wrongful Acts” and specified “offenses,” including defamation, wrongful entry and eviction. Id. at 608-09. Hermitage took the position that only one of the eight claims in the first action and one of the 21 claims in the second action, each for injurious falsehood, might trigger its defense obligations. Id. at 609. Federal, however, took the position, based on the principle cited above, that its D&O policy was excess to the Hermitage policy and that Hermitage was obligated to defend all claims, including those falling outside the scope of its coverage. Id. Hermitage subsequently undertook the defense of the actions subject to a full reservation of rights. Ultimately the first action was entirely dismissed and certain causes of action, including the claim for injurious falsehood, were dismissed in the second action. At that point, Hermitage demanded that Federal assume the defense of the action and Federal complied. Id.

In two declaratory judgment actions, the insurers filed various motions and cross-motions for summary judgment, with Hermitage seeking reimbursement either in full or alternatively on an equitable basis for the defense costs it had paid. In the first of the cases, the trial court held in relevant part that Hermitage “was the primary insurer and Federal the excess insurer” based on the other insurance clause in Federal's D&O policy, while the court in the second action denied cross-motions for summary judgment, holding that neither party had shown as a matter of law whether the Federal policies were excess to the Hermitage policy. Hermitage appealed from both orders.

The Fieldston Decision

The First Department again faced the issue of an insurer's obligation to pay the full cost of defending an action where the overlapping policy of another insurer contains an excess other insurance clause. Notably, the court found that the other insurance clause of the Federal policy was “identical” to Federal's excess other insurance clause in the Firemen's case, providing: “If any Loss arising from any claim made against the Insured(s) is insured under any other valid policies prior or current, then This policy shall cover such Loss ' only to the extent that the amount of such Loss is in excess of the amount of such other insurance whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise, unless such other insurance is written only as specific excess insurance over the limits provided in th[is] policy.” Id. at 611, 614. Nonetheless, the First Department explicitly “refuse[d] to follow [its] decision in Firemen's as it is not supported by the plain language of the 'other insurance' clause in that case.” Id. at 614. According to the court, the other insurance clause by its terms only applied where a loss was insured under both the Federal policy and another “valid policy.” Id. at 611. The court explained that only losses relating to the injurious falsehood claims were insured under the Hermitage policy, while all other losses, including defense costs, relating to the 27 other causes of action were insured only under the Federal policy. Id. Thus, the court found that, with the “possible exception” of the injurious falsehood claim, the Federal and Hermitage policies did not “provide concurrent coverage as they [did] not insure against the same risks.” Id.

A Critical Footnote

In a footnote, the court explained the reasoning that appears to have caused it to diverge from the Firemen's line of cases: “To the extent Federal argues that the risks of loss relating to the causes of action that fall outside the scope of the CGL policy are 'insured under' that policy because Hermitage is required to defend against them, that argument is meritless. The broad obligation to defend claims outside the scope of an insurer's coverage is an incident of the insurer's contractual obligation to provide a defense for other claims that are or may be within the policy ' and is a duty owed to the insured that is imposed for the benefit of the insured ' not a coinsurer. Risks that an insurer must defend against on account of this broad duty are not thereby converted into risks that are covered by its policy.” Id. at 611 n.1.

Applicable Precedent: Abax

The Fieldston court relied on the First Department's decision in Fireman's Fund Insurance Co. v. Abax, Inc. , 12 A.D.3d 277 (N.Y. App. Div. 2004). In its brief, two-paragraph opinion in Abax, the court reversed the trial court's determination that Zurich American Insurance Group had to pay the full costs of defending a personal injury action against the insured while Fireman's Fund would be treated as an excess insurer by virtue of the other insurance clause in the policy it sold to the same insured. Id. at 277-78. Although the Abax court did not provide the policy language in its opinion, the Fieldston court, having reviewed the Abax record, stated that the Fireman's policy provided that “[i]f there is other insurance covering the same loss or damage under this policy ' we will only pay for the amount of covered loss or damage in excess of the amount due from that other insurance.” Fieldston, 873 N.Y.S.2d at 612. The Abax court held that each insurer should pay half of the defense costs because the excess other insurance clause was “contained in the property section of [Fireman's] policy” and thus did not “apply to this liability claim” for personal injury. Id. at 278.

Attempting to Harmonize the Opinions

The question therefore arises whether Firemen's and Sport Rock, on the one hand, can be reconciled with Fieldston and Abax on the other. The opinions in Sport Rock offer some thoughts on this subject. The majority opinion authored by Justice David Friedman found that Abax was distinguishable because, in that case, the other insurance clause appeared only in the property damage section of the policy, not in the liability coverage section. Sport Rock at 11. If this is the case ' and it is difficult to discern any other meaning from Abax ' then, as the Sport Rock majority noted, Abax really has no bearing on the vitality of Firemen's, or, for that matter, on the issue involved in Fieldston. As for Fieldston, the majority opinion in Sport Rock recognized that Fieldston “may be read to address the situation presented here” and, to that extent, the Sport Rock court declined to follow it, “recognizing that any conflict ultimately will have to be resolved by the Court of Appeals.” Id. at 26.

The concurring opinion in Sport Rock by Justice David B. Saxe (joined by Justice James M. Catterson) took the majority to task for “unnecessarily” challenging the validity of Fieldston. According to the concurrence, Sport Rock could easily have been resolved under settled law, since it was clear that the Evanston and American policies both covered the same risk, namely, bodily injury and only in such a case does the rule concerning giving effect to an excess other insurance clause apply. Id. at 34. The concurrence noted that the crux of Fieldston was that the insurers there had not insured the same risk; as characterized by the concurrence, a general liability policy covered the injurious falsehood claim while the D&O policy covered “claims for interference with property rights.” Id. at 35.

The concurrence's attempt at reconciling the decisions is not entirely satisfying. Did Hermitage and Federal in the Fieldston case really insure such distinct risks? The Hermitage policy covered “bodily injury,” “property damage,” and “personal and advertising injury,” while the Federal policy covered “wrongful acts” and “offenses,” including defamation, wrongful entry, and eviction. Fieldston, 873 N.Y.S. 2d at 608-09. While the policies are not quoted in detail in the opinion, it does appear that the risks covered overlapped to some extent. With respect to the specific claims asserted in the underlying actions, the court itself noted that coverage overlapped with respect to the injurious falsehood claim.

'The Same Risk'

So what, in the First Department, does constitute “the same risk” under two policies for other insurance purposes? While some courts appear to have been influenced by the generalized description of the risk covered by a given policy (i.e., “bodily injury,” “property damage,” etc.) ' the Sport Rock concurrence, for example, describes the overlapping risk in that case as “the risk of the bodily injury alleged in the complaint” ' their analysis appears to focus more on the issue that ultimately is of greatest concern to both insurers and insureds: the obligation to indemnify for losses arising out of the specific causes of action asserted in the underlying action.

Here, the differing postures of the relevant underlying actions have led the courts to divergent results. In Fieldston, the court noted several times that Hermitage's policy only potentially covered few (indeed, only two of 29) causes of action in the underlying suits. The Fieldston opinion evinced notable concern that requiring Hermitage to defend all causes of action, while permitting Federal “to be a free rider,” would be inequitable. Fieldston, 873 N.Y.S.2d at 611, 613. While it is unclear what critical mass of overlapping claims would have, in the court's view, balanced the equities, plainly the Fieldston court considered an overlap of only two of 29 claims insufficient to trigger the pro rata vs. excess rule.

In Sport Rock, although the court did not explicitly state how many causes of action were potentially within the scope of American's coverage and how many were not, the trial court's opinion indicates that at least four of the eight claims asserted in the underlying case were potentially within the scope of American's coverage. Sport Rock Int'l, Inc. v. Am. Cas. Co. of Reading, Pa., No. 0603080/2005, 2007 WL 2815478 (N.Y. Sup. Ct. Aug. 22, 2007). On these facts, the court ultimately applied the pro rata vs. excess rule. One might be inclined to conclude that, consistent with Fieldston, the court considered approximately four of eight claims to be a sufficient ratio of overlapping claims to trigger the rule. But this was not the analysis explicitly adopted by the court, which simply followed Firemen's, which, in turn, appeared to consider the existence of even one cause of action implicating overlapping coverage to be sufficient to give effect to an excess other insurance clause.

As a leading commentator on insurance law has observed, it “is generally held that in order for an other insurance clause to operate in the insurer's favor, there must be both an identity of the insured interest and an identity of risk,” however, the “rule that the risks be identical in order for an 'other insurance' clause to apply does not mean that the total possible coverage under each policy be the same, but merely that with respect to the harm which has been sustained there be coverage under both policies.” 15 Couch on Insurance 3d ' 219:14. More specifically, the treatise continues: “As a rule, general policies prorate with specific policies and, hence, constitute 'other insurance.' Such is the case because, while it is necessary for both policies to insure the same person for the same risk ', it is not necessary for both policies to cover the identical field. For the purposes of an 'other insurance' clause, it is sufficient that both policies provide overlapping coverage for the risk involved.” Id. ' 219:17.

The lack of any qualifying language in the last sentence quoted above from Couch could suggest that any amount of overlap ' even with respect to just one claim ' is sufficient to trigger an excess other insurance clause. If this is the case, then Firemen's was correctly decided and Fieldston was incorrectly decided. Sport Rock was correctly decided not because it involved two CGL policies covering bodily injury, but because at least one claim was covered by both policies.

On the other hand, Couch's observations do not foreclose the possibility that a more substantial overlap should be required to trigger an excess other insurance clause, such that Firemen's must be read more narrowly. If that is the preferred rule, then Fieldston rightly required equitable contribution where the coverage afforded under two distinct types of policies overlapped with respect to only two of the 29 underlying causes of action. Such a rule, however, would lead to considerable uncertainty for insurers, since the duty to defend would depend more on the specifics of how the underlying complaint was drafted than on the policy language and facts giving rise to the underlying loss.

Conclusion

The present schism in the First Department jurisprudence regarding other insurance clauses would present an interesting question for the Court of Appeals to address. Indeed, applications for leave to appeal to the Court of Appeals were filed on Aug. 3, 2009 in the Fieldston case and on Aug. 10, 2009 in Sport Rock. The Court of Appeals therefore may soon have the opportunity to provide needed guidance on the respective roles of the types of policies involved, those policies' descriptions of covered risks, and the amount of overlap of covered causes of action required with respect to application of other insurance principles.

Lynn K. Neuner, a member of this newsletter's Board of Editors, is a partner with Simpson Thacher & Bartlett LLP in New York. She specializes in complex coverage cases representing insurers. William G. Ferullo is an associate at the firm. They can be reached at [email protected] and [email protected].