When more than one insurance policy arguably applies to a loss, a dispute often arises over which policy is primary and which is responsible for excess coverage only, especially where both policies state that they are excess over all other available coverage. Historically, Kentucky courts have approached these disputes using complex and often arbitrary methods to apportion damages between the two carriers. Recently, the Kentucky Supreme Court adopted a simpler rule. In Kentucky Farm Bureau Mut. Ins. Co. v. Shelter Mut. Ins. Co., 2008-SC-000781-DG (Ky. Nov. 18, 2010), the Court held that in a coverage dispute between the insurer of a vehicle/vehicle owner and the insurer of a permissive driver, where each policy provides coverage for the incident in question, the insurer of the vehicle will be primarily responsible for any loss and the other carrier will be responsible for excess coverage only.
The facts of Shelter involved a permissive driver who negligently caused a two-car auto accident while driving his parents’ vehicle. Kentucky Farm Bureau insured the permissive driver, while Shelter was the insurer of his parents’ vehicle. The dispute arose because each of the two insurance policies contained an “excess insurance clause,” purporting to provide coverage only in excess of any other coverage. Since the total damages were well below the $25,000 policy limits of each insurer, the question became, as a practical matter, which insurer would be solely responsible for the damages.
Under the old rule, a court normally begins by looking at the language of each policy to determine which insurer is responsible for primary coverage. However, the Shelter court pointed out that this is an extremely subjective test. The Court further noted that this approach encourages insurance companies to engage in a “drafting battle,” with each insurer trying to use the most specific exclusionary language possible. Finally, since many insurance companies use the same form language in their policies, the result is often that the relevant clauses in each policy are “indistinguishable in meaning and intent, [so that] one cannot rationally choose between them.” In other words, the relevant clauses are often “mutually repugnant,” making it impossible to designate one carrier as primary based upon the language of the policies alone. In such a case, the court would then use inconsistent and often arbitrary methods to apportion the damages between the two carriers.
To address this problem, the Shelter Court found that simpler and more straightforward approach is required. Although the Court recognized that apportionment methods “are an attempt at fairness and at times they must be adhered to,” the Court stated that the complicated two-step analysis explained above can be avoided altogether if the court “refus[es] to perpetuate the legal fiction that both insurers are primary [or excess] when the contest is between the insurer of the vehicle and the insurer of the non-owner, permissive driver.” In such a case, the Shelter Court decided that the “legislative intent underlying the Kentucky Motor Vehicle Reparations Act [requires that] where both the vehicle owner and non-owner driver are separately insured, the vehicle owner’s insurance shall be primary.”
The implications of Shelter are significant. While the Shelter court declined to decide whether the new rule will apply to commercial policies as well, its decision is certainly indicative of the Court’s desire to streamline these priority coverage disputes, and put an end to the arbitrary interpretation of competing excess insurance clauses.
If you would like a full copy of this case, or have any other questions related to insurance coverage disputes, please feel free to contact one of our Insurance Coverage Practice Area Attorneys.
