Last week, the United States District Court for the Southern District of Texas resolved a dispute between two insurers over the priority of insurance coverage for negligence claims against a mutually insured property management company. In Scottsdale Insurance Company v. Steadfast Insurance Company, 2017 WL 661520 (S.D. Tex. 2017), the Kaplan Management Company was covered under three policies: Scottsdale’s primary and excess policies, and a Steadfast policy. A 5-year-old boy fell into the swimming pool at a Kaplan-managed apartment complex and suffered severe injuries. Scottsdale provided a defense in the lawsuit that followed but consistently maintained that Kaplan’s other insurer, Steadfast, was required to participate in the defense. Steadfast refused maintaining that its coverage was excess. Scottsdale defended and settled the underlying lawsuit against Kaplan for $1,950,000. Once the underlying suit was resolved, Scottsdale sued Steadfast alleging that Steadfast had issued a primary insurance policy obligating it to defend Kaplan and contribute to settlement. In addition, Scottsdale asserted that Steadfast’s coverage took priority over Scottsdale’s excess policy, requiring the Steadfast policy to be exhausted before Scottsdale would be required to contribute under its excess policy. Steadfast asserted that its policy was an excess policy and it was not obligated to defend or contribute to the settlement. The parties filed competing motions for summary judgment advancing their respective positions.
In ruling on the motions, the Southern District analyzed and interpreted the “other insurance” policy provisions to determine how coverage should be apportioned between the insurers. Scottsdale’s primary policy contained a pro rata “other insurance” clause worded as follows:
If this insurance is primary, our obligations are not affected unless any other insurance is also primary. Then, we will share all that other insurance by the method described in Paragraph c. below [providing for pro rata apportionment].
In addition, Scottsdale’s excess policy contained an excess “other insurance” clause stating that it would apply in excess of “any other collectible insurance available to the insured.” Steadfast’s policy stated that it was primary unless there was other insurance applying on a primary basis, and contained the following endorsement:
With respect to your liability arising out of your management of property for which you are acting as real estate manager this insurance is excess over any valid and collectible insurance to you.
Scottsdale argued that the “other insurance” clauses in the Scottsdale and Steadfast policies were conflicting and under Texas law, canceled each other out. And as a result, Steadfast should contribute pro rata to the cost of defense and settlement on a pro rata basis. Scottsdale also asserted that its excess policy “other insurance” clause required Steadfast’s policy limits to be exhausted before Scottsdale's excess policy kicked in.
When the dust settled, Scottsdale lost its argument about primary coverage but won the day regarding its excess policy. In analyzing whether the other insurance clauses conflicted, the Southern District focused on Steadfast’s policy endorsement designating its policy as excess for any liability arising out of Kaplan’s property management activities. Steadfast argued that there was no conflict among other insurance clauses because the endorsement decided whether its policy was primary or excess based on whether the policyholder was a property management company—not on the presence of other insurance. The court agreed, noting that “[b]ecause Kaplan was a property manager, the endorsement in the Steadfast policy made [Kaplan’s] Steadfast insurance excess, whether the Scottsdale policy existed or not.” As a result, the Southern District held that the other insurance clauses did not conflict and concluded that the Scottsdale policy was primary and the Steadfast policy was excess.
The court then focused on the priority of coverage between the Scottsdale and Steadfast excess policies. On this point, the court found in favor of Scottsdale, holding that the language in its excess “other insurance” clause designated its policy as an umbrella policy with the lowest priority behind any other available insurance. With the competing policy provisions sorted out, Scottsdale was required to pay the costs of defense and exhaust its primary limit of $1,000,000, and then Steadfast’s excess policy limit of $1,000,000 would need to be exhausted before Scottsdale’s umbrella policy would have to contribute any settlement funds.