Beware of state statutory language that can shift liability
In a recent decision, Nat’l Liab. & Fire Ins. Co. v. State Farm Fire & Cas. Ins. Co., No. 17-1969 (4th Cir. May 31, 2018), the 4th Circuit Court of Appeals ruled that an insurance company could not use an “other insurance” clause in its personal injury policy to shift all liability stemming from a yacht accident to a fellow insurer.
Two insurance companies, National Liability and Fire Insurance Co. and State Farm Fire and Casualty Insurance Co., both issued personal injury policies to a yacht owner, whose yacht crashed in 2016 and injured two passengers. The policy issued by National Liability included an “other insurance” clause which provided that National Liability’s coverage would only apply after any other coverage had been exhausted. State Farm’s policy also had an “other insurance” clause, but it only provided that State Farm would split coverage with any other insurers in the event that other policies were implicated.
After the yacht accident, National Liability sued for a coverage determination. Citing its “other insurance” clause, National Liability argued that State Farm should provide sole coverage for the yacht accident. The district court agreed, meaning State Farm would be on the hook for the costs of two suits resulting from the yacht accident, with National Liability’s policy essentially functioning as an excess policy that would only kick in after State Farm’s policy limit was reached.
4th Circuit Decision
On appeal, the 4th Circuit found National Liability’s “other insurance” clause to be void under Virginia’s Omnibus Statute, which prohibits insurers from “limiting or reducing” coverage in specialized policies, such as personal injury policies, below a certain level. This decision rested almost entirely on a 1989 Virginia Supreme Court case, Continental Ins. Co. v. State Farm Fire & Cas. Co., 380 S.E.2d 661 (Va. 1989). In that case, the Virginia Supreme Court found State Farm’s “other insurance” clause valid, but only because the State Farm policy was a general liability homeowner’s policy, not a specialized personal injury policy like the two at issue in the yacht suit. Since Virginia’s Omnibus Statute does not apply to general liability policies, the Virginia Supreme Court ruled that State Farm could enforce its “other insurance” clause, while Continental could not because its policy was narrower and therefore covered by the Omnibus Statute.
Based on the 1989 Continental decision, the 4th Circuit reasoned that if a policy is covered by Virginia’s Omnibus Statute, a broad “other insurance” clause, such as National Liability’s, is automatically void. The 4th Circuit said that the district court erroneously interpreted Continental as “a blanket ruling allowing for enforcement of excess coverage clauses in all cases.” Instead, Continental is distinguishable from the yacht case, the 4th Circuit said, because the yacht case “involves an excess clause in a liability policy squarely within the statute.”
National Liability’s “other insurance” clause was found void as an impermissible limitation on liability coverage based on a technicality in Virginia’s Omnibus Statute. Insurers must be aware of any statutory language that may void clauses in their policies, as this could come back to haunt them once an accident occurs.
If you have any questions regarding this decision or how your insurance company’s policy language could be affected by state’s statutes, contact the experienced attorneys at Parker, LLP Attorneys at Law today.