In Horace Mann Ins. Co. v. General Star National Ins. Co., Case No. 06-2156 (January 23, 2008), the Fourth Circuit Court of Appeals held that a conflict between two insurance policies could be resolved without resorting to either policy’s other-insurance clause where the respective policies offered different levels of coverage. In reaching its conclusion, the Fourth Circuit predicted that the West Virginia Supreme Court would adopt the general rule that between a true excess policy and a primary liability policy with an other insurance clause, the limits of the policy that provides primary insurance must always be exhausted before coverage under the excess policy is triggered. Id. at 8.
The coverage dispute arose after a West Virginia high school student was sexually abused by a teacher. Id. at 1. The student brought suit against a number of defendants, including the school board and the school principal. Id. The parties settled the case for over $1 million. Id. Under West Virginia law, all county school boards and their employees must be covered by a minimum of $1 million of liability insurance procured by the State Board of Risk and Insurance Management.Id. The State Board must also provide a minimum of $5 million in excess liability coverage. Id.
The State Board procured the $1 million in liability coverage for the West Virginia county school board and its employees through a liability insurance policy provided by National Union Fire Insurance Company.Id. The $5 million in excess liability insurance coverage mandated by West Virginia law was provided by General Star National Insurance Company.Id. In settling the underlying sexual abuse litigation, National Union contributed $1 million to the settlement, exhausting its limits, while General Star, as the excess insurer, contributed the balance.Id.
Following settlement, General Star sought reimbursement from Horace Mann Insurance Company, which had provided a policy to the school’s principal.Id. Believing that its policy was excess to that of General Star, Horace Mann brought a declaratory judgment action, seeking a declaration that Horace Mann’s coverage was excess to that of General Star and that, because General Star’s policy limits had not been exhausted, Horace Mann was not liable for any reimbursement.Id. General Star counterclaimed, seeking a declaratory judgment in its favor and a money judgment compensating it for its portion of the settlement amount.Id. at 14 (Niemeyer, J., dissenting).
The district court granted summary judgment in favor of Horace Mann after comparing the other insurance clauses contained in each policy.Id. at 1. In comparing the clauses, the district court found that the Horace Mann policy was excess to all other insurance policies, while the General Star policy’s language indicated that other policies were expected to be excess to General Star’s coverage.Id. Therefore, the district court found that the General Star’s policy limits must be exhausted before Horace Mann could be required to contribute, and granted summary judgment in favor of Horace Mann.Id. General Star appealed the decision to the Court of Appeals for the Fourth Circuit.Id.
The Fourth Circuit reversed the district court, holding that General Star’s policy was a true excess policy,Id. at 3, while the Horace Mann policy provided primary liability coverage that in some cases will convert to excess coverage by virtue of an other-insurance clause.Id. at 7. Sitting in diversity, the Fourth Circuit was bound to apply West Virginia law to the dispute.Id. at 2. However, West Virginia’s Supreme Court has not addressed the issue, so the Fourth Circuit resorted to generally accepted principals of insurance law in order to resolve the conflict between the policies, believing the West Virginia Supreme Court would adopt such principals as its own.Id.
Reviewing the policies, the Fourth Circuit found the General Star policy to be a typical excess policy,Id. at 3, while the Horace Mann policy was a primary liability policy, which in some instances will convert to excess coverage by virtue of an other-insurance clause.Id. at 7. The Fourth Circuit disagreed with the district court’s determination that the conflict should be resolved by resorting to the language of each policy’s other insurance provision, as those rules do not apply when one of the policies is a true excess policy and the other is a primary liability policy.Id. at 8. The characterization of the General Star policy as an excess policy and the Horace Mann policy as a primary policy led the court to apply the general rule that “between a true excess policy and a primary liability policy with an other-insurance clause, the limits of the policy that provides primary insurance must always be exhausted before coverage under the excess policy is triggered.”Id. (emphasis in original). The court noted the widespread application of this rule:
Numerous courts in other jurisdictions have addressed the question and have aligned themselves with the position [General Star] takes: a true excess insurance policy is secondary in priority to a primary insurance policy, even with respect to an incident for which the primary policy purports to make itself excess to any other available insurance… Indeed, it appears that not only is this the majority rule, but the practically universal rule in jurisdictions that have addressed the issue. Otherwise stated, the prevailing rule is that umbrella insurance coverage is true excess over and above any type of primary coverage, excess provisions arising in regular policies in any manner, or escape clauses.
Id. (emphasis in original) (internal citations omitted). In so characterizing the policies, the Fourth Circuit found review of the other insurance clauses in each policy to be unnecessary, as courts must resort to such clauses only “when two or more policies apply at the same level of coverage. An ‘other insurance dispute’ . . . cannot arise between excess and primary insurers.”Id. (quoting North River Ins. Co .v. American Home Assur., 210 Cal.App.3d 108, 257 Cal.Rptr. 129, 132 (1989)). Although the West Virginia Supreme Court had not expressly adopted this position, the Fourth Circuit found that it was likely that West Virginia’s highest court would adopt such a position, a prediction previously made by the Fourth Circuit.Id. at 9 (citing Allstate Ins. Co. v. American Hardware Mut. Ins. Co., 865 F.2d 592 (4th Cir. 1989)). Accordingly, the Fourth Circuit reversed the district court and remanded the case with a finding that Horace Mann must reimburse General Star for it’s contribution to the sexual abuse settlement.Id. at 12.
In dissent, Judge Niermeyer took issue with the court’s application of general insurance principles to the dispute, agreeing instead with “the district court’s common sense reading of the plain language of the two policies and its conclusions that they are not in conflict.”Id. at 13 (Niermeyer, J., dissenting). Judge Niermeyer noted that West Virginia law requires that when deciding a case concerning the language employed in an insurance policy, the court must “look to the precise words employed in the policy of coverage,” giving the language in the policy its “plain, ordinary meaning.”Id. at 16 (citing Horace Mann Ins. Co. v. Adkins, 215 W.Va. 297, 599 S.E.2d 720, 724 (2004)) (internal quotations omitted). In reviewing the plain meaning of the language used in each policy’s other insurance provisions, Judge Niermeyer agreed with the district court, believing that the coverage provided by Horace Mann’s policy is unambiguously excess to the coverage provided by General Star.Id. at 17.
Benjamin T. Erwin is an associate in the firm’s litigation group and insurance/reinsurance dispute resolution group. Mr. Erwin received his bachelor’s degree from University of Georgia and his law degree from Duke University School of Law.