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24668 - SC Insurance Co. v. Fidelity and Guaranty Ins. Underwriters, Inc., et al.

Davis Adv. Sh. No. 24
S.E. 2d

THE STATE OF SOUTH CAROLINA

In The Supreme Court

South Carolina Insurance Company, Plaintiff,

v.

Fidelity and Guaranty Insurance

Underwriters, Inc. and United

States Fidelity & Guaranty

Company, Defendants.

On Certification From The United States District Court

For the District of South Carolina

Matthew J. Perry, United States District judge

Opinion No. 24668

Heard April 2, 1996 - Filed August 11, 1997

CERTIFIED QUESTION ANSWERED

Robert E. Salane and Andrew E. Haselden, both of Barnes, Alford, Stork &

Johnson, L.L.P., of Columbia, for Plaintiff.

Stephen P. Groves, Bradish J. Waring and Stephen L. Brown, all of Young,

Clement, Rivers & Tisdale, L.L.P., of Charleston, for Defendants.

TOAL, A.J.: The United States District Court for the District of South Carolina has

certified the following question to this Court:

When a blanket insurance policy and a specific policy provide coverage for the

same peril to the same property and interest, does South Carolina require that

the specific insurance policy coverage limits be exhausted first before

application of the blanket policy or will the policies be pro rated according to

the respective policy limits of each policy?

FACTUAL/PROCEDURAL BACKGROUND

For a period of time, plaintiff South Carolina Insurance Company ("SCIC") and

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

defendant United States Fidelity and Guaranty Company ("USF&G") both insured certain

buildings at Mike Smith Chevrolet, an automobile dealership located in Myrtle Beach, South

Carolina. The USF&G policy was a comprehensive business insurance policy providing

blanket property insurance covering three buildings at Mike Smith Chevrolet, as well as

buildings at dealerships located in Florida and other states. The SCIC policy was a specific

policy providing insurance coverage for commercial property, general liability, and crime

coverage for five separate buildings located at Mike Smith Chevrolet. The USF&G policy

and the SCIC policy contained identical "other insurance" clauses providing their coverage

would be "excess" to any other insurance on the property.

On September 21-22, 1989, Hurricane Hugo came ashore South Carolina, south of

Myrtle Beach, and, as a result of Hurricane Hugo's winds and rain, Mike Smith Chevrolet's

buildings sustained various degrees of damage. At the time of the hurricane, Mike Smith

Chevrolet was insured by both SCIC and USF&G. The losses were reported to both

insurance companies, and SCIC adjusted and paid the claim. USF&G has not paid any sums

to SCIC as contribution for the damages or adjusting expenses incurred in connection with

the claim by Mike Smith Chevrolet.

On September 14, 1992, SCIC flied suit in state court in Richland County against

defendant USF&G. SCIC sought contribution from USF&G for the payments it made to

Mike Smith Chevrolet. USF&G removed the case to federal district court on October 15,

1992. One day later, USF&G filed its answer to SCIC's complaint and alleged as an

affirmative defense the fact that SCIC's policy provided specific coverage that must be

exhausted before USF&G would be liable. The parties agree no facts are in dispute.

After filing a Stipulated Statement of Facts with the federal court, both parties moved

for summary judgment. The federal district court determined that the action involved

questions of South Carolina law for which there was no controlling precedent in the decisions

of the South Carolina Supreme Court. The federal court therefore certified to this Court the

question listed above. On November 9, 1995, we agreed to answer the certified question.

LAW/ANALYSIS

When judges first set about the task of interpreting insurance policies, we looked

confidently to tried and true principles of contract law. After all, lawyers are taught in their

earliest classes that the common law rules of contract are the bedrock of all Anglo-American

jurisprudence, thus judges clearly had at hand the perfect tools for crafting fair and lucid

interpretations of insurance agreements. We failed utterly to anticipate the linguistic excesses

to which the insurance industry would resort in order to avoid paying claims when "other

insurance" may be available. This is an area in which hair splitting and nit picking has been

elevated to an art form. "Other insurance" clauses have been variously described as: "the

catacombs of insurance policy English, a dimly lit underworld where many have lost their

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

way,"1 a circular riddle,2 and "polic[ies] which cross one's eyes and boggle one's mind."3

"Other insurance" clauses are intended to apportion an insured loss between or among

insurers where two or more policies offer coverage of the same risk and same interest for the

benefit of the same insured for the same period. These clauses began their lives as an

attempt to prevent fraud in the over insuring of property. Now the clauses are widely used

in many other types of insurance policies where fraud by over insurance would not be a

possibility. The four most common forms of "other insurance" clauses are:

( I ) the "pro rata" clause, which provides that the insurer will pay its share of

the loss in the proportion its policy limits relates to the aggregate liability

coverage available; (2) an "excess" clause, which provides that an insurer will

pay a loss only after other available primary insurance is exhausted; (3) an

"escape" clause, which provides that an insurer is absolved of all liability if

other coverage is available; and (4) an "excess escape" clause, which provides

that the insurer is liable for that amount of a loss exceeding other available

coverage and that the insurer is not liable when other available insurance has

limits equal to or greater than its own."4

Each type of clause has its own rules of construction and when these clauses compete with

each other, the rules of interpretation become more complex.

In the present matter we have two policies which (I ) cover the same risk - 3 buildings

at Mike Smith Chevrolet, (2) cover the same interest - commercial property, (3) are for the

benefit of the same insured - Mike Smith Chevrolet, (4) apply for the same time period -

September 21-22, 1 989. Each policy's "other insurance" clause is identical, providing:

"If there is other insurance covering the same loss or damage . . . . .we will

pay only for the amount of covered loss or damage in excess of the amount

due from that other insurance whether you can collect on it or not. But we

will not pay more than the applicable limit of insurance."

1Insurance Co. of North America v. Home & Auto Ins. Co., 628 N.E.2d 643,

644 (Ill. Ct. App. 1993).

2Linda Hasse, Is There a Solution to the Circular Riddle? The Effect of "Other

Insurance" Clauses on the Public, the Courts and the Insurance Industry, 25 S.D. L.

Rev. 37 (1980).

3Columbia Cas. Co. v. Northwestern Natl. Ins. Co., 282 Cal. Rptr. 389, 396

(Cal. Ct. App. 1991).

4Douglas R. Richmond, Issues and Problems in "Other Insurance," Multiple

Insurance, and Self Insurance, 22 Pepp. L.Rev. 1373, 1381 (1995), an excellent,

comprehensive analysis of this topic in the context of property as well as liability insurance.

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

Thus, in this matter we have a competition between two "excess" "other insurance" clauses,

each of which attempts to make its policy excess to all other available coverage.

Additionally, the USF&G policy styles itself as "blanket commercial property coverage"

detailing coverage for specified properties at several different dealerships, including Mike

Smith-Myrtle Beach, whereas the SCIC policy is a specific policy only for the Mike Smith

Myrtle Beach location.

The question presented to us is framed as one involving blanket versus specific policies.

For the reasons we outline in this opinion, we believe the more proper analytical framework

to be that of resolving competing "excess" "other insurance" clauses.

That having been said, if the blanket/specific analysis is used, there are at least two

schools of thought concerning the apportionment of losses covered under both blanket and

specific policies. One school of thought finds that blanket policies are intended only to

supplement specific policies and that, therefore, the policy limit of a specific policy must be

exhausted before the blanket policy provides any coverage, without regard to any policy

language concerning apportionment of other insurance. See John A. Appleman & Jean

Appleman, Insurance Law & Practice § 3912 (1972)("A blanket or floating policy is only

intended to supplement specific insurance, and it cannot become operative until the specific

insurance has become exhausted."); see also, e.g., Hennes Erecting Co. v. National

Union Fire Ins. Co., 813 F.2d 1074 (10th Cir. 1987) (citing general rule that specific

policy must be exhausted before blanket/floater policy can provide coverage); USAA v.

United States Fidelity & Guaranty Co., 555 S.W.2d 38 (Mo. Ct. App. 1977)(finding

that exhaustion of coverage under specific policy constituted condition precedent to right to

recover under blanket/floater policy). Other cases apply an entirely different rule by holding

that when blanket and specific policies insure the same entity against the same risk, they

provide concurrent coverage and should be prorated. See, e.g., Home v. Great American

Ins. Co., 1 34 S.E.2d 865 (Ga. Ct. App. 1964) (applying rule that policies insuring the

same entity against the same risk should be considered concurrent even if one policy is more

specific than the other).

Prior South Carolina precedents suggest that if two or more policies insure the same

entity against the same risk to the same object, the policies are concurrent and losses should

be prorated between the insurers who issued the policies. In Lucas v. Garrett, 209 S.C.

521, 41 S.E.2d 212 (1947), this Court found that there was no concurrent coverage under

separate insurance policies where the policies did not insure against the same interest or the

same casualty. Id. at 527, 41 S.E.2d at 215. One of the policies at issue insured against

a party's legal liability, but the other policy insured against the destruction of property (bales

of cotton). Id. Given these facts, there was no concurrent coverage. However, the clear

implication of the decision is that if policies do insure the same entity and the same interest

against the same casualty, then coverage is concurrent, and the loss must be prorated, at least

absent policy language to the contrary.

Similarly, in Murdaugh v. Traders & Mechanics Insurance Co., 218 S.C. 299, 62

S.E.2d 723 (1950), this Court found that two fire insurance policies protecting the same

home did not provide concurrent coverage, because the policies did not insure the same

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

interest. Id. at 310, 62 S.E.2d at 727-28. One of the policies protected the interest of

the homeowner himself, but the other policy was intended to protect the interest of the

mortgagee. Id. at 309-10, 62 S.E.2d at 727-28. Again, Murdaugh implies that if policies

insure the same entity and interest against the same casualty, then the coverage provided by

the policies is concurrent, thus requiring pro rata contribution absent a contrary provision in

an "other insurance" clause contained in one of the policies.

Lucas and Murdaugh suggest that the only prerequisite to proration of a loss among

multiple insurers is that all policies concerned provide coverage for the same peril to the same

property and interest, a condition that is indisputably satisfied here. Those cases, however,

do not squarely address whether a distinction should be made between the kind of coverage

provided by blanket and specific policies, such that a blanket policy should always be

considered excess to more specific insurance. We must now address that issue.

We do not favor a rule that creates a wooden distinction between "blanket" and

it specific" policies, because such a distinction will often fail to effectuate the intent of the

insurer and the insured as to coverage. As we view it, courts faced with the distasteful chore

of apportioning liabilities among multiple insurers should look to the language of the policies

to ascertain whether the policies are intended to provide primary or secondary coverage.

In other words, the relevant question is not whether a policy is blanket or specific, but what

is the "total policy insuring intent" embodied within the policy. See, e.g., Allstate Ins. Co.

v. Frank B. Hall & Co., 770 P.2d 1342, 1346 (Colo. Ct. App. 1989). For example, if

both policies provide coverage for the same peril to the same property and interest, and both

contain language evincing an intent to provide primary coverage, that one policy may be

somewhat more specific than another usually should make no difference. See, e.g., Harbor

Ins. Co. v. USAA, 559 P.2d 178 (Ariz. Ct. App. 1976)(rejecting position that coverage

of general homeowners' liability policy should be considered secondary to more specific

coverage of motor vehicle liability policy); see also State Farm Fire & Cas. Co. v.

LiMauro, 482 N.E.2d 13, 16 (N.Y. 1985)("As our case law has developed, it has rejected

as an exercise in 'meaningless semantics' the effort to determine which among policies

covering the risk which occurred is the more specific, but recognized the right of each insurer

to rely upon the terms of its own contract with its insured.").

One method insurance companies use to indicate whether they intend to provide

primary, secondary, or other coverage is to include in their policies "other insurance" clauses

that attempt to apportion liability among multiple insurers. An "excess" clause the most

common kind of "other insurance" clause, provides that a policy will cover only amounts

exceeding the policy limits of other insurance covering the same risk to the same property.

When two policies both contain "excess" clauses, most courts have regarded the clauses as

mutually repugnant and have treated both policies as primary, ordering proration of the loss.

See, e.g., Indiana Ins. Co. v. Mission Natl. Ins. Co., 874 F.2d 631 (9th Cir.

1989)(Under Washington law, where both policies contain "excess" "other insurance"

provisions, clauses are mutually repugnant, and the loss must be prorated.); Universal

Underwriters Ins. Co. v. Allstate Ins. Co., 638 A.2d 1220 (Md. Ct. App. 1994) (Where

two "excess" clauses are applicable and directly conflict, they must be disregarded as

mutually repugnant, and each policy is treated as primary insurance.). Generally, we agree

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

that, in many cases, "excess" "other insurance" clauses should cancel each other out, because

two policies with such clauses cannot both be treated as "excess" policies.

However, this rule should not apply "when its use would distort the meaning of the

terms of the policies involved." LiMauro, 482 N. E.2d at 17. The total policy insuring

intent of the parties always should remain the central issue in apportioning liabilities among

multiple insurers. Although the wording of "other insurance" clauses is a relevant factor in

determining the total policy insuring intent of an insurer and its insured, the "other

insurance" clause constitutes only one factor among many to be considered. Other pertinent

factors for the Court to consider in ascertaining the purpose an insurance policy is intended

to serve include (1) the stated coverage provided in the policy, (2) the premium paid for

such coverage, (3) any requirements in the policy that the insured have underlying insurance

policies, and (4) other relevant factors. See, e.g., LiMauro, 482 N.E.2d 13.

In LiMauro, the New York Court of Appeals was faced with the task of determining

the priority of liability among three automobile insurance policies.5 One of the policies

indisputably provided primary coverage, so the New York court only had to resolve whether

the amount of the loss exceeding the limits of the primary policy should be prorated between

the other two insurers, Aetna and State Farm, or whether the limits of Aetna's policy had

to be exhausted before State Farm's policy bore any liability.

One of the policies at issue was a "family automobile policy" with coverage of

$100,000 per person and $300,000 per accident for accidents caused when the insured

driver was driving a non-owned vehicle. This policy ("the Aetna policy") contained an

"other insurance" clause providing that coverage for accidents involving non-owned or

temporary substitute vehicles would be excess over any other valid and collectible insurance.

Id. at 19. The other policy at issue ("the State Farm policy") was designated a "success

protector policy" and contained a liability limit of $ 1,000,000, covering "personal injury

or property damage arising out of operation of an automobile, watercraft or aircraft or of

business or rental property, and as to the operation of an automobile covered not only the

named insured but also any person operating the vehicle with, and within the scope of, the

consent of the named insured." Id. at 15-16. Aetna argued that the "excess" clause in its

policy made its coverage secondary to that of the State Farm policy.

The New York Court of Appeals disagreed. It instead determined that the State Farm

coverage should be excess to any coverage provided by the Aetna policy notwithstanding the

"other insurance" provision in the Aetna policy. The court found that the following features

of the State Farm policy evinced an intent by State Farm and its insured that coverage was

to be truly excess to other collectible insurance:

5Although there are some jurisdictions in which the rules for interpreting "other

insurance" clauses in automobile insurance policies are different from those applicable to

other types of liability and property insurance policies, the framework we adopt here of

examining "total policy insuring intent" will apply to all "other insurance" clauses without

regard to policy type.

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

The State Farm policy specified that it provided coverage only in excess of the

total limit of liability of any underlying insurance collectible by the insured.

The policy required the insured to maintain underlying automobile liability

insurance in minimum amounts of $100,000/$300,000.

The policy contained an "other insurance" clause providing that its coverage

would be excess to all insurance except insurance purchased to apply "in excess

of the sum" of the coverage provided by both the underlying insurance and the

State Farm policy.

The State Farm policy provided $ 1,000,000 coverage at a premium of $ 144

as compared to Aetna's policy, which provided $100,000/$300,000

coverage for a premium of $ 119. The court found that the small premium

for the large amount of coverage provided by State Farm indicated State Farm

intended to insure "at a lesser level of risk than did Aetna."

Id. at 19-20. The court examined the Aetna policy and concluded that it generally was

intended to provide primary coverage and that the "excess" clause evinced Aetna's intent

that its coverage be excess only to other primary coverage on non-owned automobiles, not

to coverage that was inherently excess or secondary, like that of the State Farm policy. Id.

at 19. Accordingly, the court required exhaustion of the Aetna policy prior to any

contribution by the State Farm policy. Id. at 20.

When we examine the commercial property portions of the policies at issue in this

case, it is clear that the SCIC policy and the USF&G policy provide the same kind of

coverage. As we view it, both policies (absent their "excess" clauses) appear to provide

primary coverage. Most significantly here, neither policy requires the insured to possess

"underlying insurance" as to the commercial property coverage, which many strictly "excess"

policies require. In fact, the coverage terms of the two policies are quite similar. The

commercial property portions of the policies differ primarily in that the USF&G policy covers

more buildings at more locations. We do not think this difference should free USF&G from

its obligation to its insured.

The SCIC and USF&G policies contain identical "excess" "other insurance" clauses.

Like the "excess" clause in the Aetna policy in LiMauro, the "excess" clauses in the SCIC and

USF&G policies evince only an intent that coverage be excess to that of other inherently

primary policies. Obviously, it is impossible to give effect to both "excess" clauses, and given

that there is nothing else in the policies that differentiates the kind of coverage they provide,

the clauses should be disregarded as mutually repugnant and the loss should be prorated

between SCIC and USF&G according to their respective policy limits. See 44 Am. Jur. 2d

Insurance § 1791 (1982 & Supp. 1995) ("Proration has not been universally compelled

between liability insurers both of whose policies contain 'excess insurance' provisions,

although it has been compelled in a great majority of cases."); see also, e.g., Home Ins.

Co. v. Certain Underwriters., 729 F.2d 1132 (7th Cir. 1984) (where "excess" clauses are

mutually repugnant, each insurance company is liable for pro rata share of the total liability);

Kansas City Fire & Marine Ins. Co. v. Hartford Ins. Group, 442 N.E.2d 1271 (N.Y.

1982)(mutual "excess" policies covering the same risk cancel each other out, and

contribution by both insurers is required); Paul R. Koepff, "Other Insurance " Clauses, PLI's

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SC INSURANCE COMPANY v. FIDELITY & GUARANTY, et al.

13th Annual Insurance, Excess and Reinsurance Coverage Disputes, 539 PLI/Lit 249

(1996) (summarizing general rules concerning "other insurance" clauses).

Accordingly, under South Carolina law, the policies' "excess" clauses are mutually

repugnant, both policies provide primary coverage, and the loss with regard to the three

buildings covered by both policies should, therefore, be prorated between SCIC and USF&G

according to their respective policy limits.

CONCLUSION

We find that in determining whether a loss covered by multiple insurers should be

prorated, or whether one policy should be treated as an "excess" policy, courts in South

Carolina should consider the "total policy insuring intent" based on all the language of the

insurance policies at issue. If two policies both contain "excess" clauses, but otherwise appear

to provide for primary coverage, the excess clauses should be disregarded, and the

concurrently covered loss prorated according to the policy limits of the respective policies.

We would be hard pressed to improve upon this conclusion penned by the Kentucky

Court of Appeals:

This opinion represents our honest effort to make detailed answers to the

conflicting arguments of the parties relative to the construction of an insurance

policy. It would be somewhat ludicrous for us to say this policy is not

ambiguous. It is. But no more so than most others. Ambiguity and

incomprehensibility seem to be the favorite tools of the insurance trade in

drafting policies. Most are a virtually impenetrable thicket of incomprehensible

verbosity. It seems that insurers generally are attempting to convince the

customer when selling the policy that everything is covered and convince the

court when a claim is made that nothing is covered. The miracle of it all is

that the English language can be subjected to such abuse and still remain an

instrument of communication. But, until such time as courts generally weary

of the task we have just experienced and strike down the entire practice, we

feel that we must run with the pack and attempt to construe that which may

well be impossible of construction.

Universal Underwriters Insurance Company v. Travelers Insurance Co., 451 S.W.2d

616, 622-23 (Ky. Ct. App. 1970).

CERTIFIED QUESTION ANSWERED.

FINNEY, C.J., MOORE, WALLER and BURNETT, JJ-, concur.

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