Tenth Circuit: Insurers’ Policies, Not Insureds’ Lease, Determined Insurers’ Relative Responsibilities for Loss

February 21, 2017 | Insurance Coverage

The U.S. Court of Appeals for the Tenth Circuit has ruled that the two insurance policies covering a leased building damaged in a fire – and not the lease itself – determined the insurers’ relative responsibilities for the damage.

The Case

Philadelphia Indemnity Insurance Company and Lexington Insurance Company insured the same school building that was leased by a charter school, Tulsa School of Arts and Sciences (“TSAS”), from a school district in Tulsa County, Oklahoma. The lease required TSAS to purchase insurance, which it obtained from Philadelphia.  The Philadelphia policy named TSAS as the named insured and the school district as the loss payee.  The school district had a separate insurance policy with Lexington that covered several buildings within the school district, including the school building leased by TSAS.

The Philadelphia and Lexington policies were similar. They both protected against fire damage, had the same effective dates, and identical “other insurance” clauses. The policies had different limits, however.  The Philadelphia policy had a limit of $7 million, whereas the Lexington policy, which covered many buildings, had a limit of $100 million.

After the school building was damaged in a fire, the insurers disputed their relative responsibilities to pay for the loss. Philadelphia filed a complaint in the U.S. District Court for the Northern District of Oklahoma. The district court ordered Philadelphia to pay 54 percent and Lexington 46 percent of the loss.  The court determined that Lexington’s relevant policy limit for purposes of the pro rata calculation equaled the total value of the damage, approximately $6 million.

In reaching this outcome, the court concluded that, under Oklahoma law, the policies’ “other insurance” provisions canceled each other out because the insurers had provided insurance policies that covered the same loss.

Among other things, the district court also rejected Lexington’s argument that Philadelphia’s policy was the policy of first resort because the parties to the lease – TSAS and the school district – had agreed that TSAS would acquire primary insurance.

Lexington appealed to the Tenth Circuit, arguing it should have no obligation to pay. Philadelphia cross-appealed, arguing that Lexington should have been ordered to pay more.

The Tenth Circuit’s Decision

The Tenth Circuit affirmed.

In its decision, the circuit court agreed with the district court that both insurers had to bear some responsibility for the loss because their policies’ “other insurance” clauses canceled each other out and their policies’ identical “pro rata” clauses required that they share the loss to the building.

Then, the circuit court rejected Lexington’s argument that it should not have to share coverage of the loss because the lease between TSAS and the school district made Philadelphia the primary insurer, with Lexington the excess insurer. The circuit court ruled that “the insurance policies, not the lease,” controlled.

Under applicable Oklahoma law, the Tenth Circuit explained, a private agreement between insureds could not expand the terms of an insurance policy.

Indeed, the Tenth Circuit reasoned, there was “no reason to look to the lease.” Philadelphia’s policy unambiguously disclaimed primary coverage in the presence of “other insurance,” as did Lexington’s, the circuit court said. These conflicting excess-coverage clauses canceled each other out. The district court therefore had not erred by ordering pro rata apportionment.

Finally, the Tenth Circuit rejected Lexington’s contention that Philadelphia’s policy was more specific to the risk, and thus, primary because it covered only the building that TSAS had leased, whereas Lexington’s “blanket” policy covered over 100 sites owned by the school district, including the TSAS school.

The circuit court said that policies that covered the same risks with respect to damaged property must be treated as “concurrent insurance,” even if the policies did not cover an “identical set of property.”

The case is Philadelphia Indemnity Ins. Co. v. Lexington Ins. Co., 845 F.3d 1330 (10th Cir. 2017).

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  • Robert Tugander

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