The "Other Insurance" Clause

493344169.jpg
Image courtesy of [Jeff J. Mitchell] / Getty Images.

Some claims covered by general liability policies are also covered by other types of insurance. Consider the following scenario:

Example

Harry operates a large retail hardware store in a building he leases from Buildings Inc. Harry's lease requires him to insure the building under a commercial property policy. The policy lists both Buildings Inc. and Harry's business, Harry's Hardware, as insureds. The lease also requires Harry to purchase a general liability policy that includes Buildings Inc.

as an additional insured.

Late one night a fire breaks out in the building when the store is closed. Fire fighters determine that  the fire started in a bag of recyclables when a 9-volt battery reacted with a piece of steel wool. The fire caused $200,000 in damage to the building.

The liability policy that covers Harry's Hardware includes a $250,000 limit for Damage to Premises Rented to You Coverage. The fire resulted from the hardware store's negligent storage of recyclables. If Building's Inc. demands that Harry's Hardware pay for the fire damage to the building, the claim should be covered by the hardware store's liability policy. However, the fire damage to the building is also covered under the commercial property policy Harry has purchased. Which policy will apply first?

Other Insurance Provisions

Most claims insured under your liability policy are covered on a primary basis. For example, if a customer files a claim against your company for bodily injury he sustained in a slip-and-fall accident on your premises, your liability policy should cover the claim on a first-line basis.

However, some events, like the fire described above, generate claims that are more appropriately insured by other types of policies. To address this issue, liability policies contain a policy condition entitled Other Insurance. This clause explains how the policy will respond when certain claims that are covered by the policy are also insured elsewhere.

When Your Policy Is Excess

A typical liability policy provides excess coverage for losses covered by the following.

Fire or other property insurance covering your work

For example, you are an electrical contractor and are installing electrical wiring in a building that is under construction. All of the contractors involved in the project (including you) are insured for physical damage to the building during its construction under a builders risk policy. If you accidentally cause damage to the building during its construction, the builders risk policy will apply first. Your liability policy will cover damage caused by your negligence on a secondary basis.

Fire or other property insurance covering premises you rent (or occupy without a lease with the owner's permission).

In the opening example, Harry is insured under a commercial property policy for damage to the building he rents from Buildings Inc. Because the fire damage is insured under a property policy, that policy should apply first. Harry's liability policy will apply on an excess basis.

Other insurance you have purchased to cover your liability as tenant for property damage to premises you rent (or occupy without a lease with the owner's permission)

For example, suppose that you have rented office space under a short-term lease. Your landlord has insured the building under a commercial property policy. To protect yourself, you have purchased a legal liability policy, a type of property policy that covers your legal liability for damage to property that is owned by someone else but is in your care. If you accidentally cause property damage that is covered by your legal liability policy, the latter should apply first. Your general liability policy will apply as excess coverage.

Any other insurance that covers your liability for the use of aircraft, autos or watercraft.

For example, a typical liability policy covers bodily injury or property damage you accidentally cause to others while operating small watercraft you don't own (as long as you aren't using the boat to carry passengers for a fee). Suppose that your company owns a yacht. You have purchased a marine policy that covers your liability for the use of your boat as well as boats you don't own. You rent a small boat and inadvertently cause an accident in which someone is injured. If the injured person files a claim, your boat policy should apply first. Your general liability policy will apply on a secondary basis.

Coverage provided to you as an additional insured.

If you are covered for a claim under someone else's policy as an additional insured, that policy should cover you on a primary basis. Your own policy should cover the claim on an excess basis.

For example, Buildings Inc. is an additional insured under Harry's Hardware's liability policy for claims arising out of Harry's use of the leased building. Suppose that Building's Inc. is sued by a company that claims its building suffered smoke damage from the hardware store fire. The lawsuit alleges that Buildings Inc. is partly liable for the fire because it knew about Harry's improper storage of recyclables but did nothing to remedy the situation. Because the claim arose out of Harry's use of the rented building, Harry's liability policy should respond to the claim on a primary basis. If Harry's liability coverage is used up, then Building's Inc.'s own liability policy should provide excess coverage.

Conflicts

The Other Insurance provisions in your liability policy may conflict with those in another policy. For example, you are insured under two liability policies, both of which state that they apply on an excess basis. When Other Insurance clauses are inconsistent, a state law or a previous court decision may determine how the conflict is resolved.