August 19, 2010

Double or Quits: recent caselaw on Double Insurance

Double insurance arises when the same party is insured with two (or more) insurers in respect of the same interest on the same subject-matter against the same risks. The general rule is that (subject to the terms of each policy), the insured can recover in full from either insurer and the paying insurer is then entitled to a contribution from the other insurer.

Insurers commonly try to limit, or even exclude, the right of contribution by including a contractual term in their policy. The most commonly used terms are designed to have the following effects if there is other insurance:

  1. transmute the policy into an excess layer policy (an “excess clause”); or
  2. limit the insurer’s liability to a rateable proportion of the loss (a “rateable proportion clause”); or
  3. exclude indemnity altogether (an “escape clause”).

A recent case, National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) Ltd (“the NFU case”), provides a reminder of two questions which have to be asked in the event of potential double insurance:

Background

Following exchange of contracts on a property, the risk of damage to a property passes to the buyers (under common law). In the NFU case, the buyers therefore took out a policy with NFU, which insured them against damage by fire. The policy provided that if there was insurance covering the same damage, the insurer would only pay its share (i.e. a rateable proportion clause). Following a fire at the property 17 days after exchange of contracts, NFU paid out and the issue then became whether there was any other insurance covering the same damage.

The sellers were insured by HSBC at the time of the fire against damage to the building, and the policy contained an extension covering anyone buying the property (until completion of the sale or the end of the policy, whichever was sooner) but provided that the insurer would not pay "if the buildings are insured under any other insurance".

Question 1: Is this really a case of double insurance?

The deputy judge (Gavin Kealey QC) held that this was an escape clause and that therefore the only policy covering the buyers in respect of the fire was the NFU policy. He said that "the grant of buildings cover by HSBC to buyers ... was directly qualified by the proviso [i.e. that there is no other insurance in place]: the one cannot properly be separated from the other". Accordingly, this was not a case of double insurance. The buyers were never covered under the HSBC policy and NFU was not entitled to a contribution from HSBC. In reaching this conclusion, the judge had regard to the primary purpose of the policy extension: it was intended to provide valuable protection to HSBC's policyholders (the sellers), in the event that the buyers were otherwise uninsured (and so the cover would enable or encourage the buyers to complete the purchase following damage to the property between exchange and completion).

If this had been a case of double insurance, though, a second question would then have arisen:

Question 2: How do contractual terms in the two policies interact?

How the different clauses mentioned above interact with each other has been explored to a certain extent in English law. It is an established principle that, if both policies (which would otherwise cover the loss) contain an escape clause, the two exclusions will cancel each other out – since the absurd alternative would be that neither policy responded. So the insured can claim the entire loss under either policy but (since there is double insurance) liability is ultimately shared rateably between the insurers (see Weddell v Road Transport & General [1932]).

It seems likely that the same principle would apply where both policies contain an excess clause (although there is no reported English decision on this yet). Furthermore, where both policies contain a rateable proportion clause, those clauses will both apply and each insurer will be liable only for its rateable proportion of the insured’s loss (see Gale v Motor Union Insurance [1928]).

What happens where the two policies contain different, conflicting clauses? This is where the older cases point in conflicting directions.

In Gale v Motor Union Insurance Company [1928] both policies contained an escape clause and a rateable proportion clause. The court concluded that in both policies the one clause modified the other, such that both operated on a rateable proportion basis. By contrast, in Austin v Zurich General Accident [1944] both policies contained an escape clause; in addition one policy contained a rateable proportion clause and the other contained an excess clause. The judge did not find that the escape clause in either policy was modified by the other provision. Instead he concluded that the escape clauses cancelled each other out; and that the rateable proportion and excess clauses did so too.

In the NFU case, Kealey QC commented (obiter) that in his view it would have been more correct to say that the policy with the rateable proportion clause was liable to the full extent of its limits and that the other policy only provided excess cover. In other words, the excess clause prevailed over the rateable proportion clause.

The HSBC policy in the present case contained an excess clause as well as an escape clause. Kealey QC decided that the escape clause was not modified by the excess clause (as was held to be the case with the rateable proportion clause in Gale, above). Instead the escape clause took precedence because it applied specifically to cover for buyers while the excess clause had more general application.

Pointers?

Kealey QC's analysis suggests that there might be a hierarchy of clauses (depending on the precise circumstances of a case). So an exclusion clause or (according to Kealey QC) an excess clause in one policy would prevail over a rateable proportion clause in the other, such that the second policy would have to respond in full to any loss. What if one policy contains an exclusion clause and the other an excess clause? And does it make a difference if the loss exceeds the limit of one of the policies? These issues remain to be resolved by the English courts. There are also open questions about the interaction of inconsistent "other insurance" provisions in the same policy.

In conclusion, insurers would do well to check whether the "other insurance" provisions in a policy are self-consistent and apt.