First Party vs. Third Party

First Party vs. Third Party

 “Other Insurance Clause” Eliminates Coverage

First party property insurance only insure the owner of the property for its loss and makes no promise to defend or indemnify the insured against claims of third parties. Even in bailment situations, where the policy insures against the risk of loss of property of others, it does not insure against suits by the property owner for its loss. In United National Insurance Co. v. Mundell Terminal Services, Inc., 13-50052 (5th Cir. 01/23/2014) the Fifth Circuit was called upon to decide claims seeking coverage under a first party policy for defense and indemnity of a subrogation claim.

FACTS

Mundell Terminal Services, Inc. (“MTS”) and Keith D. Peterson & Company, Inc. (“KDP”) and Scarbrough Medlin & Associates, Inc. (“SMA”) appeal from the district court’s grant of summary judgment in favor of United National Insurance Company (“UNIC”) in this declaratory judgment insurance coverage dispute. The case involves certain property owned by BAL Metals International Incorporated (“BMI”) that was stolen while MTS stored it in its warehouse. The district court held on summary judgment that UNIC’s first-party property insurance policy issued to MTS is excess to BMI’s own insurance policy and, therefore, no coverage exists under UNIC’s policy.

MTS operates a warehouse business in El Paso, Texas. In 2008, BMI entered into a contract with MTS to store copper sheeting at one of MTS’s warehouse facilities. On November 28, 2010 and December 5, 2010, thieves stole BMI’s copper, valued at $483,389.20, from the MTS warehouse.

Before the thefts, MTS had purchased a first-party property insurance policy from UNIC (the “UNIC policy”). The “Building and Personal Property Coverage Form” in the UNIC policy defines “Covered Property” to mean MTS’s “Business Personal Property located in or on the building described in the Declarations… ¶ Personal Property of Others that is: (1) In your care, custody or control; and (2) Located in or on the building described in the Declarations…”

The parties expanded coverage to include “Stock,” elsewhere defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” Moreover, the “Supplemental Declarations” page provides a $500,000 coverage limit for “Stock, including Property of Others while in the insured’s care, custody and control.”

Aon Risk Solutions issued an insurance policy to BMI (the “Aon policy”), which covers the stolen copper. The Aon policy has a policy limit of $25 million. The UNIC policy has a policy limit of $500,000.

In response to MTS’s timely claims for the copper thefts, UNIC sent a “reservation of rights” letter to MTS on December 31, 2010. On January 5, 2011, pursuant to the Aon policy, Aon paid BMI $483,389.00 for the loss. On February 24, 2011, Aon, as subrogee of BMI, filed a law suit against MTS (the “BMI lawsuit”). In March 2011, MTS requested that UNIC defend it in the BMI lawsuit. UNIC rejected MTS’s request because the UNIC policy did not provide liability coverage of any kind.

UNIC moved for summary judgment in its declaratory judgment action, which MTS and BMI opposed. The district court granted summary judgment in favor of UNIC on the first and second declarations. The district court found that the UNIC policy does not impose upon UNIC any duty to defend or indemnify MTS in the BMI suit, and that the UNIC policy precludes coverage for the thefts of the copper under the UNIC policy.

ANALYSIS

Texas courts (which the Fifth Circuit must follow) construe insurance policies according to the same rules of construction that apply to contracts generally. When interpreting insurance contracts, courts seek to ascertain the true intentions of the parties as expressed in the instrument. To this end, Texas courts examine and consider the entire writing in an effort to harmonize, give effect to all the provisions of the contract so that none will be rendered meaningless, and give policy terms their ordinary and commonly understood meaning unless the policy itself shows the parties intended a different, technical meaning.

At issue is whether the theft of the copper is covered under the UNIC policy. The parties do not dispute that the copper is property described in the policy and states a limit in the amount of $500,000. The policy contains an excess “other insurance” clause, which will vary, limit, or eliminate the insurer’s obligation to reimburse the insured where other insurance may cover the same loss. The well-known and evident purpose of such “other insurance” clauses is to avoid and guard against the moral hazards and attendant temptations to fraud which might be reasonably expected to arise out of the existence of undisclosed concurrent policies of insurance having identity of scope and of subject matter. The parties further, did not dispute that the two policies cover the same property — BMI’s copper — against the same risk of theft.

The parties agree that, by storing BMI’s goods in MTS’s warehouse, the two formed a bailor-bailee relationship. Texas law allows a bailee to insure bailed goods for their full value, for the benefit of itself and the bailor.

Under Texas law, MTS insured both its interest and BMI’s interest. Even if SMA can point to distinct “insurable interests” between the UNIC policy and the Aon policy, their coverage need not be completely coextensive to be considered “other insurance” as to each other. Both policies cover at least BMI’s interest in the copper itself. This sufficiently constitutes coverage of the same interest under the “other insurance” test. Wherever there are two separate insurers liable for the same loss the fact that one policy covers more property or wider risks than the other does not prevent the insurance being double on the subjects covered by both.

The Fifth Circuit held that both the UNIC policy and the Aon policy are in favor of BMI. The UNIC policy provides that UNIC’s payment for loss of or damage to personal property of others will only be for the account of the owner of the property. As the district court correctly noted, the plain meaning of the phrase for the account of suggests that the UNIC policy covers the personal property of others on behalf of, or for the benefit of, the owners of the property. Furthermore, the policy limits any payment “only” to the account of the owner of the personal property, thereby demonstrating the parties’ intent to solely benefit the owner of the property and not the insured.

Consequently, because the owner of the copper is BMI, any loss incurred under the UNIC policy would actually be paid to BMI, and thus the UNIC policy is in favor of BMI. As there is no dispute that the Aon policy is also in BMI’s favor, this element of the “other insurance” test is also satisfied.

The UNIC policy and the Aon policy thus cover the same property and interest therein, i.e., BMI’s interest in the copper; against the same risk, i.e., theft; and in favor of the same party, i.e., BMI. The Fifth Circuit concluded that the Aon policy constitutes “other insurance” with respect to the UNIC policy. Pursuant to the clear and unambiguous exclusion no coverage exists under the UNIC policy for the thefts of BMI’s copper.

MTS now must face a subrogation claim without liability insurance coverage has no bearing here because the UNIC policy is a first-party property policy and does not provide liability coverage of any kind. Property insurance policies are intended solely to indemnify the insured for his actual monetary loss by the occurrence of the disaster. Liability policies, on the other hand, insure against loss arising out of legal liability, usually based upon the assured’s negligence.

While a liability policy may insure against a loss arising out of the subrogation claim MTS now faces, MTS chose not to procure such insurance.

ZALMA OPINION

Available to a warehouseman like MTS are first party policies that provide coverage for its property and property of its customers in its care, custody, and control to avoid liability suits. Also available are third party liability policies that would promise to defend and indemnify the insured if suit for its negligence caused a loss to its insured. It either failed to acquire liability insurance or refused to make claim to its liability insurer.

The failure to buy the coverage they needed leave MTS open to a suit from BMI’s insurer out of its own pocket.

First party insurance is different from third party insurance as an apple is from an automobile. Never the twain shall meet and the only similarity between the two is the use of the work “insurance.”