Other Insurance Clause Raises Actual Controversy

[ON MY RADAR] By Barry Zalma

Other Insurance Clause Raises Actual Controversy Self-Insured & Insurer “Other Insurance Clause”

When two or more insurers agree to insure against the same risk of loss disputes often arise as to which insurer must pay on a primary basis, which is excess or whether they must share the liability of the insured on a pro rata basis. In Cinoman v. University of North Carolina, — S.E.2d —-, 2014 WL 2937050 (N.C.App.), the North Carolina Court of Appeal was called upon to resolve the dispute, not once but twice. In its final review of the case the court made its final order.

FACTS

Plaintiffs Michael I. Cinoman, M.D. and Medical Mutual Insurance Company of North Carolina (“MMIC”) appeal from an order granting UNC defendants’ motion to stay this declaratory action pending a final resolution of the underlying malpractice action.

In February 1999, Dr. Cinoman served as a temporary attending physician for fulltime rotations in the University of North Carolina Hospital at Chapel Hill Pediatric Intensive Care Unit (“UNC–PICU”) as part of an agreement to assist UNC defendants with a staffing shortage in the UNC– PICU. On 21 June 2007, Thomas M. Stern, as guardian ad litem for Armani Wakefall, initiated a medical malpractice action against Dr. Cinoman and others for damages allegedly incurred by Wakefall as a result of negligent treatment she received at the UNC–PICU in February 1999 (“underlying malpractice action”). Dr. Cinoman is insured under a professional liability insurance policy issued by MMIC, which has treated its coverage as broad enough to cover the claims asserted against Dr. Cinoman in the underlying malpractice action. UNC defendants maintained that Dr. Cinoman is not entitled to coverage under the University of North Carolina Liability Insurance Trust Fund (“UNC–LITF”), which provides coverage for claims against employees and agents of UNC defendants, because he was not a full-time employee of UNC defendants at the time of the events giving rise to the underlying malpractice action.

In the absence of coverage by the UNC–LITF, the damages demanded in the underlying malpractice action allegedly exceed Dr. Cinoman’s professional liability insurance coverage.

Dr. Cinoman and MMIC filed this declaratory judgment action to determine whether he is entitled to coverage under the UNC–LITF, in addition to his coverage under the MMIC policy, and the relative liabilities of MMIC and the UNC–LITF. Plaintiffs and UNC defendants moved for summary judgment, and the trial court granted summary judgment in favor of UNC defendants. After the trial court decision was reversed the UNC defendants moved to stay further proceedings in the declaratory relief action pending the final resolution of the underlying malpractice action.

On appeal, it was claimed that the trial court erred by granting the stay based on its determination that no actual controversy exists as to the UNC–LITF’s duty to indemnify until the underlying malpractice action is finally resolved.

ANALYSIS

An actual controversy between adverse parties is a jurisdictional prerequisite for a declaratory judgment. An actual controversy exists where an insurer seeks a determination that primary coverage is not provided under its policy and is instead provided under policies issued by other insurers. No such controversy exists, however, in a declaratory judgment action to determine whether coverage is provided under an excess insurance policy where the underlying liability action has not yet been resolved.

When more than one insurance policy affords coverage for a loss, the “other insurance” clauses in the competing policies must be examined to determine which policy provides primary coverage and which policy provides excess coverage. An excess clause is a type of “other insurance” clause which “generally” provides that if other valid and collectible insurance covers the occurrence in question, the excess policy will provide coverage only for liability above the maximum coverage of the primary policy or policies. An excess clause is distinguishable from a pro rata “other insurance” clause. Where a pro rata clause in one policy competes with an excess clause in another policy, the policy with the pro rata clause provides primary coverage, and the policy with the excess clause provides secondary coverage which will only be triggered if the limits of the policy containing the pro rata clause are first exhausted.

In general, there is no primary versus excess insurance policy relationship where a self-insurance program is at issue because self-insurance does not constitute other collectible insurance within the meaning of an insurance policy’s “other insurance” clause. Self-insurance is equivalent to a primary insurance policy, however, when the self-insurance expressly provides that it is primary to other insurance.

The UNC–LITF is a self-insurance program for professional liability, authorized by state statute. The plain language of the following “other insurance” clause in the UNC–LITF Memorandum of Coverage is controlling:

“When this agreement and other collectible insurance both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for a greater proportion of the loss than that stated in the applicable contribution provision below:

1. Contribution by Equal Shares. If all such other valid and collectible insurance provides for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than would be payable if each insurance company contributes an equal share until the share of each company equals the lowest applicable limit of liability under any one policy or the full amount of the loss is paid. With respect to any amount of loss not so paid, the remaining companies shall continue to contribute equal shares of the remaining amount of the loss until each such company has paid its limit in full or the full amount of the loss is paid.
2. Contribution by Limits. If any of such other insurance does not provide for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than the applicable limit of liability under this agreement for such loss bears to the total applicable limit of liability of all valid and collectible insurance against such loss.”

Nothing in this provision indicates that the UNC–LITF’s liability arises only after the limits of other collectible insurance policies have been exhausted. Rather, the provision provides that the UNC–LITF shares liability with other collectible insurance according to their respective limits.

The pro rata clause means that the UNC– LITF provides primary coverage regardless of the terms of the MMIC policy.

Because the UNC–LITF affords primary coverage, an actual controversy exists as to the UNC–LITF’s duty to indemnify, and the trial court erred by granting the stay based on its determination that no such controversy exists pending a final resolution in the underlying malpractice action.

ZALMA OPINION

Other insurance clauses are important to every dispute between insurers. Although a self-insured program like UNC–LITF is not insurance, when they write into their operational agreement an other insurance clause that requires UNC– LITF to share with other collectible insurance on a pro rata basis it creates a situation where it becomes “insurance” for the purpose of sharing the costs to defend or indemnify the insured. Therefore, hoist on its own petard, UNC–LITF created an actual controversy that must be tried to determine if it owes a share of Dr. Cinoman’s defense.

UNC–LITF could have avoided this decision and problem, if that is what it intended, by rewriting the other insurance clause to read:

When this agreement (which is not insurance) and collectible insurance both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for any costs of defense or indemnity until the other collectible insurance is exhausted.

UNC–LITF wrote their self-insurance program as if it was insurance and must, therefore, if coverage applies, share with MMIC on a pro rata basis.