514 F.3d 327 (4th Cir. 2008), 06-2156, Horace Mann Ins. Co. v. General Star Nat. Ins. Co.
| Citation | 514 F.3d 327 |
| Party Name | HORACE MANN INSURANCE COMPANY, Plaintiff-Appellee, v. GENERAL STAR NATIONAL INSURANCE COMPANY, Defendant-Appellant. |
| Case Date | January 23, 2008 |
| Court | United States Courts of Appeals, U.S. Court of Appeals — Fourth Circuit |
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Argued: Sept. 26, 2007.
Appeal from the United States District Court for the Northern District of West Virginia, at Clarksburg. Irene M. Keeley, Chief District Judge. (1:04-cv-00163-IMK)
ARGUED:
Jeffrey Alan Holmstrand, McDermott & Bonenberger, P.L.L.C., Wheeling, West Virginia, for Appellant.
Daniel C. Cooper, Bridgeport, West Virginia, for Appellee.
ON BRIEF:
Jamison
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H. Cropp, Steptoe & Johnson, Clarksburg, West Virginia, for Appellee.
Before NIEMEYER and TRAXLER, Circuit Judges, and Samuel G. WILSON, United States District Judge for the Western District of Virginia, sitting by designation.
Reversed and remanded by published opinion. Judge Traxler wrote the majority opinion, in which Judge Wilson joined. Judge Niemeyer wrote a dissenting opinion.
OPINION
TRAXLER, Circuit Judge:
This appeal involves a dispute between two insurance companies, with each company claiming that the insurance provided by its policy was "excess" to the other insurance and that its coverage therefore was not triggered until the limits of the other company's policy were exhausted. The district court granted summary judgment in favor of Horace Mann Insurance Company, concluding that its policy was excess to the policy issued by General Star National Insurance Company. General Star appeals. We reverse the decision of the district court and remand for entry of judgment declaring the General Star policy excess to the Horace Mann policy.
I.
A West Virginia high school student was sexually abused by a teacher, and the student filed suit against numerous defendants, including the school board and the school principal. The parties settled the claims for an amount in excess of $1,000,000.
West Virginia law requires the State Board of Risk and Insurance Management to provide a minimum of $1,000,000 of liability insurance coverage for all county school boards and their employees. See W.Va. Code § 29-12-5a. The board must also provide a minimum of $5,000,000 in excess liability insurance coverage. See id.
In this case, the statutorily required first layer of liability insurance was provided by National Union Fire Insurance Company, and the $5,000,000 in excess liability coverage was provided by General Star. National Union contributed its policy limits to the settlement of the student's claims, and General Star, as excess insurer, contributed the balance of the settlement amount.
General Star thereafter sought reimbursement from Horace Mann Insurance Company, which had issued to the school principal a policy providing some coverage for the student's claim. Believing that its policy provided no coverage until the limits of the General Star policy were exhausted, Horace Mann commenced this declaratory judgment action seeking a declaration of the parties' obligations with regard to the settlement.
The district court granted summary judgment in favor of Horace Mann. The district court compared the language of the "other insurance" clauses contained in the General Star and Horace Mann policies and concluded that the Horace Mann policy was excess to all other insurance policies, while the General Star policy contemplated situations where other policies would be excess to its coverage. The district court therefore concluded that the language of the policies required the limits of the General Star policy to be exhausted before any contribution was required under the Horace Mann policy
II.
On appeal, General Star argues that its policy is a true excess policy, unlike the
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Horace Mann policy, which provides primary coverage that sometimes becomes excess by virtue of an "other insurance" clause. General Star argues that it is a well-established principle of insurance law that true excess policies are always excess to policies that provide primary coverage, and that the district court therefore erred by granting summary judgment in favor of Horace Mann.
As we will explain, we agree with General Star that its status as a true excess insurer requires us to reverse the decision of the district court. Before delving into the details of General Star's argument, however, we believe it will be helpful to first discuss the nature and operation of primary and excess liability insurance policies. Because we are sitting in diversity, our role is to apply the governing state law, or, if necessary, predict how the state's highest court would rule on an unsettled issue. See Private Mortgage Inv. Servs., Inc. v. Hotel & Club Assocs., Inc., 296 F.3d 308, 312 (4th Cir. 2002). Accordingly, where there is West Virginia law addressing a particular question, we will follow it. But if the West Virginia courts have not addressed an issue, we will look to generally accepted principles of insurance law, because we believe that West Virginia's Supreme Court of Appeals would adopt those principles as its own.
A.
Primary liability insurance "provides the first layer of insurance coverage. Primary coverage attaches immediately upon the happening of an 'occurrence,' or as soon as a claim is made. The primary insurer is first responsible for defending and indemnifying the insured in the event of a covered or potentially covered occurrence or claim." Gauze v. Reed, 219 W.Va. 381, 633 S.E.2d 326, 332 (2006) (internal quotation marks omitted). "Because most losses are within primary policy limits and therefore create greater exposure for primary insurers, and because primary insurers are generally obligated to defend their insureds, primary insurers charge larger premiums for coverage than do excess and umbrella carriers." Id. (internal quotation marks omitted)
Excess liability policies, by contrast, do not provide first-dollar coverage for insured losses, but instead provide an additional layer of coverage for losses that exceed the limits of a primary liability policy. Coverage under an excess policy thus is triggered when the liability limits of the underlying primary insurance policy have been exhausted. See id. ("In keeping with the reasonable expectations of the parties, including the insured, which paid separate premiums for its primary and excess policies, excess coverage generally is not triggered until the underlying primary limits are exhausted by way of judgments or settlements." (internal quotation marks and citation omitted)); 15 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 220:32 (3d ed. 2005) ("The purpose of . . . excess . . . coverage is to protect the insured in the event of a catastrophic loss in which liability exceeds the available primary coverage. Accordingly, it is only after the underlying primary policy has been exhausted does the excess . . . coverage kick in." (footnote omitted)). "Excess insurance is priced on the assumption that primary coverage exists: indeed, an excess policy usually requires by its terms that the insured maintain in force scheduled limits of primary insurance."1 Gauze, 633 S.E.2d at 332 (internal quotation marks omitted).
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The General Star policy at issue in this case is a typical excess policy. The policy describes itself an excess liability policy, see J.A. 25 ("Certificate of Excess Insurance"), and the declarations on the first page of the policy include a listing of the required underlying insurance and define the coverage as limited to occurrences where liability is "in excess of the limits" of the underlying insurance, J.A. 25. The policy's insuring agreement likewise clearly defines the coverage as excess in nature. See J.A. 31 ("The Company shall indemnify the insured for ultimate net loss in excess of the underlying insurance stated in Item 2 of the Declarations, but not in excess of the Company's limits of liability stated in Item 3 of the Declarations.").
The Horace Mann policy is an "educators employment liability" policy issued to the school principal by virtue of his membership in the National Education Association. J.A. 16. It provides for $1,000,000 of coverage per member per occurrence for claims other than civil rights claims; $300,000 of coverage for civil rights claims; reimbursement of up to $35,000 for attorney's fees incurred in successfully defending a criminal action; and $1,000 bail bond premium reimbursement. Whether the policy is a primary or excess policy is a matter of some dispute that we will address in detail later in the opinion. For the moment it suffices to say that the policy appears to provide first-dollar, primary liability insurance coverage for the specified risks.
B.
Under certain circumstances, a primary liability insurance policy may in fact provide only excess liability coverage. Because multiple insurance policies may cover a given loss, liability insurance policies generally contain "other insurance" clauses that attempt to define the insurer's responsibility for payment when other insurance coverage is available. These clauses typically take the form of a pro-rata clause, an escape clause, or an excess clause. A pro-rata clause "limit[s] the insurer's liability to its pro rata share of the loss in the proportion that its policy limits bear[ ] to the aggregate of available liability coverage." State Farm Mut. Auto. Ins. Co. v. U.S. Fidelity & Guar. Co., 490 F.2d 407, 410 (4th Cir. 1974). An escape clause provides that the insurer will have no liability to the insured when other insurance coverage is available, while an excess clause provides that the insurer will be liable only after the exhaustion of the limits of any other applicable insurance. See id.; see also 15 Russ & Segalla, Couch on Insurance § 219:5.
A primary liability insurance policy that contains an excess other-insurance clause thus effectively operates as an excess policy if other...
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Caveat settlor: insurance coverage settlements and the triumph of policy language over precedent.
...policy is written at a lower premium than that of the primary policy."). (166) See Horace Mann Ins. Co. v. Gen. Star Nat'l Ins. Co., 514 F.3d 327, 334 (4th Cir. 2008) ("[T]he general rule is that as between a true excess policy and a primary liability policy with an other-insurance clause, ......