State Farm Mut. Auto. Ins. Co. v. Bogart

• Decision Date: 27 March 1986
• Docket Number: No. 18116-PR,18116-PR
• Citation: 149 Ariz. 145,717 P.2d 449
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a corporation, Plaintiff- Appellant, v. Joseph K. BOGART and Donna M. Bogart, his wife; the Hertz Corporation, a Delaware corporation; Employers Insurance of Wausau, a mutual company; John J. May and Margaret May, his wife, Defendants-Appellees.
• Court: Arizona Supreme Court

Page 449

717 P.2d 449

149 Ariz. 145

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a corporation, Plaintiff- Appellant, v. Joseph K. BOGART and Donna M. Bogart, his wife; the Hertz Corporation, a Delaware corporation; Employers Insurance of Wausau, a mutual company; John J. May and Margaret May, his wife, Defendants-Appellees.

No. 18116-PR.

Supreme Court of Arizona, In Banc.

March 27, 1986.

Hofmann, Salcito, Stevens & Myers by Leroy W. Hofmann, Phoenix, for plaintiff-appellant.

Leonard & Clancy by Kenneth P. Clancy, Phoenix, for defendants-appellees Bogart.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by Noreen L. Sharp, Phoenix, for defendant-appellee Hertz Corp.

Browder & Kenney by Robert W. Browder, Phoenix, for defendant-appellee Employers Ins. of Wausau.

FELDMAN, Justice.

We have accepted review of this declaratory judgment action to resolve an apparent conflict between "other insurance" clauses in two insurance policies. One policy contains an "escape clause" and the other an "excess clause." Both policies are potentially applicable to the same occurrence. The trial court granted summary judgment and ordered that the loss be prorated between the two insurers in the proportion which the limits of each policy bear to the total available limits. The court of appeals reversed, giving full effect to the escape clause. State Farm Mutual Auto Insurance Co. v. Bogart, 149 Ariz.App. 154, 717 P.2d 458 (1985). Since the case raises issues of first impression in Arizona, we granted review pursuant to Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3), A.R.S. §§ 12-1837 and 12-120.24.

FACTS

On October 2, 1978, John May (May) rented an automobile from a Maricopa County office of the Hertz Corporation (Hertz). May was in Arizona on business for his employer, the Xerox Corporation (Xerox). While driving the car on Xerox business, May was involved in an accident with Mr. and Mrs. Bogart (the Bogarts), both of whom were injured. The insurance situation with respect to the rented car was as follows:

1. Hertz is required by statute to provide liability insurance coverage for the drivers of cars which it owns and rents. See A.R.S. § 28-324. However, Hertz avoided this requirement by qualifying as an Arizona self-insurer pursuant to A.R.S. § 28-1222.

2. Xerox had purchased a comprehensive automobile liability policy providing both owned and non-owned automobile coverage from the Employers Insurance Company of Wausau (Employers). It included an endorsement specifically covering Xerox employees as insureds, "but with respect to a non-owned automobile only while such automobile is being used in the business of [Xerox]."

3. May was a named insured on an owner's liability insurance policy issued to him on his personal automobile by State Farm Mutual Automobile Insurance Company (State Farm). This policy also provided May with non-owned vehicle coverage.

The Bogarts brought a damage action against May. Hertz defended him and eventually settled with the Bogarts for $200,000, the maximum amount for which May's defense was then taken over by both State Farm and Employers. Eventually the Bogarts obtained a judgment of $609,198. Subtracting the $200,000 paid by Hertz, May was liable for an additional $409,198. The Employers policy provided $500,000 in coverage for the occurrence in question, while the State Farm policy provided coverage of $200,000. If the State Farm policy is applicable, there is a total of $700,000 in coverage.

[149 Ariz. 147] Hertz was responsible under its car rental contract. As part of the settlement the Bogarts agreed not to execute against May's personal assets.

State Farm refused to pay any part of the judgment and filed a declaratory judgment action (A.R.S. § 12-1831 et seq). It asked the court to find its "escape clause" valid and to hold, therefore, that State Farm provided no coverage. Employers counterclaimed, requesting that the court find that State Farm did provide coverage for this occurrence and that any coverage provided by Employers was not only excess as to Hertz but was also excess as to State Farm.

The trial judge ruled on cross-motions for summary judgment. He held that State Farm's escape clause was unenforceable and that Employers' coverage was not excess to State Farm. The judgment finds that both Employers and State Farm are primary carriers and holds that payment of the unpaid balance of the judgment is to be prorated, two-sevenths to State Farm and five-sevenths to Employers.

State Farm appealed. The court of appeals reversed, holding that Hertz provided primary coverage and that both State Farm and Employers were therefore excess carriers. The court then held that State Farm's escape clause was valid and applicable; thus, Employers must pay the entire unpaid balance of the judgment. Employers petitioned for review, arguing that the declaratory judgment should be affirmed.

THE "OTHER INSURANCE" CLAUSE

No field of insurance law has been so perplexing and productive of litigation as the battles between alleged excess carriers seeking contribution or escape from payment of losses. State Farm Mutual Automobile Insurance Co. v. United States Fidelity and Guaranty Co., 490 F.2d 407, 410 (4th Cir.1974). Because we believe it will shed some light on the proper disposition of the issues before us, we first consider the purpose and nature of "other insurance" clauses. These clauses originated in property insurance and were initially inserted to discourage an insured from over-insuring against a particular loss. Sloviaczek v. Estate of Puckett, 98 Idaho 371, 372-73, 565 P.2d 564, 566 (1977). Thus, the idea of reducing an insurer's liability where there was "other insurance" covering the loss originally protected the insurer against fraudulent recovery. Id. Nevertheless, "other insurance" provisions came to be included in many liability policies even though the possibility of over-insurance inducing fraudulent claims was remote in such losses. Id. As automobile insurance policies began to provide protection beyond coverage for a specific insured and vehicle, multiple coverage situations became common. As a result, many losses are covered by more than one policy, thus triggering "other insurance" clauses which are now standard in most insurance policies.

"Other insurance" clauses fall into three general categories. First is the excess clause which states that the insurer provides liability coverage only for amounts due after all other available insurance has been exhausted. Second is the prorata clause, limiting the insurer's liability to a share of the loss to be determined by the proportion that the insurer's policy limit bears to the aggregate of available limits. Third are escape clauses, which provide that a policy which would otherwise cover the loss will afford no coverage at all in the event that there is other insurance available. State Farm v. United States Fidelity and Guaranty Co., 490 F.2d at 410; Comment, Double Insurance Coverage in Automobile Insurance Policies--The Problem of "Other Insurance" Clauses, 47 TUL.L.REV. 1039 (1973).

With this brief background, we now turn to the clauses in question. The Employers policy provided primary coverage for Xerox employees in almost every situation, except it expressly provided as follows:

With respect to a hired automobile, or a non-owned automobile, this insurance shall be excess insurance over any other valid and collectible insurance available to the insured. (emphasis omitted)

This is a true excess clause, obviously intended to make the owner's coverage primary and the Employers non-owned coverage excess in those situations in which Xerox employees drove rented or non-owned automobiles.

The State Farm policy also contains a provision stating that "The insurance with respect to ... a non-owned automobile, shall be excess over other insurance...." However, the same clause goes on to state that there shall be no coverage at all if the non-owned vehicle is a rented automobile covered by other insurance which applies "in whole or in part" to the loss. Thus, the State Farm policy contains an excess clause for non-owned vehicles plus an escape clause applying to rented vehicles which have any other coverage, regardless of amount. If we were dealing with two excess clauses, the solution would be quite simple. In Arizona,

... where two policies cover the same occurrence and both contain "other insurance" clauses, the excess insurance provisions are mutually repugnant and must be disregarded. Each insurer is then liable for a prorata share of the settlement or judgment.

Harbor Insurance Co. v. United Services Automobile Association, 114 Ariz. 58, 63, 559 P.2d 178, 183 (App.1976) (dealing with two true excess clauses). This is also the general rule throughout the country. See 8A J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4909 at 396. No other rule is possible, since if a court were to give literal effect to each of the excess clauses, each policy would be cancelled out and the final result would depend upon which policy was read first. ¹ Sloviaczek v. Estate of Puckett, 98 Idaho at 374, 565 P.2d at 567.

However, the two clauses with which we deal here do not automatically cancel themselves out. 8A J. APPLEMAN, supra, § 4910 at 470. Under the peculiar facts of this accident the battle between insurers matches unequal contestants. Employers' entry is a true excess clause. The State Farm entry, on the other hand, is a combined excess-escape clause which excludes all non-owned coverage for rented automobiles whenever there is other insurance, regardless of whether the primary insurance covers all or only part of the entire loss, and regardless of whether any other excess insurance is sufficient to cover the entire loss. Thus, the weapons which arm the State Farm contestant in this battle are aimed not only at the other insurer but also at its own insured;...