Appeal and cross-appeal from a declaratory judgment filed in the District of Connecticut by Judge T. Emmet Clarie, apportioning liability equally between two insurers whose excess/umbrella policies both covered the same underlying accident. Remanded with instructions to divide liability in proportion to policy limits.
Lumbard, Pratt, and Altimari, Circuit Judges.
This declaratory judgment action arises from a dispute between two excess insurers, Continental Casualty Company and Aetna Casualty and Surety Company, over their respective rights and obligations regarding coverage for a motor vehicle accident. On February 2, 1987, Judge T. Emmet Clarie filed judgment in the District of Connecticut, apportioning excess liability equally between the two insurers. Continental appeals, arguing that Aetna should bear the full burden of excess coverage because it insured the car involved in the accident -- in lexicon of the insurance industry, because "coverage follows the car." Aetna cross-appeals on the ground that the language of the two policies makes Continental's liability prior to Aetna's. If liabilities apportioned, Aetna contends further, it should not be divided equally but in proportion to the respective policy limits. We affirm, but modify the judgment to apportion liability based upon policy limits.
In lieu of a trial, the parties submitted stipulated facts, including four insurance policies, to the district court. On December 17, 1977, James Flynn, Sr. (Mr. Flynn), president and sole shareholder of North Atlantic Oil, Ltd., loaned the company's corporate car, a Cadillac registered in North Atlantic's name, to his 16-year-old son and asked him to run a family errand. While driving the Cadillac, James, Jr. was involved in a major automobile accident in Fairfield, Connecticut, which left Jo Ann Strait seriously and permanently injured. Subsequently, Charles M. Strait, Jo Ann's conservator, brought suit against James, Jr. in state court. The case settled before trial for $2,479,319, pursuant to a structured settlement agreement.
Four insurance policies issued by four different insurers covered James, Jr. The Hartford Accident and Indemnity Company contributed the maximum amount of $500,000 under its primary automobile liability policy issued to North Atlantic, which covered the Cadillac. Continental and Aetna paid the remaining $1,979,319 of the settlement, explicitly reserving their right to have their obligations determined in this action. Continental paid pursuant to its excess liability policy issued to Mr. Flynn, because the policy covered Mr. Flynn and his family members while driving non-owned vehicles. Continental's policy contained a $5,000,000 policy limit. Aetna's liability derived from an excess liability policy issued to North Atlantic. This policy covered permissive users of North Atlantic's vehicles, including the Cadillac. The maximum amount of Aetna's policy is $2,000,000. The parties agreed that American Insurance Company, the fourth insurer which issued a $100,000 policy to Mr. Flynn on his personally owned Camaro, would pay $30,000 in full satisfaction of its potential liability. Tath sum will be divided between Continental and Aetna in accordance with our decision.
Both Contintental and Aetna policies are excess/umbrella policies containing "other insurance" clauses. Continental's policy states, "this policy provides coverage over and above any of your other insurance policies." The policy defines "you, your or yours" to mean "the person named in the declarations [Mr. Flynn] and his or her spouse." Aetna's policy provides, in pertinent part, "the insurance afforded by this policy shall be excess insurance over any other valid and collectible insurance available to the insured and applicable to any art of ultimate net loss . . . unless such other insurance specifically applies as excess insurance over the limits of liability provided in this policy" (emphasis delete). It defines "insured" as "any person while using [the Cadillac] . . . provided its actual use is with the permission of [North Atlantic]."
As our jurisdiction rests upon diversity of citizenship, we apply Connecticut law. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188(1938). Do the two "other insurance" clauses in fact conflict with each other? We think so. Relying on Continental's definition of "you, your or yours" as Mr. Flynn and his wife, Aetna argues that Continental's "other insurance" clause only makes Continental's liability excess "to additional insurance policies owned by Mr. and Mrs. Flynn" (emphasis added). Aetna therefore concludes that it escapes liability because North Atlantic, not Mr. or Mrs. Flynn, owns its policy. Judge Clarie brushed this argument aside, stating that "such a conclusion on its face is not tenable; obviously, ['your'] was used only in a generic sense." We agree.
Aetna's argument depends upon its equation of "your other insurance policies" with policies owned by Mr. or Mrs. Flynn. We are not persuaded. We interpret Continental's reference to Mr. or Mrs. Flynn's other policies to man other policies available or paid to them or someone claimant derivatively through them. As the proceeds of the Aetna policy are available or payable to James, Jr., whose coverage from Continental derives from Mr. Flynn, we concluded that Continental's "other insurance" clause, by its own terms, purports to make its liability excess to Aetna.
This construction more closely comports with the common sense meaning of Continental's "other insurance" clause -- Aetna never explained why Continental would want to make its liability excess only to those policies owned by Mr. or Mrs. Flynn, and not to other policies which paid to them or others claiming through them. Nor does the fact that Aenta's "other insurance" clause more explicitly describes the scope of its liability alter our conclusion. We agree with Judge Clarie that ranking policies in this manner "would serve to encourage insurance companies to compete endlessly for the ultimate language to be used in excess clauses," for no good reason.
Continental does not dispute that Aetna's policy purports to make its liability subordinate to Continental's. Accordingly, we hold that the excess clauses of Aetna and Continental are mutually repugnant.
Continental contends that when two excess policies conflict, the excess policy of he automobile's owner should pay prior to the excess policy covering the nonowning driver of the automobile -- in other words, "coverage follows the car." Continental begins by arguing that the basic coverage of the automobile owner precedes the basic coverage of the non-owning driver, citing, e.g., Union Ins. Co. v. Farmland Ins. Co., 389 N.W.2d 820, 822 (S.Dak. 1986), and Indiana Ins. Co. v. American Underwriters, Inc., 290 N.E.2d 784, 786 (Ind. Ct. App. 1972), and that a driver's basic policy comes before the owner's umbrella policy. It reasons that the next logical step in the "evolution" of insurance policy classification would be to require the owner's umbrella policy to pay before the driver's umbrella policy, thus absolving Continental of liability. We disagree.
Continental's premise that the owner's basic coverage pays prior to the driver's basic coverage is not entirely accurate. A substantial number of the cases ostensibly applying this principle merely follow "the general rule that where an excess clause and pro-rata clause appear in concurrently effective automobile liability policies, the pro-rata clause is disregarded and full effect is given to the excess clause, making the pro-rata policy the primary insurance." Cosmopolitan Mut. Inc. Co. v. Continental Cas. Co., 28 N.J. 554, 147 A.2d 529, 533 (1959). See also Allstate Ins. Co. v. Atlantic National Ins. Co., 202 F. Supp. 85, 87 (S.D.W.Va. 1962); 8A J. Appleman & J. Appleman, Insurance Law & Practice, 4909.45 at 425-27 (Rev. ed. 1981). Continental admits this, but contends that "the prevalence of non-owned car' [sic] excess clauses . . . merely reflects the general acceptance of the [coverage follows the car] principle by the insurance industry." We find such circular reasoning to be wholly unpersuasive.
The "coverage follows the car" principle also lacks a persuasive rationale. When the courts which apply the principle bother to state its rationale, they explain that the car is closer to the risk than the driver. See Transamerican Ins. Co. v. Austin Farm Center, Inc., 354 N.W.2d 503, 508 (Minn.Ct.App. 1984). It is difficult to see how this relationship is capable of measurement. As a leading insurance law treatise states, "[a]n equally reasonable argument could ...