“Other Insurance” Issues with Additional Insureds and Indemnity

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Excess insurance policies are generally written to be just that; they—through their “other insurance” provisions—purport apply in excess of other insurance available to the insured. In many jurisdictions, courts will commonly enforce “other insurance” provisions that are consistent and disregard “other insurance clauses” that are “mutually repugnant.” See, e.g., Safeco Ins. Co. of Illinois v. Harleysville Ins. Co., 580 F. Supp. 3d 1079, 1084 (M.D. Ala. 2022). This doctrine allows, with appropriate facts and policy language, excess insurers to demand exhaustion of all primary policies before participating in defense or indemnity. However, underlying indemnity obligations can implicate an exception where coverage is afforded under multiple primary and excess policies.

Often times, commercial parties enter into agreements where—in addition to the sale of goods or provision of services—they agree that one party (the indemnitor) will defend against and/or pay claims made against the other party (the indemnitee) by a third party that arise out of the goods or services. These indemnity obligations frequently depend on the identity of the third-party claimant or nature of the third-party claim. These agreements also often require the indemnitor to make the indemnitee an additional insured under their primary and excess insurance policies.

Such circumstances can lead to the application of a “widely recognized exception for cases in which the policy of the insurer seeking to invoke the ‘other insurance’ clauses also covers another insured who is liable to indemnify the insured in the policy of the other insurer.” Am. Indem. Lloyds v. Travelers Prop. & Cas. Ins. Co., 335 F.3d 429, 436 (5th Cir. 2003). One of the leading cases comes from the Eighth Circuit: Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002). There, a supplier agreement required the vendor to indemnify and provide insurance coverage to the buyer. Id. at 585. When one of the products caused an injury and led to a lawsuit, the indemnitee-buyer sought coverage under the policies procured by the indemnitor-vendor. Id. at 585-86. The indemnitor-vendor’s excess insurer argued that its coverage applied after the indemnitee-buyer’s own insurance by virtue of the language of the “other insurance” clause. Id. The court rejected this argument, holding “when we analyze the parties obligations under both the insurance contracts and the indemnity agreement, we conclude that the indemnity agreement controls the outcome of this case.” Id. at 589. Central to the court’s reasoning was the prospect of “circuitous litigation that would still result in [the indemnitor-vendor’s excess insurer] being ultimately liable for the $10 million [settlement].” Id. at 593. Namely:

We think this potential circuity of action is significant, in that it reveals the true nature of the parties’ obligations and relationships with each other. [The indemnitor-vendor’s excess insurer] will ultimately be liable for the $10 million because of [the indemnitor’s] promise to indemnify [the indemnitee] and [the indemnitor-vendor’s excess insurer] contractual-liability coverage in its policy covering [the indemnitee]. To prevent such wasteful litigation and to give effect to the indemnification agreement between the parties, we hold that [the indemnitor-vendor’s excess insurer] cannot recover against [the buyer-indemnitee’s own insurer] . . . . 

Id. at 594. In the end, the court found that the indemnitor-vendor’s insurance applied prior to the indemnitee-buyer’s separate insurance policy. Id. This exception has been applied by many courts in similar situations, leading to what the Eighth Circuit described as “the clear majority of jurisdictions [who] give[] controlling effect to the indemnity obligation of one insured to the other insured over ‘other insurance’ or similar clauses in the policies of the insurers.” Am. Indem. Lloyds v. Travelers Prop. & Cas. Ins. Co., 335 F.3d 429, 436 (5th Cir. 2003) (citing cases from the Eighth Circuit, Florida, California, and the Fifth Circuit).

This exception is important for carriers in commercial disputes with “additional insured” issues in that the agreements between the named insured and additional insured can become central to determining priority. If a claim falls within an indemnity agreement and the indemnitor was required to add the indemnitee as an additional insured, the insurance policies issued to the indemnitor may need to be exhausted prior to contribution from the indemnitee’s own insurance, despite “other insurance” provisions. Carefully analyzing both the policies and the agreements between the insureds may become an important step in determining priority and should be aimed at avoiding circuitous litigation.