What you need to know:

The Massachusetts Appeals Court ruled that an excess insurance policy covered the insured’s loss above primary policy limits, up to the scheduled property value—and did not provide coverage overlapping with the primary policy, providing in effect for two sets of primary policy limits—where the policy defined “ultimate net loss” to mean “loss sustained by the Insured . . . after making deductions for . . . other valid and collectible insurance other than recoveries under the policy(ies) of the primary and underlying excess insurer(s).”

What you need to do:

Companies should consider the impact of the Massachusetts Appeals Court’s ruling in determining whether insureds are entitled to coverage under excess property insurance policies.

Background

The Landmark Insurance Company insured the owners of two apartment complexes in Louisiana under an excess policy. Landmark agreed “to indemnify the Insured named in the schedule herein in respect of direct physical loss or damage to the property described in the schedule.” The policy provided that coverage would not attach until “the primary and underlying excess insurer(s) have paid or have admitted to liability for the full amount of their respective ultimate net loss liability.” It defined “ultimate net loss” to mean “loss sustained by the Insured . . . after making deductions for . . . other valid and collectible insurance other than recoveries under the policy(ies) of the primary and underlying excess insurer(s).” The property described in the schedule was listed as having a value of $8.7 million, though the damage to the property from Hurricane Katrina exceeded that amount. The primary insurer paid its entire per occurrence limit of $2.5 million, and Landmark paid the remainder of the scheduled value, $6.2 million.

The policyholder contended that Landmark was liable for the entire ultimate net loss, without any deduction for amounts paid by the primary insurer. The policyholder thus argued that it was entitled to recover $11.2 million on property with a scheduled value of $8.7 million. The trial court disagreed, granting summary judgment that Landmark was liable only for the stated values of the property, minus the limits paid by the primary insurer. The Massachusetts Appeals Court affirmed. See LES Realty Trust “A” v. Landmark Am. Ins. Co., No. 11-P-747, 2012 Mass. App. LEXIS 272 (Mass. App. Ct. Oct. 24, 2012).

The Court’s Ruling

The Massachusetts Appeals Court held that:

  • “Limit” Clause: The policy’s “Limit” clause clearly provided that Landmark’s liability attached after the primary and other underlying insurers paid their respective portions of the ultimate net loss, and would not exceed the reported value of property.
  • Limit of Liability Endorsement: The policy’s limit of liability endorsement did not provide that Landmark was liable for the entire ultimate net loss, without deduction of the primary policy limits. The endorsement provided that Landmark’s liability was the least of the actual amount of the loss, less deductibles; 100% of the stated property value insured, less deductibles; or the limits of liability. The court held that the endorsement “sets the upper limits of Landmark’s liability; it does not, in itself, purport to change the nature of the policy from one providing excess coverage to one providing overlapping coverage.”
  • "Drop Down” Clause: The court held that the policy’s “drop down” clause confirmed that the primary and excess policies did not provide “overlapping” coverage. The drop down clause provided that “in the event of reduction or exhaustion of the underlying aggregate limit or limits, such insurance as is afforded by this Policy shall apply in excess of the reduced underlying limit, or if such limit is exhausted, shall apply as underlying insurance.” The court held that “[i]f, as the [policyholders] contend, they are entitled to recover from Landmark 100 percent of the stated value of the damaged properties even after the $2.5 million primary policy limits have been paid, they would be afforded excess coverage in the full amount of the stated values in situations where the primary policy has been paid in full, even though, in drop down situations, they would be afforded coverage only in excess of the reduced underlying limits.”

Conclusion

The Massachusetts Appeals Court ruled that, giving a reasonable interpretation to all policy provisions, Landmark’s policy functioned as an excess policy and covered only the stated values of the property, minus the limits paid by the primary insurer.