On October 24, 2012, the Appeals Court of Massachusetts affirmed that an excess insurer’s liability extends only to the amount of loss that exceeds the amount of coverage available from underlying insurance, and not, under usual circumstances, to the total amount of loss.
In Les Realty Trust ‘A’ & others v. Landmark American Insurance Company, No. 11-P-747 (Mass. App. Ct. 2012), the insured owners of two Louisiana apartment complexes sought coverage for damage to their property caused by Hurricane Katrina in August 2005. The insureds’ insurance program included a primary policy with a limit of $2.5 million per occurrence, and an excess policy with a limit of $100 million per occurrence. The excess policy, which had been issued by defendant Landmark American Insurance Company, expressly stated that the $100 million per occurrence limit of liability “was not to exceed [the] value reported.” Despite that the stated value of the insureds’ property was reported at $8.7 million, the insureds sought coverage for losses in excess of $8.7 million under the theory that exhaustion of the primary policy limits merely triggered, but did not reduce, the excess insurer’s obligation to pay up to the full amount of the stated value of the damaged property. The insureds relied on the definition of “ultimate net loss” in the excess policy and a “scheduled limit of liability” endorsement to the excess policy in support of their argument that the excess insurer was liable for the entire loss, without any deduction for amounts paid by the primary insurer.
Rejecting the insureds’ argument, the Court determined that the insureds’ analysis was inconsistent with two fundamental principles of insurance. First, the Court found that the insureds’ policy interpretation was dependent upon a reading of the referenced policy provisions in isolation, contrary to the well-established rule requiring that policy provisions be construed in light of the policy as a whole. The Court determined that when viewed in light of other related policy terms, neither the definition of “ultimate net loss” nor the “scheduled limit of liability” endorsement supported the insureds’ analysis. Second, the Court observed that the insureds’ claim that they were entitled to recover 100 percent of the $8.7 million stated value of the damaged properties from the excess policy, even after the $2.5 million primary policy limits had been paid, was inconsistent with the traditional relationship between primary and excess insurance. The Court explained that, absent a specific policy provision to the contrary, primary and excess insurers do not act as “coinsurers” of the whole risk. Rather, the court cogently and correctly noted that each insurer contracts with the insured to cover a particular portion of the risk. Accordingly, the Court determined, Landmark’s liability under the excess policy was limited to the $8.7 million stated value of the damaged property, less the $2.5 million limit paid by the primary insurer.