The United States District Court for the Eastern District of Michigan, applying Michigan law, has held that: (1) an insurer was estopped from relying on a policy endorsement relating to the existence of other "project-specific" insurance to bar coverage where that coverage defense was first asserted after the insurer represented it would contribute to a settlement; and (2) the insurer could not rely on the policy's excess other insurance clause to bar coverage. URS Corp. v. Travelers Indem. Co., 2007 WL 2221395 (E.D. Mich. July 31, 2007). The court did rule, however, that the underlying lawsuit against the insured for the negligent design of two buildings amounted to "a series of related acts" constituting a single claim with a maximum exposure for the insurer of $1 million.
An insurer issued a professional liability policy to a design company with a per claim limit of $1 million and an aggregate limit of $2 million. The policy included an endorsement providing that the policy does not apply to "[a]ny CLAIM arising from any project for which YOU are an INSURED under any other professional liability policy issued for any specific client(s) or specific project(s)." The policy also contained an "excess" other insurance clause making the policy excess over "other insurance that applies to any CLAIM covered by this policy." In addition, the policy provided that "[o]ne or more CLAIMS arising from the same act, error, or omission or a series of related acts, errors or omissions shall be considered a single CLAIM."
A public school system hired the insured company to design two schools. The school system subsequently filed suit against the company, alleging that the schools were defectively designed.
The company provided notice of this lawsuit to the insurer, which provided a defense under a reservation of rights. The company and the insurer disputed whether the suit constituted a single claim subject to a $1 million limit of liability or two claims. The company filed a coverage action in July 2006. Before the insurer answered the complaint, the company realized that it was potentially insured under another insurance policy with a limit of $5 million that had been purchased by the school system and which covered many companies involved in school construction. After learning of the other policy, the insurer answered the coverage complaint by alleging, among other things, that the other policy provided primary coverage to which its policy was excess, but it did not specifically cite the exclusion related to "specific projects."
During a mediation of the underlying lawsuit in November 2006, the insurer's counsel represented that it would contribute up to $1 million toward settlement. In January 2007, conditional settlement terms were reached. However, after the company sought the insurer's approval to enter into the settlement, the insurer denied coverage on the grounds that the company had project-specific insurance for the lawsuit. The insurer then sought leave to amend its answer in the coverage action to add the Endorsement as an affirmative defense. The parties filed cross-motions for summary judgment addressing: (1) the applicability of the "specific project" Endorsement; (2) the effect of the policy's other insurance clause on the insurer's obligations; and (3) the insurer's potential exposure under the policy.
The district court first held that the insurer was estopped from relying on the endorsement to bar coverage. Although the court was reluctant to use the doctrine of estoppel "to expand coverage beyond what was provided by the contract," it found that it is "proper to do so" where the inequity to the insurer is outweighed by the inequity suffered by the insured because of the insurance company's actions. In reaching this conclusion, the court relied on Michigan cases that applied this reasoning to prevent insurers from first relying on exclusions after the entry of jury verdicts in the underlying litigation. The court observed that insureds are entitled to the same "protection of insurance until the verge of reaching a settlement when the insurer is well aware of the progression of settlement discussions" as insureds who face an insurer's "late-arising assertions" after a jury verdict or close of pretrial activities.
Next, the court rejected the insurer's contention that the other insurance clause prevented the company from recovering under the policy because the settlement was for less than the other applicable policy's $5 million limit. The court distinguished the situation from "true excess" coverage, calling it a case of "coincidental excess coverage" where a policy "would be primary but for the presence of another policy which is primary over itself." The court observed that the issue was complicated by the fact that the company was not the sole insured under the other policy, and that claims for more than the $5 million limit had been made by the company and others against that policy. The court inquired, therefore, whether a coincidental excess insurer's liability begins "only when its insured receives the entirety of the [other] aggregate limit . . . [or whether] the aggregate is met regardless of what the coincidental excess insurer's insured received." Distinguishing the case from an instance where a primary insurer and an excess insurer contract with only one insured, the court concluded that "when an excess insurer contracts to provide coverage to any one and only one of the entities subject to the [primary] policy without providing coverage for all of them together, it has no rational basis of assuming its coverage will begin at any value greater than $0.01" because the other policy could be eroded due to the losses of the other insurance entities. Accordingly, the court held that, while the company could not recover the entire settlement amount from the insurer, the other insurance clause did not serve as a basis for the insurer to deny coverage in its entirety.
Finally, the court agreed with the insurer that the underlying lawsuit alleged a single claim and that its maximum exposure was limited to $1 million. In doing so, the court found that the term "'related' is very broad in its scope, [but] it has a clear definition in the language generally, as well as in the insurance industry in particular." The court held that the claims against the company for the negligent design of the two schools were related because "[t]he acts from which the claims arise are failures to properly perform the duties required of Plaintiffs in their [contractual] agreement." In addition, the court found that it would reach this result "regardless of whether the errors were regarding different systems designed by different engineers or whether similar errors were made in two different school buildings that resulted in different quantities of damage."