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November 16, 2017

Legal Update
John G. O'Neill, Jessica H. Park

Massachusetts high court: No reason to look beyond policy language in determining priority of coverage

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Addressing an issue of first impression, the Massachusetts Supreme Judicial Court has held that a “true excess” liability insurance policy, and a policy with a generic “other insurance” clause, both cover the same level of risk.

Great Divide Ins. Co. v. Lexington Ins. Co. (Nov. 1, 2017) arose from a fatal motor vehicle accident to which three liability insurance policies applied. The first was a $1 million general liability insurance policy issued by Commerce Insurance Company that provided primary coverage. The second was a $10 million excess liability policy issued by Lexington Insurance Company. The third was a “hybrid” policy issued by Great Divide Insurance Company, which provided $1 million in primary liability coverage for accidents involving vehicles owned by its policyholder, but for leased vehicles—such as the one involved in the subject accident—said that it would be “excess over any other collectible insurance.”

Great Divide sued in federal court for a declaration that its policy and Lexington’s both covered the same level of risk—namely, any amounts in excess of Commerce’s primary limits. Lexington disputed this, arguing that notwithstanding the text of the provision referenced above, the Great Divide policy was intended to be primary in nature and therefore had to be fully exhausted before Lexington’s policy was triggered. Lexington cited the fact that the Great Divide policy generally covered mostly primary risks, that Great Divide charged high premiums for a relatively low limit of coverage, a common characteristic of primary policies, and that the Great Divide policy was nowhere labeled as an excess policy. In contrast, Lexington called its policy an “umbrella” policy, and charged a relatively low premium for a high limit of coverage, a common feature of excess policies.

The federal court handling Great Divide’s suit recognized that it raised unresolved issues of Massachusetts law, and certified questions to the SJC for decision. At the outset, departing from the approach in most other states, the SJC held that the issue of priority should be resolved based only on the language of the policies at issue, without reference to other factors such as the intent of the parties in procuring coverage. Because “[e]very word in an insurance contract ‘must be presumed to have been employed with a purpose and must be given meaning and effect whenever practicable,’” the court was required to give full effect to the “other insurance” provision in the Great Divide policy.

The policy language plainly made both policies excess to the Commerce policy, the court held, but did not provide a basis for establishing priority between them. In such circumstances, the policies must be interpreted as insuring the same level of risk. And this ended the analysis: in the court’s view, the evidence about relative pricing and the names given to the policies would not have supported an inference that the parties intended that the policies be treated differently. But even if the evidence had been potentially probative on the issue, under ordinary contract law principles it could not be used to alter the failure of the policy language to provide a basis for prioritizing either.