Coordinating Contracts and Recovery Rights

Coordinating Multiple Policies: Primary, Excess, and Allocation Methods

Insurance policies are conditional contracts, so you must meet applicable policy conditions, including duties after a loss, to obtain coverage. When two or more policies cover the same loss, the Other Insurance condition establishes how those policies respond. These provisions coordinate payments among all applicable contracts to help prevent recovery of more than the actual covered loss.

Under these terms, a policy designated as primary pays first up to its limits of liability when a covered loss occurs. An excess policy generally responds after the underlying insurance specified in its terms has been exhausted as the policy requires. For example, a commercial umbrella policy is designed to sit excess over underlying primary liability limits. A true umbrella policy may provide broader coverage than underlying primary policies and drop down over a self-insured retention. When covered claims exhaust a primary policy's aggregate limit, an applicable excess policy may respond if its terms and exhaustion requirements are met. Furthermore, an excess liability insurer's duty to defend, if any, depends on its policy terms and often begins only after applicable underlying limits are exhausted.

Standard policy forms define whether coverage applies on a primary or excess basis depending on the situation. Under the standard ISO Personal Auto Policy, liability coverage for an auto you own is generally primary, while liability coverage for a nonowned auto is generally excess. Under the standard Commercial General Liability form, coverage is generally primary unless specific exceptions make it excess. For instance, Commercial General Liability coverage is excess over certain insurance for rented premises, such as fire insurance, as specified in its Other Insurance condition.

When policies apply concurrently at the same level, they share the loss using pro rata liability or contribution by equal shares. Under a pro rata liability provision, each insurer pays a proportion of the loss based on its share of total applicable policy limits. To calculate a pro rata share, divide an insurer's applicable limit by the sum of all applicable limits, then multiply by the covered loss, subject to policy limits and terms. Under the contribution by equal shares method, all insurers contribute identical dollar amounts until the loss is paid or a policy limit is reached. If one insurer reaches its limit under contribution by equal shares, the remaining insurers continue contributing equally until the covered loss is paid or their applicable limits are exhausted. Conversely, nonconcurrency occurs when policies that might apply to a loss differ in coverage terms, conditions, or policy periods, so they do not respond in the same way. Nonconcurrency can result in serious coverage gaps or disputes between insurers during a claim.