Nfu v. Farm and City Ins. Co.

Citations: 2004 SD 124; 689 N.W.2d 619; 2004 S.D. LEXIS 195; 2004 WL 2616277Docket: 23192, 23199

Court: South Dakota Supreme Court; November 17, 2004; South Dakota; State Supreme Court

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National Farmers Union Property and Casualty Company (NFU) initiated a declaratory judgment action to clarify the priority between its umbrella insurance policy and a primary insurance policy from Farm and City Insurance Company, which included an 'other insurance' clause. The trial court concluded that the policies were mutually repugnant and required both insurers to pay their pro rata shares of the damages. 

The case arose from a serious motor vehicle accident on January 16, 1999, involving Gene Fredrickson, who was driving a pickup owned by Larry Lorenzen. Fredrickson, covered by Farm and City’s 'Personal Auto Policy' (liability limits of $25,000 per person and $50,000 per accident), caused injuries to six occupants of another vehicle. NFU provided coverage through both a 'Private Passenger Automobile' policy (liability limits of $250,000 per person and $500,000 per occurrence) and a 'Personal Umbrella Policy' (an additional $1,000,000 coverage). NFU settled the claims for $735,000, exceeding the primary policy limit by $235,000, and sought reimbursement from Farm and City.

Farm and City contended it was not liable due to its policy being last in priority and, if found liable, claimed it would only cover its pro rata share of the excess settlement. The trial court ruled that NFU was not a volunteer and ordered Farm and City to pay its pro rata share of the excess settlement. NFU appealed, and the case was reviewed to determine if the trial court correctly interpreted the insurance contracts and the law regarding their mutual repugnance.

The issue at hand involves the priority of payment between an umbrella insurance policy and a primary insurance policy with an "other insurance" clause. The primary insurance policy of the vehicle owner must be exhausted before any other coverage is applied, resulting in the first $500,000 of the settlement being covered by that policy. A remaining $235,000 is disputed between the negligent driver's auto policy, which has a limit of $50,000 and states that its coverage is excess to any other collectible insurance, and the vehicle owner's umbrella policy with a $1,000,000 limit that also claims to be excess over other collectible insurance.

Three potential resolutions are considered: (1) requiring the umbrella policy to be exhausted first, (2) determining the policies to be mutually repugnant and assigning pro rata liability to both insurers, or (3) requiring the non-owner's liability policy to be exhausted first before the umbrella policy. The majority of courts favor the third approach, which this Court adopts, affirming that the non-owner's liability policy must be exhausted before the umbrella policy.

The trial court previously found the policies mutually repugnant and assigned pro rata liability. However, this Court emphasizes that the language of the policies is key to determining their relative priority. After reviewing the policies' provisions and intent, the Court concludes that the NFU umbrella policy is a true excess policy and should be last in priority for payment.

The analysis begins with a comparison of the excess insurance clauses in the NFU umbrella policy and the Farm. City policy. The NFU clause specifies that if a covered individual has other collectible insurance for damages also covered by the NFU policy, the NFU policy acts as excess and does not contribute, except for insurance specifically bought to exceed the retained limit plus the NFU policy's liability limit. The Farm. City clause states it will only cover its share of the loss based on the proportion of its limit to the total applicable limits, with its coverage being excess over any other collectible insurance for vehicles not owned by the insured.

Farm. City interprets the NFU clause as requiring the exhaustion of both NFU's primary and umbrella policy limits before it becomes liable. However, the NFU policy's language indicates it is an excess policy if another collectible insurance exists for the same damages. The definition of 'retained limit' incorporates the required underlying insurance and any other available insurance, suggesting that Farm. City would only be last in priority if its policy was intended to cover amounts over both the underlying and umbrella policies.

Farm. City has not demonstrated that its primary policy was specifically purchased to provide liability coverage above NFU's primary and umbrella coverage. The Colorado Court of Appeals highlighted the concept of a tertiary level of liability insurance, indicating that the NFU exception refers to this level. Therefore, unless another insurance was bought to cover amounts exceeding the umbrella policy, the NFU umbrella policy remains true excess and will not contribute. In this case, the Farm. City personal auto policy was intended as primary liability coverage and only becomes excess if other insurance covers the damages, not as a secondary excess umbrella policy; the vehicle owner's personal umbrella policy is the true excess coverage.

Premiums paid for insurance policies can indicate which policy serves as the 'umbrella or true excess insurance policy,' as illustrated by the different premiums for a $1,000,000 NFU umbrella policy ($211 annually) compared to a $50,000 Farm City auto policy ($108 for two months). The Iowa Supreme Court previously ruled against Farm City, emphasizing that the designation and terms of a policy, like the "Personal Excess and Catastrophe Liability Policy" of LeMars Mutual, clarify its intent to provide excess coverage. The court noted that umbrella policies are generally recognized as true excess coverage over primary policies, and contractual clauses regarding "other insurance" should not override the fundamental purpose of each policy. The decision affirms that a primary insurer must exhaust its policy limits before the umbrella insurer's coverage is triggered. This principle is supported by various cases from other jurisdictions, reinforcing the notion that an umbrella policy is not liable until the primary policy is fully depleted. The Eighth Circuit also confirmed that a 'true excess' or 'umbrella' insurer bears no responsibility for loss until the primary policy limits are exhausted, highlighting that the trial court incorrectly deemed the policies mutually exclusive. The NFU policy is determined to be the 'true excess' or umbrella policy in this situation.

Farm. City contends that NFU should be barred from seeking contribution due to NFU's voluntary payment of the claim. Citing American Reliable Ins. Co. v. St. Paul Fire. Marine Ins. Co., Farm. City argues that insurers with pro rata clauses in their policies cannot seek contribution from one another. In this case, NFU's umbrella policy does not contain a pro rata provision, rendering Farm. City's volunteer argument irrelevant. The court clarifies the distinction between equitable contribution and equitable subrogation, noting that NFU accepted its responsibility for the claim and notified Farm. City of its intent to seek contribution prior to settling. However, the court found Farm. City primarily liable under the NFU umbrella policy, establishing NFU's right to indemnity due to Farm. City’s failure to pay. The court determines that equitable subrogation, not contribution, is the appropriate basis for NFU's reimbursement, as NFU paid the claim and is entitled to recover from the primary insurer, Farm. City. Consequently, the court reverses the trial court's decision, awarding NFU $50,000 plus interest and granting it costs and disbursements as the prevailing party.