Supreme Court of Virginia – Policy Language Trumps Indemnification Clause

Written by Lauren Gibbons, Esq.

Edited by Bill Pfund, Esq.

The issue of priority of coverage arises on a daily basis for attorneys and claims examiners alike in the world of insurance defense, and are often a source of headache and confusion.

In the recent case of Nationwide Mut. Fire Ins. Co. v. Erie Ins. Exch., the Supreme Court of Virginia shed some light on how to properly determine the priority of applicable insurance coverage. 2017 Va. LEXIS 52 (Va. Apr. 13, 2017). In Nationwide, the Supreme Court determined the priority of applicable insurance policies involved in an underlying civil suit arising out of a fatal car accident.

Two companies, East Coast and Rodriguez Construction, entered into a subcontract for construction services. East Coast loaned a work truck to Rodriguez under this contract. One of Rodriguez’s employees was operating that vehicle in the course of his employment when he struck another vehicle. The driver of the other vehicle died as a result of the accident and his Estate filed a wrongful death suit against the driver and East Coast. East Coast was eventually nonsuited from the matter, leaving only a potential judgment against Rodriguez’s employee. The issue before the Supreme Court was priority of coverage for the employee.

At the time of the accident, East Coast was insured under two Erie policies –

(1) Erie Auto Policy and

(2) an Erie Umbrella Policy.

Rodriguez, on the other hand, was insured by Nationwide and had the following policies –

(1) Nationwide Auto Policy

(2) Nationwide CGL Policy, and

(3) Nationwide Umbrella Policy.

The subcontract between East Coast and Rodriguez required Rodriguez to obtain primary insurance for bodily injury caused by accident. The subcontract also contained an indemnification provision requiring Rodriguez to indemnity East Coast for injuries arising out of work performed pursuant to the subcontract.

Erie and the insured driver filed suit against Nationwide and the decedent’s Estate seeking declaration as to the priority of the available insurance coverage. Nationwide filed a cross-claim and counterclaim also seeking declaratory judgment. Ultimately, the Circuit Court held that the indemnification provision in the subcontract was controlling and ruled that the priority of coverage was as follows:

(1) Nationwide Auto Policy,

(2) Nationwide CGL Policy,

(3) Nationwide Umbrella Policy,

(4) Erie Auto Policy, and

(5) Erie Umbrella Policy.

Nationwide appealed this ruling.

Most notably, the Supreme Court held that the trial court erroneously ruled that the Nationwide policies provided primary coverage for this accident. The trial court erred in determining that the indemnification provision in the subcontract was controlling. The indemnification clause in this particular case only required indemnification of East Coast for any claims filed against East Coast. Since East Coast was nonsuited from the tort action and coverage for East Coast was not at issue, the Supreme Court determined that the indemnification clause was not applicable and was altogether irrelevant. Furthermore, the indemnification provision did not absolve Erie of its contractual obligation to insure East Coast’s vehicles under its policy.

The Supreme Court also held that the trial court erred by holding that the Nationwide CGL Policy provided any liability coverage when it contained an exclusion for claims arising out of the use of automobiles.

The Supreme Court held that the proper priority for insurance coverage in this case was as follows –

(1) Erie Auto Policy,

(2) Nationwide Auto Policy, and

(3) Nationwide Umbrella Policy and Erie Umbrella Policy, pro rata.

The Erie Auto Policy offered primary coverage because it expressly provided primary insurance for any covered auto it owned. Nationwide’s Auto Policy expressly provided that its policy would be excess over any other collectible insurance for covered autos it didn’t own. The remaining policies, the Nationwide Umbrella and Erie Umbrella, were to be applied pro rata. The Supreme Court held that a pro rata share was appropriate considering both umbrella policies were nearly identical in that they are “irreconcilable and mutually repugnant.” The Supreme Court elaborated stating that basic contract interpretation principals apply to determine the priority between two escape or excess policies, but when the policies are so similar as to force the Court into analyzing the “meaningless semantics” to determine which policy is more specific, the policies should be applied pro rata.

In light of this ruling, it is important to recall the general theories of contract interpretation in considering how to apply policies and indemnification clauses to ultimately determine coverage. Be sure to pay careful attention to which parties are involved in the litigation, the parties to any underlying contracts or subcontracts, and the express and implied language of those contracts and policies.  Following these guidelines can certainly help in determining several coverage issues we face, including tender of defense issues at the outset of a case.

 

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