Submitted: January 24, 2006
Filed: July 5, 2006
Susan Van Zant, Esq. Charles R. Bailey, Esq.
Williamson, West Virginia Mark E. Troy, Esq.
Attorney for Appellee Tammy Bowles Raines, Esq.
Walter Gauze Bailey & Wyant
Charleston, West Virginia
Attorneys for Appellant National Union
Fire Insurance Company
Glen A. Murphy, Esq.
Kathlene Harmon-McQueen, Esq.
McQueen, Harmon & Murphy
Charleston, West Virginia
Attorney for Appellee Chidetta Reed
and the West Virginia Insurance
JUSTICE STARCHER delivered the Opinion of the Court.
JUSTICE BENJAMIN concurs and reserves the right to file a concurring opinion.
2. When a claimant or an insured wishes to enforce a covered claim, as defined by W.Va. Code § 33-26-5(4) (1985) (Repl. Vol.1996), for insurance benefits against an insolvent insurer and to recover such insurance proceeds, as permitted by W.Va. Code § 33-26-8(1)(a) (1985) (Repl. Vol.1996), from the West Virginia Insurance Guaranty Association, W.Va. Code § 33-26-12(1) (1970) (Repl. Vol.1996) requires him/her first to exhaust all other sources of solvent insurance which collaterally insure the covered claim. Once the claimant or insured has exhausted all other sources of solvent insurance which collaterally insure the covered claim or where there exists no other solvent insurance which provides coverage for the covered claim, he/she is entitled to enforce his/her covered claim against the West Virginia Insurance Guaranty Association, to the extent allowed by W.Va. Code § 33-26-8(1)(a) (1985) (Repl. Vol.1996). Syllabus Point 2, DeVane v. Kennedy, 205 W.Va. 519, 519 S.E.2d 622 (1999).
3. When an insurance company (a) issues a primary liability insurance policy; and (b) has contracted for and received a premium for a risk as though it were a primary insurer; but (c) the insurance company has become a secondary insurer by operation of an other insurance clause in the policy and the existence of another primary insurance carrier, then if that other insurance carrier is declared insolvent, the insurance company is responsible for coverage of the loss as though it were the sole primary liability insurer.
In this appeal from the Circuit Court of Mingo County, we are asked to resolve an insurance coverage dispute between an insurance company and the West Virginia Insurance Guaranty Association.
The vehicle involved in the accident was owned by the Human Resource Development Foundation (HRDF), a non-profit agency and an administrator of the state- funded Wheels to Work Program. The program provided lower income applicants with transportation for job purposes. The vehicle was leased to the defendant, Ms. Reed, on July 31, 2001 under a lease-to-own agreement. In the lease agreement, HRDF acknowledged sole ownership of the vehicle and agreed to provide insurance coverage on the vehicle.
HRDF purchased an automobile liability insurance policy for the vehicle from Oak Casualty Insurance Company, and designated both HRDF and Ms. Reed as insureds. HRDF purchased coverage with $100,000.00 in per person liability limits. Unfortunately, after the accident _ on November 19, 2002 _ Oak Casualty was declared insolvent and liquidation was ordered by the Circuit Court of Cook County, Illinois. As a result of the insolvency order, the appellee West Virginia Insurance Guaranty Association (Guaranty Association) stepped into Oak Casualty's place and assumed the defense of Ms. Reed.
As a non-profit agency, HRDF also qualified for insurance coverage provided through the State of West Virginia by the Board of Risk and Insurance Management, as authorized by W.Va. Code, 29-12-5 . (See footnote 1) The Board of Risk and Insurance Management purchased automobile liability insurance for vehicles owned by HRDF _ including the vehicle leased to Ms. Reed _ from the appellant, National Union Fire Insurance Company (NUFIC).
The statutes which create the Guaranty Association require that a plaintiff exhaust all potential solvent sources of insurance coverage before recovering from the Guaranty Association. W.Va. Code, 33-26-12(a)  mandates that any person having a claim against a solvent insurer . . . shall be required to exhaust first his right under such solvent insurer's policy before seeking a recovery from the Guaranty Association. This provision is commonly referred to as the non-duplication provision of the Insurance Guaranty Association Act.
In accordance with the non-duplication provision, on August 18, 2004, the Guaranty Association filed a motion to compel Mr. Gauze to serve the other solvent insurer of the Wheels to Work Program. (See footnote 2) Specifically, the Guaranty Association claimed that the liability policy provided by NUFIC to HRDF contained solvent coverage for the plaintiff's claims, and that the NUFIC policy limits would have to be exhausted before any compensation could be recovered from the Guaranty Association. In response, the plaintiff filed a notice with the circuit court claiming he was entitled to benefits under the policy issued by NUFIC.
NUFIC filed a notice of appearance with the circuit court, and shortly thereafter filed a detailed motion for summary judgment. Documents filed in the record by NUFIC admit that HRDF was named as an insured on its comprehensive auto liability policy at the time the accident occurred. As the certificate of liability insurance provided by NUFIC stated:
This certifies that [Human Resource Development Foundation
of Morgantown, West Virginia] . . . is an Additional Insured for
the Coverage indicated below under General Liability Policy GL
6124594 and Automobile Policy CA 5348561 issued to the State
of West Virginia by National Union Fire Insurance Co. of
This certificate presents a summary of coverage. The policies may be inspected at the office of the Board of Risk and Insurance Management . . . South Charleston, WV . . . during its regular business hours. Reproduction of the policies shall be at cost.
The certificate of liability insurance stated that the limits of liability were $1,000,000 each occurrence.
NUFIC argued, however, that its policy did not provide liability insurance coverage for the plaintiff's claim. NUFIC contended that its policy was an excess insurance policy rather than a primary liability insurance policy. NUFIC pointed to other insurance language contained in the certificate of liability insurance indicating that if HRDF has other primary insurance from another source, then there was no coverage provided by NUFIC's policy except to the extent that the amount of loss exceeds the limit of liability of the other primary insurance policy. (See footnote 3) NUFIC therefore argued that because HRDF had purchased other primary insurance from Oak Casualty, and the Guaranty Association had assumed responsibility for Oak Casualty's policy once the company was declared insolvent, then the Guaranty Association was responsible for providing the primary liability insurance coverage for Ms. Reed's negligence. NUFIC argued that it provided only excess insurance coverage to HRDF, and that its responsibility under the policy would only be triggered when the Guaranty Association had exhausted its obligation to provide primary coverage.
The Guaranty Association responded to NUFIC's motion for summary judgment by filing its own motion for summary judgment. The Guaranty Association argued that the NUFIC policy explicitly defines the coverage provided as primary for any covered auto owned by the insured. The policy stated, under the title other insurance:
For any covered auto you own, this Coverage Form provides
primary insurance. For any covered auto you don't own, the
insurance provided by this Coverage Form is excess over any
other collectible insurance.
The policy defined HRDF as an additional insured. The Guaranty Association therefore asserted that because HRDF owned the auto involved in the accident, the coverage under the NUFIC policy was primary liability coverage by the policy's own terms and conditions. The Guaranty Association also noted that the language of the NUFIC policy was ambiguous, and should be construed against NUFIC.
In an order dated February 15, 2005, the circuit court granted the Guaranty Association's motion for summary judgment, and denied the motion filed by NUFIC. The circuit court rejected NUFIC's argument that its policy was nothing more than an excess liability insurance policy that was intended to provide coverage only after Oak Casualty had fulfilled its obligations. The circuit court concluded that the terms of the NUFIC policy:
. . . identify it as a primary insurer. . . . Thus, the plain language of the policy is such that it provides primary insurance to automobiles owned and operated by the insureds, the Foundation and Ms. Reed.
NUFIC now appeals the circuit court's February 15, 2005 summary judgment
NUFIC argues _ citing to numerous state court decisions from around the country _ that when a primary liability insurance company is insolvent, the law is clear that an excess insurance company's policy does not drop down to take the place of the primary liability insurance policy. NUFIC argues that in most jurisdictions, a state's insurance guaranty association must step into the place of the primary insurance company and fulfill the obligations under the primary insurance policy. Only if those obligations are completely fulfilled, NUFIC argues, is an excess insurance company's obligation to provide coverage triggered.
NUFIC argues that the insurance policy that it issued to HRDF clearly and unambiguously contains an amendatory endorsement that converts its policy from a primary liability insurance policy into an excess insurance policy. In sum, NUFIC argues that the insurance policy it sold to HRDF was purely an excess insurance policy, and that the Guaranty Association is therefore obligated to provide liability insurance coverage to HRDF and Ms. Reed. NUFIC asserts that only after the Guaranty Association's obligation is completed (in this case, by the exhaustion of the $100,000.00 liability limits of the Oak Casualty policy) does NUFIC have any obligation to provide excess coverage.
The Guaranty Association responds by pointing out that this case is governed, first and foremost, by state law and not by the provisions of any insurance policy. The Guaranty Association argues that the West Virginia Insurance Guaranty Association Act is to be liberally construed, W.Va. Code, 33-26-4 , so as to afford insureds a remedy for their covered claims under a solvent insurance company's policy first, and the Guaranty Association's assets second. W.Va. Code, 33-26-12.
The Guaranty Association further argues that the NUFIC policy is not a true excess insurance policy. Instead, the Association argues that the NUFIC policy is a primary liability insurance policy that contained other insurance policy language. This other insurance policy language suggests that if there is other insurance available to an insured, then the NUFIC policy becomes a secondary liability insurance policy. The Guaranty Association argues that this other insurance policy language is provisional, that is, it indicates that NUFIC provides secondary, excess coverage only if there is other primary coverage available. Because Oak Casualty is insolvent, the Guaranty Association asserts that there is no other primary coverage available _ and therefore, that NUFIC once again becomes, by operation of its own policy language, the primary liability insurer that covers Ms. Reed's accident. We agree.
The parties' arguments in this case focus upon primary insurance policies and excess insurance policies. These terms are generic, insurance industry labels, but a sufficient definition of the two policies is this:
A primary policy provides the first layer of insurance coverage.
Primary coverage attaches immediately upon the happening of
an occurrence, or as soon as a claim is made. The primary
insurer is first responsible for defending and indemnifying the
insured in the event of a covered or potentially covered
occurrence or claim. Because most losses are within primary
policy limits and therefore create greater exposure for primary
insurers, and because primary insurers are generally obligated to
defend their insureds, primary insurers charge larger premiums
for coverage than do excess and umbrella carriers. . . .
An excess policy provides specific coverage above an underlying limit of primary insurance. Excess insurance is priced on the assumption that primary coverage exists: indeed, an excess policy usually requires by its terms that the insured maintain in force scheduled limits of primary insurance. In
keeping with the reasonable expectations of the parties, including the insured, which paid separate premiums for its primary and excess policies, excess coverage generally is not triggered until the underlying primary limits are exhausted by way of judgments or settlements. . . .
Douglas R. Richmond, Rights and Responsibilities of Excess Insurers, 78 Denv.U. L.Rev. 29-30 (2000).
NUFIC correctly argues that many jurisdictions have held that an excess insurance carrier is not required to drop down and provide coverage when a primary insurance carrier becomes insolvent. These jurisdictions often hold that the state's guaranty association must step into the shoes of the primary insurance carrier and fulfill that carrier's obligations before the excess insurance carrier is obligated to provide coverage. (See footnote 5) As one treatise stated:
Unless insolvency coverage is an express exception, most excess
coverage policies clearly condition the obligation of the excess
carrier to provide coverage only upon the exhaustion of the
primary carrier's limits by payment of claims against the
primary coverage, and where this condition is expressed, the
courts have ruled that the insolvency of the primary carrier does
not activate excess coverage.
Irvin E. Shermer and William Schermer, 2 Auto.Liability Ins. § 18:12 [4th Ed. 2005].
The reason that a pure excess insurance carrier is not required to drop down in the event of the primary insurer's insolvency is two-fold: insolvency of the underlying insurer(s) is usually not regarded as an occurrence as defined by most insurance policies, and excess insurers charge low premiums in exchange for placing the burden of retaining a financially stable primary insurer upon the insured. Put simply, excess insurers are not the guarantors of the solvency of underlying insurers. See, e.g., North Carolina Ins. Guar. Assn. v. Century Indemn. Co., 115 N.C.App. 175, 185-86, 444 S.E.2d 464, 470 (1994) ([T]he fundamental purpose of excess insurance is to protect the insured against excess liability claims, not to insure against the underlying insurer's insolvency[.]); Wurth v. Ideal Mut. Ins. Co., 34 Ohio App.3d 325, 518 N.E.2d 607 (1987) (excess insurance does not drop down when primary insurer is insolvent, because to hold otherwise would place the risk of loss for securing an insolvent insurer not on the insurance purchaser, who purchased the policy, but on the excess coverage provider, who never contracted to cover such a contingency.).
The record, however, clearly shows that the policy provided by NUFIC is not a pure excess insurance policy. The NUFIC policy does not provide specific coverage above a defined underlying limit of primary insurance, and we see nothing in the record to suggest that NUFIC's premiums were priced on the assumption that primary coverage existed. There is also nothing in the NUFIC policy terms indicating that the insured was required to maintain in force certain scheduled limits of primary insurance.
Instead, the NUFIC policy bears all the characteristics of being a primary insurance policy. The policy states that NUFIC would provide the first layer of insurance coverage, unless there was some other coverage. Further, it appears that NUFIC charged premiums for the policy that were commensurate with the greater liability exposure of a primary insurance policy, and a primary insurer's duty to provide a defense to the insured. (See footnote 6)
By virtue of the other insurance language in its policy, NUFIC appears to fall within that category of insureds known as a secondarily liable carrier rather than an excess carrier. And the limited authorities on this topic suggest that, when the primary insurance carrier has become insolvent, between an insurance guaranty fund and a secondarily liable carrier, courts suggest that the secondarily liable carrier becomes responsible for payment of the loss.
The leading case on this topic is Ross v. Canadian Indemnity Ins. Co., 142 Cal.App.3d 396, 191 Cal.Rptr. 99 (1983). In Ross, the court examined a situation where a plaintiff was injured while loading a truck. Two liability insurance policies covered the plaintiff's claim: an insurance policy on the truck, and an insurance policy on the premises where the truck was being loaded. The premises liability insurer became insolvent, and the California Insurance Guaranty Association (CIGA) intervened and demanded that the truck's insurer provide coverage for the claim.
The truck's liability insurer in Ross argued that it provided only excess and not primary coverage, and cited to statutory language which stated that insurance policies on vehicles being loaded were not primary when there was other insurance. The California Insurance Guaranty Association, however, argued that an insurance guaranty association is not statutorily created to be other insurance.
The California court resolved the question against the truck's liability insurer on public policy grounds, stating:
We resolve this dilemma by reference to the public policy
considerations involved in the creation of CIGA in its role of
protecting the public from insolvent insurers. CIGA is a
compulsory association of insurers created by statute whose
purpose is to provide insurance against loss arising from the
failure of an insolvent insurer to discharge its obligations under
its insurance policies. . . .
In our view, CIGA was created for the protection of the public. Thus, when a secondary insurer is available in the event of an insolvent primary insurer, the secondary insurer should be responsible in the absence of specific language to the contrary. The secondary insurer has received a premium for the risk and thus the secondary insurer, and not CIGA, should be responsible for the coverage of the loss.
142 Cal.App.3d at 403-404, 191 Cal.Rptr. at 103-104 (citations and quotations omitted). In accord, Oliver v. Oklahoma Prop. & Cas. Insurance Guar. Assn., 774 S.W.2d 902, 904 (Mo.App. 1989); Harrell v. Reliable Ins. Co., 258 Ill.App.3d 728, 731, 631 N.E.2d 296, 298 (1994) (The reasoning . . . comports with the Illinois legislature's intention that whenever possible, potential claims against the Fund's assets should be reduced by a solvent insurer, rather than the Fund. Insurance associations such as the fund are created for the purpose of providing a limited form of protection to the public and not to insurance companies.).
The non-duplication of recovery statute in our Insurance Guaranty Association Act, W.Va. Code, 33-26-12, clearly states that any liability under the Act is reduced by the amount of any recovery under any policy of a solvent insurer. The statute does not distinguish between primary and secondary coverage. See Rinehart v. Hartford Cas. Ins. Co., 91 N.C.App. 368, 371 S.E.2d 788 (1988) (The statute does not distinguish between primary and secondary coverage or between an operator's policy and an uninsured motorists provision.).
The Guaranty Association is a compulsory association of insurers created by statute to provide a mechanism for the payment of covered claims . . . to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer[.] W.Va. Code, 33-26-2 . (See footnote 7) The Guaranty Association was created to protect the public from insolvent insurance carriers, not to protect insurance carriers from other insurance carriers. In our view, when an insurance company (a) issues a primary liability insurance policy; and (b) has contracted for and received a premium for a risk as though it were a primary insurer; but (c) the insurance company has become a secondary insurer by operation of an other insurance clause in the policy and the existence of another primary insurance carrier, then if that other insurance carrier is declared insolvent, the insurance company is responsible for coverage of the loss as though it were the sole primary liability insurer. In other words, the secondary insurer and not the Guaranty Association should bear the loss.
The record in the instant case plainly shows that NUFIC issued a primary insurance policy upon the vehicle owned and operated by HRDF and Ms. Reed. It further appears that premiums were paid, not for excess coverage as NUFIC argues, but for primary insurance coverage as the Guaranty Association argues. While the NUFIC policy suggests that the policy becomes a secondary excess policy if there is other primary insurance, the record establishes that there is no other primary insurance because Oak Casualty is insolvent. NUFIC must therefore provide coverage for the loss as though it were the sole primary liability insurance carrier.
Accordingly, we find no error in the circuit court's order, and National Union
Fire Insurance Company and not the West Virginia Insurance Guaranty Association should
bear any loss.