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Excess Other Insurance Clause Struck Down By 5th Circuit Court Of Appeals

The U.S. Court of Appeals for the 5th Circuit recently held, interpreting Mississippi law, that a policy's excess other insurance clause in a policy issued to an alumni association was mutually repugnant with the other insurance clause in the University's policy.

In Southern Insurance Co. v. Affiliated Insurance Co., 2016 WL 3947761 (5th Cir. July 21, 2016) interpreting Mississippi law, Southern Insurance Company insured the University of Southern Mississippi alumni association with commercial property coverage. A house that the association leased from the University was covered by the policy. Under the lease with the University, the University was obligated to maintain and repair the house while the association was obligated to pay for repairs exceeding the normal scope of repairs that took place to other buildings. The University was included as an additional insured under the policy. At the same time the University had a policy with Affiliated Insurance Company that covered multiple university buildings, including the house.

The house was severely damaged by a tornado. The alumni association made a claim with Southern for repairs. Southern paid the personal property part of the claim, but denied payment for the building repair, asserting that the University was obligated to make the repairs to the house and that any payments made by the association would constitute a voluntary payment and were therefore not covered. A declaratory judgment action was then initiated by Southern against its insured. As part of the assertions made in the declaratory judgment action, Southern asserted, in the alternative, that the University's policy and the association's policy were mutually repugnant, requiring pro rata apportionment.

While the declaratory judgment action was pending, Affiliated paid the University to repair the house. At that point, the alumni association assigned its rights against Southern to Affiliated.

Southern added two new arguments to its declaratory judgment posture. The first new argument relied upon Southern's "lost payment" clause under which Southern was to determine the value of loss in accordance with a valuation condition which stated in part that Southern would value repairs at nothing if entities other than the association covered the cost of repairs. Therefore, Southern argued that under this provision, the association's loss was zero because the University had paid for repairs to the property. The 5th Circuit rejected this argument, finding that the valuation condition was ambiguous. The court found that to enforce Southern's interpretation of the policy would create an absurd result wherein an insurance company could deny coverage because another party was responsible to make the repairs or because Southern did nothing and thereby caused another insured to step in and pay for them. Thus Southern was able to agree to insure the house without assuming any risk. The court also rejected as being absurd Southern's argument that it could reject a claim for coverage and then subsequently contend that the value of the claim was nothing, merely because another insurance company stepped in and provided benefits.

Turning to the voluntary payment argument, the court disagreed with Southern. Affiliated had an obligation under its policy to repair the house.

Finally, under Mississippi law the other insurance clause was mutually repugnant.

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