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Property insurance disputes differ from disputes involving other types of insurance policies because they typically involve not whether coverage is owed or excluded but rather how much coverage is owed. A subset of disputes about how much involves property insurance losses that are covered by multiple, overlapping provisions.

For instance, an explosion or flood that damages the policyholder's factory and the neighboring factory, which is the policyholder's main customer, can implicate both business income and contingent business income coverages. Such overlap should be "neither surprising nor controversial," but rather part of the "belt-and-suspenders" protection purchased and expected by commercial policyholders.

Just as it is common for multiple property insurance coverages to apply to a single loss, it is likely that each of those coverages will have a separate monetary sublimit, or a sublimit expressed in terms of time.

Where a policyholder seeks coverage for one event under overlapping coverages, questions may arise as to whether the policyholder must elect to proceed under one coverage or the other, whether both apply simultaneously, or whether the policyholder can elect to maximize its recovery by claiming one coverage then the other.

For instance, after a catastrophe, if a policyholder has both a civil authority claim, subject to a four-week limit, and a business income claim, subject to a low-dollar limit, can it seek civil authority coverage for the first four weeks of its loss? Can the policyholder then seek business income coverage with no erosion of the business income limit?

The answer should be that in the absence of policy language directing otherwise, the policyholder is entitled to structure the application of its coverage provisions to maximize coverage.

Predictably, insurance companies having sold "belt-and-suspenders" coverage, seek to confine their policyholders to using the belt or the suspenders, whichever benefits the insurance company. Recently, courts have rejected this practice, permitting the policyholder the right to order recovery as it sees fit.

In Audubon Internal Medicine Group v. Zurich American Insurance Co., the policyholder suffered loss from Hurricane Katrina. The policyholder made a variety of time-element claims, including one under the civil authority provision and one under the contingent business income provision.

The policyholder argued that because the contingent business income provision did not state specifically when it began, he was entitled to "stack" the two coverages, collecting civil authority coverage for the first 21 days after the loss and contingent business income coverage for the next 30 days. The insurance company argued that the two coverages ran concurrently, and that it owed only 30 days of time element loss. Because the policyholder was not seeking "double recovery" the court permitted it to stack the coverages and recover 51 days of loss.

The severity of these losses triggered two independent coverage provisions. Katrina has caused many legitimate claims of coverage under both homeowner's and flood policies without running afoul of the law.

Other courts have refused to permit an insurance company to confine a loss covered by overlapping coverages to the coverage with the lower limit.

In Manpower Inc. v. Insurance Co. of the State of Pennsylvania, the policyholder owned two adjacent buildings, but occupied only one of them. The building it did not occupy partially collapsed, rendering unusable the building occupied by the policyholder. The day after the collapse, however, civil authorities prohibited occupancy of the policyholder's building. The order remained in effect for weeks, and the policyholder lost income until it eventually relocated.

The insurance company rejected any obligation to pay business income, concluding the only applicable coverage was civil authority, capped at $500,000. The court rejected this. It concluded that coverage was available under the ordinary business interruption provisions of the policy, and that the civil authority order confirmed that the collapse rendered the entire building unstable. The $500,000 sublimit on civil authorities coverage does not apply, the court ruled.

This principle is sometimes expressed in the policy at issue. One clause in commercial use states that in the event of a claim for loss or losses, ?it is agreed that at the Named Assured's election such claim may be apportioned over the coverage interests in the order most beneficial to the Named Assured."

Whether or not your property insurance policy contains such a clause, the common law affords policyholders the right to order application of overlapping coverages to maximize their recovery.

DOUGLAS CAMERON is a partner and practice group leader of the firm-wide Insurance Recovery Group at Reed Smith.

November 15, 2011

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