U.S. District Court Clarifies the Interplay Between Contractual Obligations to Procure Property Insurance and “Other Insurance” Clauses

Written by: Thomas K. Wingfield, Esq.

Hall Booth Smith, PC obtained summary judgment in favor of an owner’s property insurer, finding that the property policy procured by the tenant of the property provided primary insurance in a declaratory judgment action filed in the U.S. District Court for the Western District of Tennessee, which was styled Landmark American Insurance Company v. HEXO Realty, LLC and Liberty Mut. Fire Ins. Co., No. 1:20-cv-02631-jay. The Court, in a detailed thirty page order, provided a thorough review of insurance coverage law on the interplay between “other insurance” clauses in property policies providing coverage for the same property and provisions in commercial leases requiring the tenant to procure property insurance that insures both the owner and the tenant.

The dispute concerned damage to the premises leased from the owner that occurred during the tenant’s tenancy as a result of alleged theft. The lease required the tenant to obtain property insurance covering the leased premises and to have the owner included as a named insured. The tenant purchased the required insurance. The lease also placed the responsibility for making repairs to damaged property, including property damage caused by theft, on the tenant. The owner also purchased its own property insurance. The tenant’s policy and the owner’s policy both contained “other insurance” clause.

The Court first examined the competing “other insurance” clauses. The owner’s policy’s “other insurance” clause stated in the first section that if the owner had “other insurance subject to the same plan, terms, condition and provisions” as the policy, then coverage would be provided on a pro rata basis. In the second section, the owner’s policies “other insurance” clause stated that if there was insurance other than that described in the first section, the owner’s policy would be excess.

The Court found that the pro rata section of “other insurance” clause in the owner’s policy did not apply because the tenant’s policy was not  subject to the same plan, terms, condition and provisions” because the policies did not contain the same “other insurance” clauses. The court found that the second section of the “other insurance” clause of the owner’s policy and the “other insurance” clause of the tenant’s policy were mutually repugnant because they each attempted to make the respective policy excess to the other insurance policy.

Because the “other insurance” clauses were mutually repugnant, the Court had to determine the priority of coverage. Noting that Tennessee courts had not directly addressed the question, the court stated that it must “predict” how the courts of Tennessee would determine the priority of coverage. The Court found persuasive a line of cases that have concluded that “an indemnity agreement between the insureds or a contract with an indemnification clause… may shift an entire loss to a particular insurer notwithstanding the existence of an ‘other insurance’ clause in its policy.” The Court believed that Tennessee courts would resolve the priority dilemma under equitable principles by looking to the lease, which reflected the intentions of the owner and the tenant. Because the lease required the tenant to procure property insurance naming the owner as an insured and placed the burden on the tenant to make repairs for damage, including damage caused by theft, it was the intention of the parties that the tenant would indemnify the owner for damage to the property and that the owner would receive the benefit of the property insurance procured by the tenant. Thus, the Court found that the tenant’s policy provided primary coverage.