“Insured versus Insured” Exclusion Interpreted by Fifth Circuit
The U.S. Fifth Circuit recently interpreted an insurance policy exclusion prohibiting one insured from suing another party insured under the same policy. In finding the exclusion inapplicable, the Fifth Circuit determined that a claim for indemnity differed from a claim for “property damage” as required by the language of the exclusion.
In Kinsale Insurance Company v. Georgia-Pacific, L.L.C., issued on July 27, 2015, the Fifth Circuit considered a declaratory judgment action by Kinsale Insurance arising out of a fire at a Georgia-Pacific plant in Mississippi. Georgia-Pacific had hired Advanced Services, Inc. for demolition work on the plant. Advanced had purchased the Kinsale Insurance policy, and had Georgia-Pacific named as an additional insured. A fire occurred at the plant, damaging equipment that Advanced had leased from H&E Equipment Services. H&E thereafter sued Advanced for it damaged equipment.
Advanced filed a third party demand against Georgia-Pacific for any damages that Advanced may be required to pay to H&E. Georgia-Pacific, as an additional insured, filed a claim for coverage under the Kinsale policy for any indemnification that it might owe Advanced. Kinsale denied coverage, citing its policy’s “insured versus insured” exclusion. This exclusion provides: “This insurance does not apply to claims or ‘suits’ for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ brought by one insured against any other insured.” Kinsale then filed the declaratory judgment action which ultimately resulted in the appeal to the Fifth Circuit. Following cross-motions for summary judgment, the district court applied the exclusion, thereby upholding Kinsale’s denial of coverage.
The Fifth Circuit concluded that the “insured versus insured exclusion does not apply. Advanced ‘brought’ a ‘claim’ against another insured, Georgia–Pacific, but it was not one for ‘property damage.’ The plain meaning of the exclusion makes it inapplicable to an indemnity claim.” The Fifth Circuit explained that a claim for indemnity “certainly does seek reimbursement, but that does not make the claim one for property damage brought by one insured against another.” Instead, the Fifth Circuit wrote that indemnity is simply a mechanism to pass liability from one potentially liable party to another.
For the Fifth Circuit, it was immaterial that the underlying lawsuit involved a claim by H&E for actual property damage. The Fifth Circuit related with approval Georgia-Pacific’s argument that “Advanced did not, in turn, seek damages from Georgia–Pacific due to a property loss; it sought indemnity based on general tort principles for the property damage that occurred to another party. Advanced had no property damage, but it seeks protection from a potential duty to pay for someone else’s property damages.
Interestingly, sensing likely future litigation, the Fifth Circuit recalled the purpose of the insured versus insured exclusion. “We do not deny that it is possible that Advanced’s indemnity claim could become a battle between two insureds over who, if either, was responsible for the fire and even whether there was shared responsibility. One central purpose of the insured versus insured exclusion no doubt is to keep the insurance company free from such litigation.”
The “insured versus insured” exclusion is often found in a professional liability or directors and officers liability policy. Many other general liability policies often specifically authorize suits between insureds with a “separation of insureds” or “cross liability” condition. Therefore, this recent decision by the Fifth Circuit provides a worthwhile addition to the precedent construing an insured versus insured exclusion.