2 Policies Covering Same Property

Arlington insurance attorneys will run across situations where a person, on purpose or by accident, has two insurance policies covering the same property. So what are some of the possible outcomes of this situation? A 2005, Fort Worth Court of Appeals opinion had this issue. The style of the opinion is, Harris v. American Protection Insurance Company. Here is some of the relevant information from that case.
This case arises from two insurance claims for successive casualty losses to the roof of a shopping mall.
On May 5, 1995, a severe hail storm damaged the roof of a vacant building known as Westridge Mall. At the time, the shopping mall was covered by two insurance policies, one issued by American and the other by Aetna Life & Casualty. Each policy effectively covered fifty percent of the loss and named Southwest Portfolio as the insured. On September 6, 1995, roofing contractor Gary Boyd discovered the hail damage during a warranty-related roof inspection. Southwest made a claim for the hail damage under the Aetna policy on October 6, 1995. Because it was unaware of the American policy, Aetna agreed to cover one hundred percent of the loss and settled the claim for $712,612.50. In accordance with the settlement agreement, Aetna paid Southwest $268,445 for the actual cash value of the loss (“ACV”) and retained $444,167.50 as the replacement cost holdback, which would be paid out as repair costs were incurred.
Meanwhile, the insurance broker who had sold both insurance policies to Southwest notified American of the claim. American sent a written claim acknowledgment to the broker and Aetna and assigned the file to American adjuster Dana McDade. McDade contacted Aetna’s adjuster, who asked American to reimburse Aetna for half of the ACV it had paid to Southwest. American complied after McDade inspected the roof, reviewed documentation relied upon by Aetna’s adjuster, and talked with Aetna’s adjuster, construction consultants, and Southwest representatives. Southwest representative Jeff Landel told McDade that the claim had already been settled with Aetna, and advised him to “stay out of it” and not do “anything that muddies up the stream” on the pending sale of the property to Harris. Landel also expressly declined to make a claim with American and instructed McDade to resolve American’s liability for the claim directly with Aetna.
After Southwest received the ACV payment and before any repairs were made to the roof, Southwest sold the building to Harris. The purchase and sale agreement assigned to Harris “any assignable rights to the insurance claim paid or payable as a result of the hail damage to the roof of the Project occurring on or about May 5, 1995.” Pursuant to this agreement, Harris was credited at closing with $268,445, the amount of the ACV payment.
The settled claim assigned to Harris was based on an approved proposal from Boyd, the roofing contractor who discovered the damage. Boyd proposed perforating the existing roof and installing a new recovery board and rubber roof. Instead of hiring Boyd to do the repairs, Harris entered into a contract with Mike Wright under which Wright agreed to perforate the existing roof and install a recovery board and modified bitumen roof, ostensibly for $690,000. Wright replaced the roof without installing the promised recovery board.
Harris represented to Aetna that he had incurred $690,000 in replacement costs, and Aetna released payments to cover those costs, minus the prior ACV payment and the $25,000 policy deductible. Aetna, in turn, asked American to reimburse it for half of the replacement costs. American did not immediately reimburse Aetna for these costs because it recognized it was in uncharted legal territory. American questioned its liability for the replacement costs because Aetna had paid the money to Harris rather than American’s named insured, Southwest, and American had never authorized Southwest’s assignment of the policy benefits to Harris. Despite its misgivings, American ultimately reimbursed Aetna for half of the replacement costs.
In total, Harris received $680,260 for the hail damage claim, and American reimbursed Aetna for half of that amount. Further, although Harris represented to Aetna that he had paid Wright $690,000 to replace the roof, he had actually paid only $375,000.
On February 12, 1997, private adjuster Steve Mayor filed a supplemental proof of loss with Aetna on behalf of Harris, claiming a loss of over $1.8 million allegedly caused by Wright’s faulty roof replacement. Aetna rejected the claim and forwarded the statement of loss to American on March 10, 1997. American contacted Mayor and asked for a copy of his scope of loss, but did nothing further when Mayor failed to provide the requested information.
American lost at trial.
Harris, on appeal, contended that he proved as a matter of law that American owes him $175,000 for the hail damage claim. American did not dispute below that it was liable for half of the hail damage claim, and American witness Ed Cass agreed that $175,000 accurately reflected the true amount of that liability. American argued, however, that it more than satisfied its liability for the hail damage claim by paying Aetna $340,130 because Aetna became subrogated to Harris’s right to recover fifty percent of his loss from American when Aetna paid one hundred percent of the hail damage claim. American also argued that if Harris receives any additional benefits for the hail damage claim, they will constitute an impermissible double recovery.
This Court agreed.
When two insurers have contracted to pay a loss and each insurer’s policy contains a pro rata clause, each insurer is liable to the insured only for its proportion of the loss. In that situation, the pro rata clause implements the principle of indemnity and eliminates the potential for a double recovery that would otherwise exist. Further, if an insurer overpays its share of a loss, the correct manner of adjusting for that overpayment is for the insurer to assert a contractual or equitable right of subrogation. Whether the overpayment was voluntary is immaterial for purposes of the subrogation claim.
According to Black’s Law Dictionary, subrogation is the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. Application of the doctrine is said to be “the purest of equities,” and Texas courts are particularly hospitable to it. Equitable subrogation is not dependent upon contract, but arises by operation of law or by implication in equity to prevent injustice.
In this case, the Aetna policy contained a contractual subrogation provision that provides, in pertinent part, “If any person or organization to or for whom we make payment under this policy had rights to recover damages from another, those rights are transferred to us to the extent of our payment.” Thus, when Aetna paid the entire hail damage claim to Harris, it became equitably and contractually subrogated to Harris’s right to recover fifty percent of the loss from American. Therefore, American discharged its liability to Harris by paying its half of the hail damage claim to Aetna. Moreover, Harris is not entitled to receive any additional money for the hail damage claim because the loss was fully compensated by Aetna.

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