State Farm's “other insurance” clause provided that it would pay a pro rata share of any claim up to the limit of its policy.

National Liability's “other insurance” clause, on the other hand, provided that its coverage would apply only after any other coverage had been exhausted.

In a suit to ascertain the scope of coverage for the accident, the U.S. District Court for the Eastern District of Virginia held that National Liability's “other insurance” clause was valid under Va. Code § 38.2-2204 (the “Omnibus Statute”), and that the two policies could be reconciled to require that State Farm first cover the claim up to the limits of its policy before National Liability would be required to pay.

State Farm appealed to the Fourth Circuit, arguing that National Liability's “other insurance” clause was void under the Omnibus Statute.

The Fourth Circuit's Decision

The circuit court vacated the district court's judgment and remanded for further proceedings.

In its decision, the circuit court explained that Virginia's Omnibus Statute applied to liability insurance policies for bodily injury or property damage that covered “liability arising from the ownership, maintenance, or use” of “any motor vehicle, aircraft, or private pleasure watercraft.” The statute, the Fourth Circuit added, disallowed any provision that “purports or seeks to limit or reduce the coverage” required by the statute.

This included “other insurance” clauses in covered policies that provided that an insurance company's obligations to pay or defend would be in excess of any other existing liability coverage, because such clauses “limit or reduce” coverage, the Fourth Circuit observed.

The circuit court then ruled that the Virginia Supreme Court's decision in Continental Ins. Co. v. State Farm Fire & Cas. Co., 380 S.E.2d 661 (Va. 1989), resolved the dispute between State Farm and National Liberty.

In that case, the Fourth Circuit said, two insurance companies provided liability insurance to the insured for boating accidents. One policy, however, was issued as yacht liability insurance, while the other provided coverage as part of a homeowners policy. Both policies had similarly worded “other insurance” clauses that stipulated that each insurance company's payments would apply as excess over any other existing liability coverage.

The Fourth Circuit noted that the Virginia Supreme Court determined that the yacht insurance policy was governed by the Omnibus Statute, as a policy “covering liability arising from the ownership, maintenance, or use of any . . . private pleasure watercraft.” Accordingly, the court held that the “other insurance” clause in the yacht insurance policy was void under the Omnibus Statute as an impermissible limit or reduction in coverage because the Omnibus Statute disallowed “[a]ny endorsement, provision or rider attached to or included in any such policy of insurance which purports or seeks to limit or reduce the coverage.” Va. Code § 38.2-2204(E) (emphasis added). The nearly identical excess coverage clause in the homeowners' insurance policy was not void, however, because the Omnibus Statute does not apply to such general liability policies.

Applying that reasoning, the Fourth Circuit ruled that National Liability's “other insurance” clause was void as an impermissible limitation on liability coverage. The circuit court found that the National Liability policy, which provided “bodily injury or property damage liability insurance, covering liability arising from the ownership, maintenance, or use of [a] . . . private pleasure watercraft,” was governed by the Omnibus Statute. Because the National Liability policy's “other insurance” clause applied only as excess over other insurance policies on the yacht, it was an “impermissible limit on coverage” under the statute and could not be enforced, the Fourth Circuit concluded.

The case is National Liability and Fire Ins. Co. v. State Farm Fire and Casualty Ins. Co., No. 17-1969 (4th Cir. May 31, 2018). Attorneys involved include: Dawn E. Boyce, BANCROFT, MCGAVIN, HORVATH & JUDKINS, P.C., Fairfax, Virginia, for Appellant. Christopher A. Abel, Justin G. Guthrie, WILLCOX & SAVAGE, P.C., Norfolk, Virginia, for Appellee.