It’s a clear day and Joe is driving home from work. He approaches an intersection, the light just turns yellow and he picks up his speed so he doesn’t have to stop. He begins to smile, thinking he beat the light. His smile is knocked off his face as he slams into a pickup operated by a driver who anticipated a green light. Later, as he is dealing with reporting the claim, he finds not one, but two different auto policies. He had recently switched insurance companies but, by mistake, his new and old policies overlapped by exactly one month. “Great” he thinks, “I have double the coverage I need!”
Two sources of protection for a single loss? That may appear to be a good situation, but it violates an important point of insurance. Insurance is designed to protect persons against losses; but NOT to permit persons to profit by them. In Joe’s situation, while he might like to be paid in full for his loss by Company A and Company B; that is not going to happen. It is almost guaranteed that each policy will contain language that addresses “other insurance” situations.
When an insurance company is aware that another source of coverage exists for a loss, it makes an important adjustment. It wants to reduce the amount of money it has to pay for a loss but it also attempts to be fair to its customer as well as to persons who want to collect for their injuries or for damage to their property. An “other insurance” provision explains how the insurance company will respond in such situations. Approaches will differ according to the company. Usually a company will either share a loss or it will try to make itself an excess source of coverage.
When a company shares payment, it may do so on either an equal or on a proportional basis. In the former, each company will just split the coverage and pay for half of the loss. However, since two companies may have policies with different limits, they may cover the loss according to their proportion of coverage. The proportion is determined by adding the total amount of coverage provided by the companies and calculating each company’s percentage of that total amount.
If a company responds on an excess basis, its policy language will indicate that, when another source of coverage exists, its policy will only contribute to a loss payment after the other source is exhausted.
Regardless the approach that is used, the intent is the same. The total amount paid for a given loss remains no greater than if only a single coverage source existed. T
Things become more complicated when additional sources of coverage apply, but the total payment result is the same……the other insurance clause makes certain of that.