What Is an “Other Insurance” Clause and Why Do They Exist In Property Insurance Policies?

An “other insurance” clause is a provision found in property insurance policies that establishes how a loss is to be apportioned among insurers when more than one policy covers the same loss. The original purpose of an “other insurance” clause is debatable. It may be to prevent the policyholder from collecting more than the actual loss. It also promotes fairness between insurers covering the same loss, so they share the cost proportionally based on their respective policy limits.

What are the common “other insurance” clauses?

Pro Rata Clauses

A pro rata clause typically states that if other valid and collectible insurance covers the same loss, the insurer will pay its proportional share of the loss based on the policy limits.

For example:

If there is other insurance covering the same loss or damage, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.

Excess Clauses

An excess clause provides that the policy will only cover losses in excess of the coverage provided by other valid and collectible insurance up to the policy limits.

For example:

This insurance is excess over any other insurance, whether primary, excess, contingent or on any other basis, except such insurance as is specifically purchased to apply in excess of this policy’s Limit of Insurance.

The specific wording of “other insurance” clauses varies by insurer and policy type. When multiple policies cover the same loss, the interaction between their “other insurance” clauses determines how the loss is ultimately apportioned among the insurers.

Double Recovery

One of the reasons I frequently hear about why these “other insurance” clauses were written was to prevent double recovery. Show me the proof of that!

I would articulate how these clauses operate in a slightly different view. It would make sense that such clauses uphold the principle of indemnity, which is a fundamental principle of insurance. To indemnify the insured for their loss but not allow them to profit from it, “other insurance” clauses help ensure indemnity is maintained when multiple policies are involved by apportioning the loss payment among insurers. The policyholder cannot be better off after the loss.

Similarly, these clauses help to prevent over-insurance and moral hazard: If an insured could collect more than their actual loss by having multiple policies without “other insurance” clauses, it would incentivize purchasing coverage in excess of the risk (over-insurance). This creates a moral hazard by reducing the insured’s incentive to prevent losses and potentially even encouraging fraud.

Prompt Payment Concerns

Multiple property insurance policies covering the same interest and property may occur for a number of reasons. To provide a mechanism for insurers to share losses proportionally when multiple policies cover the same risk, “other insurance” clauses allow insurers to apportion the loss among themselves in a fair way, usually proportional to their respective policy limits, rather than any one insurer being liable for the entire loss. To avoid disputes and delays for the insured in getting paid, these clauses specify how insurers will share responsibility when multiple policies apply. “Other insurance” clauses aim to facilitate prompt payment to the insured while the insurers sort out apportionment amongst themselves in the background.