Self-Insurance as Insurance in LiabilityPolicy "Other Insurance" Provisions

1. Introduction It is not uncommon for multiple insurers to find themselves liable for the same loss.1 When two different insurers would each cover a particular loss in the absence of other insurance, one or both insurers may attempt to limit their respective liability through the use of "other insurance" clauses in their policies.2 In essence, "other insurance" clauses provide that if another insurance policy covers the same loss, the issuer of the second policy has primary or sole responsibility to pay or both insurers are responsible for a stated portion of the loss.3 The allocation of liability between insurers when more than one insurance policy covers the same risk and one or both insurance contracts contain an "other insurance" provision is a commonly litigated issue.4 When an "other insurance" conflict involves two or more traditional insurance policies, the issue is not whether the insured has coverage but which insurer has the primary responsibility to pays.5 An interesting and more complex issue arises when one source of coverage is not a traditional insurance policy, but one of the many available forms of self insurance.6 The term self insurance applies to any portion of a risk for which an entity lacks commercial insurance.7 Forms of self insurance range from a deductible, the first portion of a loss that an insurance policy does not cover,8 to risk retention groups whose members contribute money to cover losses suffered by any of their members.9 Risk retention groups may resemble traditional insurance companies; however, risk retention groups are member-- owned.10 Jurisdictions differ on how they treat self insurance for the purposes of "other insurance" clauses." Several courts have relied strictly on the definition of insurance in finding that self insurance is not "other insurance" for the purposes of "other insurance" clauses in liability policies.12 These courts and some commentators have emphasized that self insurance is not insurance, but "is actually the antithesis of insurance as that term is commonly used."13 Although such a viewpoint might apply to some situations, particularly those in which the self insured simply forgoes insurance in the hope that it will have no losses or only manageable losses,14 many modern self insurance schemes have characteristics of traditional insurance policies, such as the spreading of risk between several entities.15 For this reason, other courts have applied detailed, fact-based analyses to determine whether insurance companies can treat a particular form of self insurance like a traditional insurance policy.16 Several courts have expressly considered the public policy and fairness issues surrounding the treatment of self insurance in deciding the issue.17 Determining whether self insurance is "other insurance" necessarily entails the consideration of whether self insurance is a form of insurance. When courts determine the nature of self insurance in the "other insurance" clause context, the decisions may have implications beyond assigning liability between insurance providers and self insureds. For example, in some jurisdictions, a governmental entity waives sovereign immunity by purchasing insurance.18 In those jurisdictions, the issue of whether or not self insurance is "insurance" may determine whether the municipality is immune from a lawsuit.19 The question is also important in determining responsibilities associated with litigation management and settlement.20 Therefore, prior court decisions on these issues are relevant to determining whether self insurance is "other insurance." This Note considers when, if ever, courts should treat self insurance as other insurance for the purpose of "other insurance" clauses in liability insurance policies. Part II discusses why many governmental and business entities are electing to self insure all or part of their risks, and it briefly describes some of the more common forms of self insurance that businesses and governments currently employ. …