WHO PAYS AND HOW MUCH? ALLOCATION OF DEFENSE AND INDEMNITY COSTS AMONG CO-INSURERS

Transcription

1 WHO PAYS AND HOW MUCH? ALLOCATION OF DEFENSE AND INDEMNITY COSTS AMONG CO-INSURERS BRIAN S. MARTIN CY W. HARALSON Thompson Coe Cousins & Irons, L.L.P. One Riverway, Suite 1600 Houston, Texas (713) (713) Fax INSURANCE AND TORT LAW UPDATE 2012 JUNE 14, 2012

2 TABLE OF CONTENTS I. SCOPE OF ARTICLE...1 II. TEXAS...1 A. Federal Ins. Co. v. Everest Nat l Ins. Co., 257 S.W.3d 771 (Tex. App. -- Dallas 2008, pet. denied)...3 B. Frymire Engineering Co., Inc. (thru real party-in-interest) Liberty Mutual Ins. Co. v. Jomar Int l, Ltd., 259 S.W.3d 140 (Tex. 2008)...4 C. Lexington Ins. Co. v. Chicago Ins. Co., 2008 WL (S.D. Tex. Aug. 8, 2008) (Rosenthal)...5 D. XL Ins. America, Inc. v. TIG Specialty Ins. Co., 2008 WL (N.D. Tex. Aug. 13, 2008)...5 E. North American Specialty Ins. Co. v. Royal Surplus Lines Ins. Co., 541 F.3d 552 (5th Cir. 2008)...6 F. Duininck Bros., Inc. v. Howe Precast, Inc., 2008 WL (E.D. Tex. Sept. 19, 2008) (Schell)...6 G. Nautilus Ins. Co. v. Pacific Employers Ins. Co., 303 Fed.Appx. 201 (5th Cir. 2008)...6 H. Trinity Universal Ins. Co. v. Employers Mutual Cas. Co., 592 F.3d 687 (5th Cir. 2010)...7 I. Employers Ins. Co. of Wausau v. Penn-America Ins. Co., 705 F. Supp.2d 696 (S.D. Tex. 2010) (Rosenthal)...8 J. Great American Ins. Co of New York v. SMX 98 Inc., 2010 WL (S.D. Tex. 2010)...8 K. Amerisure Ins. Co v. Navigators Ins. Co., 611 F.3d 299 (5th Cir. 2010)...8 L. Truck Ins. Exchg. v. Mid-Continent Cas. Co., 320 S.W.3d 613 (Tex. App. Austin 2010, no pet.)...9 M. American Southern Ins. Co. v. Buckley, 748 F.Supp.2d 610 (E.D. Tex. 2010) (R. Clark) i-

3 N. Maryland Cas. Co. v. Acceptance Indem. Ins. Co., 639 F.3d 701 (5th Cir. 2011)...10 O. Colony Ins. Co. v. Peachtree Constr., Ltd., 647 F.3d 248 (5th Cir. 2011)...10 P. Mills Development & Constr., Inc. v. America First Lloyd s Ins. Co., 2011 WL (S.D. Tex. Aug. 12, 2011) (N. Johnson)...11 III. FLORIDA...11 A. Twin City Fire Ins. Co. v. Fireman's Fund Ins. Co., 386 F. Supp. 2d 1272 (S.D. Fla. 2005) aff'd sub nom, 200 F. App'x 953 (11th Cir. 2006)...11 B. AIG Premier Ins. Co. v. RLI Ins. Co., 812 F. Supp. 2d 1315 (M.D. Fla. 2011)...13 C. Essex Builders Group, Inc. v. Amerisure Ins. Co., 429 F. Supp. 2d 1274 (M.D. Fla. 2005)...14 D. U.S. Fid. & Guan. Co. v. Liberty Surplus Ins. Corp., 485 F. Supp. 2d 1326 (M.D. Fla. 2007)...15 E. Evanston Ins. Co. v. Advanced Transp. Solutions, LLC, 949 So. 2d 320 (Fla. Dist. Ct. App. 2007)...16 F. Travelers Indem. Co. v. Integon Gen. Ins. Co., 748 So. 2d 362 (Fla. Dist. Ct. App. 2000)...17 G. Am. Cas. Co. of Reading Pennsylvania v. Health Care Indem., Inc., 613 F. Supp. 2d 1310 (M.D. Fla. 2009)...18 IV. NEW JERSEY...20 A. W9/PHC Real Estate LP v. Farm Family Cas. Ins. Co., 970 A.2d 382 (App. Div. 2009)...20 B. HANCO V. SISOUKRAJ, 834 A.2d 443 (App. Div. 2003)...21 C. AAA Mid-Atl. Ins. of New Jersey v. Prudential Prop. & Cas. Ins. Co., 763 A.2d 788 (App. Div. 2000)...22 D. Potomac Ins. Co. of Illinois ex rel. OneBeacon Ins. Co. v. Pennsylvania Mfrs. Ass'n Ins. Co., 425 N.J. Super. 305 (App. Div. 2012) ii-

4 E. Marshall v. Raritan Valley Disposal, 398 N.J. Super. 168, 940 A.2d 315 (App. Div. 2008)...25 F. IFA Ins. Co. v. Atl. Mut. Ins. Co., 331 N.J. Super. 217, 751 A.2d 610 (App. Div. 2000)...26 G. Country-Wide Ins. Co. v. Allstate Ins. Co., 336 N.J. Super. 484, 765 A.2d 266 (App. Div. 2001) iii-

5 WHO PAYS AND HOW MUCH? ALLOCATION OF DEFENSE AND INDEMNITY COSTS AMONG CO-INSURERS I. SCOPE OF ARTICLE The concept of allocation is of immense importance to both insureds and their insurers. Allocation arises any time that more than one policy may respond to a risk; where the loss fits into more than one category of insurance; or where an insured is held liable for both covered and non-covered claims. The manner in which courts decide allocation in different contexts can mean the difference between vast liability for an insurer or no liability at all. Consequently, allocation is one of the most contentious issues in coverage cases, and there is a relatively wideranging scope of case law on the subject. This article is an overview of the current issues and recent developments in Texas, Florida, and New Jersey concerning the contribution and subrogation rights of co-insurers. With regard to those rights, these three states have had very different experiences over the past decade. Texas, for example, has seen tremendous volatility after a Texas Supreme Court case called into question the very existence of such rights. In contrast, the basic analysis of contribution and subrogation claims in Florida and New Jersey is much more settled. Rather, recent cases in those states have focused on the untangling the rights in complicated multiparty actions, and on the intersection of contribution and subrogation rights with state statutory schemes. II. TEXAS For decades, insurers have relied upon their contribution and subrogation rights to ensure that co-liability insurers honor their obligations to defend and indemnify their common insured. The Texas Supreme Court s opinion in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co. cast a shadow over the continuing viability of these rights. In Mid-Continent, the court considered whether a liability insurer could recover from a co-liability insurer a proportion of the amount it paid to settle an underlying lawsuit under theories of contribution and subrogation S.W.3d 765, 768 (Tex. 2007). The court considered this issue as one of three questions certified from the U.S. Court of Appeals for the Fifth Circuit. The underlying lawsuit in Mid-Continent involved an automobile accident in which a general contractor on a highway construction project was sued based on its alleged responsibility for the signs and dividers in the construction zone. Id. at The general contractor was the named insured on a commercial general liability policy ( CGL ) issued by Liberty Mutual Insurance Company. Id. at 769. It was also an additional insured under the CGL policy issued by Mid-Continent Insurance Company to the sub-contractor responsible for signs and dividers. Id. Both CGL policies had limits of $1,000,000 and contained identical other insurance 1 Liberty Mutual did not expressly assert a right of contribution, but its reliance on a San Antonio Court of Appeals opinion implied as much. Id. at

6 clauses that provided that each insurer would pay only equal or pro rata shares of the loss if it was covered by other valid and collectible insurance. Id. The policies also each contained a voluntary payments clause, a subrogation clause, and a no action clause. Id. Liberty Mutual and Mid-Continent disagreed on their insured s potential exposure in the underlying lawsuit. Id. at 770. Based on the disparity in their evaluations, Mid-Continent agreed to contribute only $150,000 at mediation, and Liberty Mutual paid the remaining $1,350,000 ($350,000 over its CGL policy limit was paid by the Liberty Mutual excess policy) to settle the case for $1,500,000. Id. Liberty Mutual reserved its right to seek recovery of Mid-Continent s share of the settlement. Liberty Mutual then sued Mid-Continent in Texas state court, which Mid-Continent timely removed to federal court based on diversity jurisdiction. Id. The district court ruled after a bench trial that Mid-Continent was liable for half of the $1,500,000 settlement and ordered it to pay Liberty Mutual $550,000, which equaled Mid-Continent s $1,000,000 policy limit reduced by the $150,000 it had already contributed to settlement of the claims against the general contractor and the $300,000 it had paid to settle the claims against its named insured sub-contractor. Id. Mid-Continent appealed, and the U.S. Fifth Circuit Court of Appeals certified questions of law to the Texas Supreme Court. Id. at 771. The court first addressed whether Liberty Mutual had a direct action for contribution against Mid-Continent. In doing so, the court reaffirmed the rule of contribution recognized in Hicks Rubber and reiterated in Employers Casualty. Id. at 772 (citing Traders & Gen. Ins. Co. v. Hicks Rubber Co., 169 S.W.2d 142 (Tex. 1943) and Employers Cas. Co. v. Transport Ins. Co., 444 S.W.2d 606 (Tex. 1969)). It also reaffirmed, however, the exception to the rule where the co-insurers insurance policies contain other insurance or pro rata clauses. Id. The effect of the pro rata clause precludes a direct claim for contribution among insurers because the clause makes the contracts several and independent of each other. With independent contractual obligations, the co-insurers do not meet the common obligation requirement of a contribution claim each co-insurer contractual agreed with the insured to pay only its pro rata share of a covered loss; the coinsurers did not contractually agree to pay each other s pro rata share. In addition, the co-insurer paying more than its contractually agreed upon proportionate share does so voluntarily; that is, without a legal obligation to do so. Id. (citing Hicks Rubber, 169 S.W.2d at 147 and Employers Cas., 444 S.W.2d at ). The court thus held that the pro rata clauses in the CGL policies at issue precluded an equitable contribution claim. Id. at The court next considered whether Liberty Mutual had a right of reimbursement against Mid-Continent through contractual or equitable subrogation. Id. at 774. The court first noted that the Supreme Court s opinions in Hicks Rubber and Employers Casualty both contained language suggesting that a right of reimbursement through subrogation could exist. Id. (citing Hicks Rubber, 169 S.W.2d at 148 and Employers Cas., 444 S.W.2d at 610). Drawing a distinction between having a right of subrogation and the ability to recover under that right, the supreme court noted that in Hicks Rubber and Employers Casualty, it did not apply the particular facts of those cases to the elements of subrogation to determine whether the overpaying coinsurer could actually recover. Id. The court concluded that that the facts in the case before it - 2 -

7 precluded Liberty Mutual s recovery because they did not satisfy the elements of either equitable or contractual subrogation. Id. Comparing the two types of subrogation the court stated: Contractual (or conventional) subrogation is created by an agreement or contract that grants the right to pursue reimbursement from a third party in exchange for payment of a loss, while equitable (or legal) subrogation does not depend on contract but arises in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter. In either case, the insurer stands in the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured. Id. (internal citations omitted). Liberty Mutual argued that it was subrogated to its insured s contractual right to enforce Mid-Continent s policy language imposing a duty on Mid-Continent to defend and to indemnify the insured and to pay a pro rata share of settlement. Id. at 775. In addressing this argument, the court prefaced that where co-insurers contractual duties to their insured include a several and independent duty to pay a pro rata share of a covered loss up to their respective policy limits, this duty cannot be viewed independent of the purpose of a pro rata clause or without consideration of the rules of indemnification. Id. It then reiterated the well established rule that an insured s right of indemnity under an insurance policy is limited to the actual amount of loss. Id. But where two different insurance policies provide coverage for a loss, the pro rata clause informs the principal of indemnity by eliminating the potential for double recovery by the insured. Id. Concluding that an insured has no right to recover more than the sum of each insurer s pro rata share, the court held, [A] fully indemnified insured has no right to recover an additional pro rata portion of settlement from an insurer regardless of that insurer s contribution to the settlement. Having fully recovered its loss, an insured has no contractual rights that a co-insurer may assert against another co-insurer in subrogation. Id. at The opinion in Mid-Continent is the precipice the summaries below represent certain court s efforts to step back to a more workable dynamic between co-insurers. A. Federal Ins. Co. v. Everest Nat l Ins. Co., 257 S.W.3d 771 (Tex. App. -- Dallas 2008, pet. denied) Interestingly, this case is strikingly similar to Mid-Continent, but the Dallas court did not apply the lessons of Mid-Continent, except perhaps as to contribution. The case was presented as an allocation case between Everest, a CGL carrier and Federal, which issued a directors and officers policy to the HOA. When the HOA was sued for its failure to pay for repairs to the foundation of the townhome building and misrepresentation for failing to maintain the common elements of the building so as to increase property values, Federal accepted the defense of the HOA under reservation of rights. Everest later accepted the defense as the primary insurer and paid for the defense. Sometime later, Federal denied coverage. Everest settled the suit and paid - 3 -

8 $125,000. Federal, relying on its denial and its lawyers conclusion that the HOA s potential liability was unclear contributed $25,000 to the settlement. The Dallas Court of Appeals ruled that Federal, in fact, owed no coverage to the HOA due to property damage and construction defect exclusions in the Federal policy. Thus, the court held, that if the HOA has no cause of action, Everest can have no subrogated claim against Federal. The court also held, by citation to Mid-Continent, that Everest would have a right of contribution only if the policies insured the same risk. The court held that since the Federal policy only covered statements by the HOA officers and directors and specifically excluded loss arising from property damage or construction defect, the two carriers did not insure the same risk. Thus, Everest had no right of contribution. B. Frymire Engineering Co., Inc. (thru real party-in-interest) Liberty Mutual Ins. Co. v. Jomar Int l, Ltd., 259 S.W.3d 140 (Tex. 2008) This case explores the rights of equitable subrogation. Frymire entered into a contract with Price Woods, a general contractor responsible for remodeling of a hotel meeting room, to perform HVAC and sheet metal work. While working on the HVAC system, Frymire installed a Jomar valve to a chilled water line, which line later ruptured at the site of the valve resulting in damage to the hotel. Liberty Mutual, on behalf of Frymire, paid the hotel owner $450,000 for the damage to resolve the contractual indemnity claim. Frymire later sued Jomar to recoup its indemnity payment alleging damages from Jomar s negligence, product liability and breach of warranty. Jomar filed motions for summary judgment arguing that Frymire failed to establish a right of equitable subrogation and thus lacked standing to assert its claims against Jomar. The Texas Supreme Court first explored whether Frymire actually paid a debt owed by another. Subrogation is, after all, a right of recovery by one who pays a debt owed by another. Jomar contended that since Frymire owed its own contractual debt to the property owner to pay for the damage, Frymire did not satisfy Jomar s debt when it paid money to the hotel, but instead simply satisfied its own debt. The court acknowledged that Frymire s payment fulfilled its own contractual debt, but, following the reasoning from Keck, Mahin & Cate v. National Union Fire Ins. Co. of Pittsburgh, Pa., held that equitable subrogation exists in every instance in which one has paid the debt of another who was primarily liable. Thus, while Jomar was free to present its own evidence on whether the cause of the damage was its valve or the faulty installation of Frymire to determine who was primarily liable, Frymire survived summary judgment on standing to pursue its subrogation claim. The court also looked at whether Frymire s payment was involuntary due to the fact that, again, it satisfied its own contractual obligation when it settled the owner s water damage claim. More specifically, Jomar contended that Frymire entered into the contract voluntarily and voluntarily satisfied the owner s demands, so that it was not entitled to equitable subrogation. The Supreme Court rejected this argument, holding that while Frymire s decision to enter into the contract with the owner was voluntary, its duty to honor that contract was not voluntary; thus Frymire satisfied the elements of equitable subrogation

9 C. Lexington Ins. Co. v. Chicago Ins. Co., 2008 WL (S.D. Tex. Aug. 8, 2008) (Rosenthal) Lexington and Chicago both issued claims made and reported professional liability policies to Staff Search Ltd., a healthcare company. The claim was originally tendered to Lexington, who defended under reservation of rights. Lexington tendered the claim to Chicago under the theory that the claim was made during the Chicago policy. Chicago denied coverage because the claim was not reported during the Chicago policy period. Lexington sued its insured for declaratory judgment arguing its policy should be reformed due to several errors contained in the policy, including as to operative retroactive dates. Lexington also sued Chicago seeking contractual subrogation for the defense costs paid by Lexington. Lexington and Chicago eventually agreed to settle the underlying suit with each paying half of the settlement, subject to a non-waiver agreement that preserved any rights each had to challenge coverage and seek reimbursement from the other to temporarily fund the settlement. The settlement and non-waiver agreement were accomplished prior to the Texas Supreme Court decision in Mid-Continent. The district court held that the non-waiver agreement between the parties did not serve to avoid the effects of Mid-Continent because the agreement simply preserved rights each carrier had under their policies and the applicable law. The agreement did not create an independent contractual obligation between the carriers. Thus, Chicago was free to assert Mid-Continent as a defense to the equitable subrogation claim by Lexington. Next, the court acknowledged that if either insurer s policy did not provide coverage, as both had asserted, than the carrier paying a claim it did not owe could pursue the other carrier. In other words, Mid-Continent did not address and thus did not foreclose an equitable subrogation right between carriers made under these circumstances where the carrier does not seek reimbursement of excess or disproportionate contribution, but reimbursement of the entire sum based on a non-waiver agreement as here. The court then evaluated the coverage defenses of both carriers and determined neither could establish as a matter of law it did not owe coverage. 2 Since both carriers owed coverage, this was, in the district court s opinion, the Mid-Continent situation and neither carrier was entitled to reallocation of the amounts paid. D. XL Ins. America, Inc. v. TIG Specialty Ins. Co., 2008 WL (N.D. Tex. Aug. 13, 2008) XL provided primary coverage and TIG excess coverage to Electric Mobility. XL paid $180,000 to settle a claim against Electric Mobility, mistakenly believing that it has those limits available under its aggregate. In fact, however, XL had only approximately $54,000 left. XL requested reimbursement of the difference from TIG, TIG denied the claim, and brought suit seeking reimbursement under theories of contractual and equitable subrogation. The case was decided by the court on motions against XL based on the holding that payment by a carrier, albeit mistakenly, in excess of the policy limit, does not protect the carrier s legal interests and is thus voluntary. Since an involuntary payment is a required element of a subrogation claim, the court rejected XL s equitable subrogation claim. 2 This author makes no comment on coverage determinations here

10 E. North American Specialty Ins. Co. v. Royal Surplus Lines Ins. Co., 541 F.3d 552 (5th Cir. 2008) On the Mid-Continent issues, this case is interesting primarily due to the court s investigation and ultimate decision not to resolve the issue of whether the Mid-Continent holding is applicable to a claim by an excess carrier against its primary carrier. The Fifth Circuit first found that a right of subrogation does not exist by an excess carrier against a primary carrier where their policies do not overlap temporally. Next, the court suggested that the equitable subrogation right of an excess carrier against its primary carrier, announced in American Centennial Ins. Co. v. Canal Ins. Co. (Tex. 1992) and based on the insured s own Stowers claim against the primary carrier, has not been abrogated by the later decision in Mid-Continent. F. Duininck Bros., Inc. v. Howe Precast, Inc., 2008 WL (E.D. Tex. Sept. 19, 2008) (Schell) Duininck made a claim for contractual indemnity and additional insured coverage to Howe Precast. Howe (and impliedly EMCC) denied the obligation to defend or indemnify Duininck. Duininck (sued in several suits as a result of negligence in the design and placement of concrete barriers in the road construction projects for which Duininck was general contractor) paid its defense expenses and a portion of the settlement amount. Duininck s insurer, American Contractor s Insurance Company ( ACIC ), paid the remainder. Duininck sued Howe Precast and EMCC for reimbursement. The court found that the indemnity agreement between Duininck and Howe Precast was enforceable. The court also found that the EMCC policy provided coverage to Howe Precast for the contractual liability obligation, and that EMCC owed additional insured coverage to Duininck. EMCC argued that Mid-Continent prevented plaintiffs from recovering from EMCC due to its status as a co-insurer with ACIC. The court rejected these arguments, and found Mid- Continent should be applied narrowly, not broadly as espoused by EMCC. Since only EMCC owed the duty to insure Howe Precast s indemnity obligation to Duininck there was no coinsurer issue or Mid-Continent problem on that theory EMCC owed the entire amount. Duininck and ACIC had a right to sue Howe Precast and EMCC for amounts due under the indemnity agreement without regard to subrogation. Moreover, because Duininck had not been fully indemnified, due the amounts it paid on its own behalf, both Duininck and ACIC had a right to reimbursement from EMCC directly and in subrogation. G. Nautilus Ins. Co. v. Pacific Employers Ins. Co., 303 Fed.Appx. 201 (5th Cir. 2008) Nautilus and Pacific each provided additional insured coverage to EOG. Both policies contained pro rata other insurance clauses. Nautilus decided to settle some of the lawsuits against EOG for $1.5 million. Pacific did not contribute to the settlement, and proceeded to trial on other cases. Pacific, with the insured, prevailed on the remaining claims. Nautilus (and - 6 -

11 EOG) brought suit against Pacific to enforce Nautilus contractual subrogation rights for reimbursement of a portion of the settlement amount. The Fifth Circuit found that the decisions in Mid-Continent applied in this case. Nautilus attempted to distinguish Mid-Continent on the basis that here, unlike in Mid-Continent, excess exposure to Nautilus was not an issue as it was to Liberty Mutual. In other words, Liberty Mutual had an incentive to settle to protect is excess policy limits that neither Nautilus nor Pacific had in this case. The court rejected that distinction between the two cases. Interestingly, when dismissing Nautilus public policy arguments that insurers will be less likely to settle if they cannot reallocate inequitable distribution of losses among insurers, the court stated: Mid- Continent explicitly recognized when subrogation is appropriate, i.e., when an excess insurer (acting solely as such) pays a claim near the primary insurance policy limits and then seeks to recover from a primary insurer for the primary insurer s failure to pay. While Pacific declined to participate in the settlement, it was participating in the defense this was a case of differing evaluations of liability and value by co-insurers. The court was also persuaded by the fact that Pacific proceeded to trial on other claims a liability risk that Pacific took on when it chose not to settle. The court found it inequitable to force Pacific to contribute to a settlement now after it chose to undertake such risk. H. Trinity Universal Ins. Co. v. Employers Mutual Cas. Co., 592 F.3d 687 (5th Cir. 2010) The issue was whether the holding that an overpaying insurer cannot seek reimbursement from the underpaying insurer under theories of subrogation or contribution extends to an insurer s duty to defend. The Fifth Circuit found that Mid-Continent s holding did not apply in the context of the duty to defend context. Trinity, Utica National, National American Ins. Co. (together referred to as Trinity ) and EMC all issued CGL policies to Lacy Masonry. Each of the four policies contained pro rata other insurance clauses. Trinity agreed to defend Lacy against claims for property damage caused during the design, construction and improvement of the hospital building. EMC denied a duty to defend. Trinity thereafter settled the claims against Lacy. The district court held that EMC owed and breached a duty to defend Lacy, but held that under Mid-Continent the carriers could not recover defense costs from EMC under contribution or subrogation because the insured, defended by Trinity, had suffered no damage on which to base the subrogation claim. The Fifth Circuit emphasized that Mid-Continent only addressed the question of whether co-insurers have a right of subrogation or contribution against one another to recover money paid to indemnify a common insured for a loss. The duty of defense is a broader duty and is one to which the policies other insurance provision is not applicable, according to this court. Since the other insurance clauses are not applicable to duty to defend, the contribution theory of recovery between carriers is not foreclosed. To prevail on contribution, a party must show (1) the insurers share a common obligation and (2) the insurer seeking contribution has made a - 7 -

12 compulsory payment of more than its fair share of the common obligation. Since each insurer owed a complete duty to defend, the duty to defend creates a debt which is equally and concurrently due by all of the insurers. Id. at 695. The court reversed the summary judgment in favor of EMC and remanded to determination of the amount of defense costs to which Trinity was entitled. The Fifth Circuit declined to address to issue of subrogation. I. Employers Ins. Co. of Wausau v. Penn-America Ins. Co., 705 F. Supp.2d 696 (S.D. Tex. 2010) (Rosenthal) Oyster shipper s CGL carrier brought action against harvester and its CGL insurer seeking reimbursement of money it spent to settle underlying personal injury action brought by a restaurant customer who ate contaminated oysters. The harvester and its CGL carrier argued that the holding in Mid-Continent applied to protect the harvester in the reimbursement claim because the shipper was fully indemnified by its carrier and suffered no loss to which its insurer could subrogate. The court rejected this argument, noting that in this case the insurers were not co-primary insurers in fact the shipper s CGL carrier denied that the harvester was entitled to any coverage under its policy. Moreover, there was no evidence in the record as to any other insurance clauses that may be applicable. The purported extension of Mid-Continent to this situation to bar an insurer s rights to statutory or contractual indemnification against an allegedly responsible party was rejected as against Texas law. J. Great American Ins. Co of New York v. SMX 98 Inc., 2010 WL (S.D. Tex. 2010) SMX 98 stands for the proposition that Mid-Continent may apply if at all only in the situation in which the two insurers cover the same insured. Since the carriers at issue in this case were not co-insurers to the same insured, Mid-Continent is distinguishable. The court declined to extend Mid-Continent to the fact of this case. K. Amerisure Ins. Co v. Navigators Ins. Co., 611 F.3d 299 (5th Cir. 2010) The Fifth Circuit opinion contains an extensive discussion of whether and how to restrict Mid-Continent to its holdings based on its unique facts. The court reviewed cases decided since the 2007 Mid-Continent decision by the Supreme Court and found that while two courts would broadly construe Mid-Continent to apply whenever the insured has been fully indemnified or defended, many other courts have limited Mid-Continent to its facts finding that to do otherwise would effectively end contractual subrogation in Texas. Noting that the Texas Supreme Court has not revisited Mid-Continent to more particularly specify the boundaries of its holding as it applies to contractual subrogation when the insured is fully indemnified, the Fifth Circuit makes its Erie guess based on other subrogation cases outside the co-insurer context to find that contractual subrogation is not barred simply because the insured is fully indemnified. The facts here: Amerisure provided primary coverage and Navigators excess coverage to the same insured. Amerisure argued it did not have a duty to indemnify its insured based on - 8 -

13 policy exclusions. The carriers ultimately agreed to the amount of the settlement of the underlying case at $2.35 million. Amerisure paid its $1 million policy limits, but reserved the rights to seek reimbursement. At the time of settlement, Navigators refused to participate in a settlement unless and until Amerisure paid its $1 million primary limit. The Fifth Circuit found significant the principle that insurers must place their insured s interests before their own when evaluating settlement. In Mid-Continent, both insurers fully acknowledged their duties to defend and indemnify their insured. In Navigators, the excess carrier refused to indemnify unless and until Amerisure paid its primary policy limit. Thus, in the eyes of the Fifth Circuit, the insured was not fully protected in the Navigators situation; to hold that Amerisure could not contest later coverage would have deviated from settled Texas legal principle favoring settlement. In other words, to bar Amerisure from seeking reimbursement of its settlement contribution would discourage Amerisure from settling the claim against its insured and protecting the insured s best interests. L. Truck Ins. Exchg. v. Mid-Continent Cas. Co., 320 S.W.3d 613 (Tex. App. Austin 2010, no pet.) Truck and Mid-Continent both issued CGL policies to DCI, an architectural and construction firm. DCI entered into an agreement to design and construct a multi-million dollar home in Austin. DCI and the property owner eventually sued each other and DCI asked Truck and Mid-Continent for a defense. Mid-Continent denied a duty to defend. Truck defended DCI and eventually paid the judgment rendered against DCI. Mid-Continent filed a declaratory judgment action against DCI seeking resolution of its duty to defend or indemnify DCI in the underlying, now resolved suit. The court ruled in favor of Mid-Continent. Truck then brought this suit against Mid-Continent seeking reimbursement for defense and settlement costs paid on behalf of mutual insured DCI. The court ruled first that the legal issue of Mid-Continent s obligation to defend or indemnify was conclusively determined in the first declaratory judgment and that Truck was in privity with DCI for purposes of determining Truck s ability to re-litigate issues of coverage under the Mid-Continent policy. Although the court found that the determination of preclusive effect entitled Mid- Continent to summary judgment on all of Truck s claims, they went on to evaluate Truck s contribution claim under Mid-Continent v. Liberty Mutual as an additional basis on which to grant relief to Mid-Continent. The Austin court, unlike like the Fifth Circuit in Trinity Universal and Navigators, found that Mid-Continent should not be narrowly read. The Austin court found that the cases underlying the Supreme Court s decision, Hicks Rubber and Employers, were both cases in which the issue of the application of other insurance cases to defense obligations were determined. Thus, the Austin court would find the reasoning of Mid-Continent applicable in the duty to defend context so that the defending carrier has no subrogated right against a nondefending carrier for reimbursement. Of course, the analysis was made easier by the fact that - 9 -

14 Mid-Continent did not breach its duty to defend, based on the prior case holdings, so the contribution case was barred as a matter of law. M. American Southern Ins. Co. v. Buckley, 748 F.Supp.2d 610 (E.D. Tex. 2010) (R. Clark) American Southern and Colony issued consecutive general liability policies to a common insured Buckley. Buckley was sued and Colony agreed to defend under reservation of rights. American Southern filed a declaratory judgment action on its obligation to defend or indemnify Buckley. Colony counterclaimed for subrogation and contribution for reimbursement of defense expenses paid and also argued no coverage under its policy. American Southern filed a motion to dismiss Colony s counterclaim with one basis being the bar to subrogation and contribution claims as announced in Mid-Continent. The court rejected American Southern s arguments, following the reasoning of Navigators and others that Mid-Continent should be read narrowly and restricted to its facts. In this case, unlike Mid-Continent, the policies issued by Colony and American Southern were consecutive not concurrent. Moreover, both carriers in this case dispute their obligation to defend or indemnify which is also different from the coverage positions of the co-primary carriers in Mid-Continent. Notably because the parties here do not concede coverage, Mid-Continent does not apply. Id. at 621. N. Maryland Cas. Co. v. Acceptance Indem. Ins. Co., 639 F.3d 701 (5th Cir. 2011) Confirms the Fifth Circuit position that they will not read Mid-Continent broadly to apply in every instance in which an insured has been fully indemnified. In this case the subrogation action was, in part, over defense fees, as Acceptance had denied a duty to defend. Following Trinity Universal, the court found Mid-Continent inapplicable. As to the subrogation in the indemnity claim, the court found that since Acceptance had denied coverage, the Maryland policy s contractual right of subrogation was created and not effected by the holding in Mid- Continent. O. Colony Ins. Co. v. Peachtree Constr., Ltd., 647 F.3d 248 (5th Cir. 2011) Peachtree was hired by TxDOT as the general contractor for a highway repaving project. Peachtree was insured by Travelers and Great American. CrossRoads contracted with Peachtree to provide signs and warning devices throughout the project. CrossRoads primary insurer was Colony. A suit against Peachtree was filed related to the injuries and death of Lee. Peachtree added CrossRoads as a third-party defendant. Peachtree demanded defense and indemnity from Colony as an additional insured to that policy. Colony agreed, under a reservation of rights. The underlying suit was settled for $2 million. Travelers paid $1 million and Great American paid $650,00 on behalf of Peachtree and Colony paid $350,000 on behalf of CrossRoads. Great American seeks reimbursement from Colony for the $650,000 it paid in settlement. The court held that Mid-Continent did not preclude Great American s claim against Colony for reimbursement again choosing to limit Mid-Continent to its facts. The Court further held that since Great American was an excess carrier pursing a primary carrier, Mid

15 Continent was not applicable. Finally, since Colony had denied a duty to indemnify Peachtree, the court found the co-insurer basis to apply Mid-Continent inapplicable, following Amerisure. P. Mills Development & Constr., Inc. v. America First Lloyd s Ins. Co., 2011 WL (S.D. Tex. Aug. 12, 2011) (N. Johnson) America First denied a duty to defend Trendmaker. Mt. Hawley defended Trendmaker. The court ruled that America First owed Trendmaker a duty of defense. Mt. Hawley requested pro rata reimbursement from America First. The court found that Mid-Continent did not bar Mt. Hawley s right of recovery because Mid-Continent could be distinguished following Amerisure and Trinity Universal in that this case involved a question of the apportionment of defense expenses and a denial of coverage by one carrier. III. FLORIDA A. Twin City Fire Ins. Co. v. Fireman's Fund Ins. Co., 386 F. Supp. 2d 1272 (S.D. Fla. 2005) aff'd sub nom, 200 F. App'x 953 (11th Cir. 2006) The first two recent Florida cases discussed here provide an overview of the analysis that courts employ, under Florida law, to determine the contribution rights among co-insurers who each rely on excess other insurance clauses. In May 1997, four year old Jessica Enriquez was killed when a space saver wall unit manufactured by Trendlines Home Fashions, Inc. fell on her while she was shopping with her parents at a J.C. Penney outlet store in Sunrise, Florida. The child's parents brought a wrongful death action against both Trendlines and J.C. Penney, asserting claims of products liability and premises liability. At the time of the accident, Trendlines and J.C. Penney were each insured under both primary insurance policies and umbrella liability policies. Trendlines was insured under a Fireman's Fund primary insurance policy, with a limit of liability of $1 million. The Fireman's Fund Primary Policy contains a vendor's endorsement providing that any vendor of Trendlines' products is an additional insured with respect to Bodily Injury or Property Damage arising out of... [Trendlines'] products which are distributed or sold in the regular course of the vendor's business. Plaintiffs argued that J.C. Penney was covered under this vendor's endorsement in the Fireman's Fund Primary Policy. Trendlines was also insured under a Fireman's Fund umbrella liability policy, with a $10 million limit of liability. The Fireman's Fund Excess Policy provides that [a]ny person or organization who is an insured in primary policies at the inception of our policy is an insured under the excess policy as well. J.C. Penney, in turn, was insured under a Liberty Mutual commercial general liability insurance policy, with a $2 million limit of liability and a $1 million deductible, as well as a Twin City umbrella liability policy with a $15 million limit of liability, excess of $2 million. On November 30, 1999, Fireman's Fund settled what it characterized as all of the products liability claims against both Trendlines and J.C. Penney in the Enriquez Action for $175,000. Twin City and Liberty Mutual separately settled all of the remaining claims against J.C. Penney for a total of $4 million dollars. Of this $4 million, J.C. Penney paid its $1 million deductible under the Liberty Mutual Policy, Liberty Mutual paid $1 million, and Twin City paid

16 the remaining $2 million under the Twin City Policy. Fireman's Fund refused to contribute to this $4 million settlement, arguing that the claims settled in the J.C. Penney Settlement were for J.C. Penney's own active negligence on a premises liability theory and, therefore, were not covered under the Fireman's Fund policies. After determining that the claims settled in the J.C. Penney Settlement were in fact covered under the Fireman's Fund policies, the court turned to the question of the manner in which the J.C. Penney settlement should be allocated. The court stated at the outset that the other insurance clause in the various policies governed the allocation, and then went on to describe the nature and types of such clauses. In short, other insurance clauses limit an insurer's responsibility for a claim if other insurance is able to cover it. There are three basic types of other insurance clauses: a prorata clause, which usually provides that the allocation will be based on the limits of the applicable policies; an escape clause, which simply precludes coverage for a claim if other insurance is available; and an excess clause, which provides that a policy is excess to other policies and is not reached unless other insurance is insufficient to cover the claim. The court then explained that,... where there is no incompatibility among other insurance provisions, they are to be enforced by their terms. Difficulties arise when two policies contain the same other insurance provision. For example, where two policies both have excess clauses, there is no direct way to determine which should be treated as excess simply by reference to the policies. In such cases, each policy provides that it does not attach until the other has paid its limits. If a court were to give literal effect to each of the excess clauses, each policy would be cancelled out and the final result would depend upon which policy was read first. For that reason, the court continued, Florida courts have developed the rule of mutual repugnancy. Under that rule, where two policies cover the same occurrence and both contain other insurance clauses, the excess insurance provisions are mutually repugnant and must be disregarded. Each insurer is then liable for a pro-rata share of the settlement or judgment. Therefore, instead of attempting to reconcile two incompatible provisions, courts in such situations will disregard both provisions and prorate the loss. In Twin City, the Liberty Mutual policy provided that it was excess, and the Fireman's Fund Primary Policy provided that it was primary. Because those policies' other insurance clauses were compatible, they could be enforced in accordance with their terms. Therefore, Fireman's Fund had to exhaust the limits of the Fireman's Fund Primary Policy before the Liberty Mutual policy was reached. Fireman's Fund had already paid $175,000 of its $1 million primary limit in settling the claims that it deemed product liability claims. That meant that $825,000 of the $1 million limit under the Fireman's Fund Primary Policy was still available. Therefore, Fireman's Fund's remaining share of the primary loss was $825,000. Once Fireman Fund's limit was reached, Liberty Mutual was obligated to, and in fact did, contribute its limits of $2 million before either

17 of the other excess policies were reached. Accordingly, the remaining $1,175,000 was allocated between the Twin City policy and the Fireman's Fund Excess Policy. The Fireman's Fund Excess Policy provided that it was excess to any other insurance. Likewise, the Twin City Policy also provided that it was excess to any other insurance. For that reason, the court found that the two excess provisions were mutually repugnant, as giving effect to both of them would leave the insured without any overage at all. Accordingly, the proper method of allocation was to disregard the other insurance clauses, treat the two excess insurers as co-excess insurers, and pro-rate the loss between the two excess policies. Twin City's policy limits were $15 million, while the Fireman's Fund Excess Policy limits were $10 million. Thus, under the proration method of allocation, Fireman's Fund should have paid 2/5 of the $1,175,000 remaining after the primary policies were exhausted. The portion of the excess loss properly allocated to Fireman's Fund was $470,000. Twin City should have paid 3/5 of the $1,175,000. Therefore, the portion of the excess loss properly allocated to Twin City was $705,000. In sum, Twin City paid $2 million towards the J.C. Penney Settlement, when it should have paid only $705,000. Fireman's Fund, however, paid nothing towards the J.C. Penney Settlement, when it should have paid $1,295,000 $825,000 from the Fireman's Fund Primary Policy, and $470,000 from the Fireman's Fund Excess Policy. Liberty Mutual and J.C. Penney together properly paid their full limits of $2 million. Fireman's Fund was therefore ordered to reimburse Twin City in the amount of $1,295,000, while J.C. Penney and Liberty Mutual were held not entitled to any reimbursement from Fireman's Fund. B. AIG Premier Ins. Co. v. RLI Ins. Co., 812 F. Supp. 2d 1315 (M.D. Fla. 2011) In this declaratory judgment action, Scott Philip Johnson filed a complaint in the Circuit Court of Volusia County, Florida seeking damages for bodily injuries suffered when his motorcycle collided with a vehicle operated by Kenneth Johnson. At the time of the accident, Kenneth Johnson maintained a primary automobile liability insurance policy issued by Geico, which provided bodily injury liability limits of $300, Additionally, Kenneth Johnson maintained (1) a Personal Umbrella Liability Policy issued by RLI, which provided $1,000, of coverage in excess of the underlying automobile policy limits and (2) a Group Personal Umbrella policy issued by AIG to the Partners and Principals of PricewaterhouseCoopers, LLP, which provided $5,000, of coverage in excess of the underlying automobile policy limits. The underlying lawsuit by Scott Phillip Johnson settled for $750,000.00, and Geico tendered its $300, policy limit. Pursuant to the terms of a settlement agreement, RLI funded the remaining $450, and reserved its right to seek partial reimbursement from AIG. Both the AIG Policy and RLI Policy were denominated Umbrella Policies and contained excess other insurance clauses. AIG filed a complaint for declaratory relief to obtain a judgment declaring that AIG had no duty to contribute any coverage and thus no duty to reimburse RLI. In its counterclaim for declaratory relief, RLI sought a judgment declaring that the RLI and AIG policies are mutually repugnant, under Florida law, and must contribute on a

18 pro rata basis according to their respective policy limits, such that AIG must reimburse RLI in the amount of $375, Alternatively, RLI argued that Florida s mutual repugnancy rule did not apply, and that its policy should provide coverage only after AIG's policy limits are exhausted. Because the AIG and RLI policies contained competing excess other insurance clauses, the clauses were mutually repugnant, and had to be disregarded. For that reason, RLI and AIG were required to fund the remaining $450, settlement amount on a pro rata basis, determined by their policy limits in relation to the loss. Because the limits of the AIG Policy were $5,000, and the limits of the RLI Policy were $1,000,000.00, the portion of the $450, settlement payment properly allocated to AIG was $375, and the portion of the settlement payment properly allocated to RLI was $75, Therefore, the court held that AIG must reimburse RLI in the amount of $375, C. Essex Builders Group, Inc. v. Amerisure Ins. Co., 429 F. Supp. 2d 1274 (M.D. Fla. 2005) The next two Florida cases concern the general right of excess carriers to seek contribution and subrogation against primary insurers. Moreover, the cases also demonstrate the sometimes conflicting views Florida courts take on the right of insureds to recover statutory attorney s fees in a subrogation action. In March 1999, Plaintiff Essex Builders Group, Inc. entered into an agreement to act as general contractor on an apartment construction project. Travelers Casualty & Surety Company's predecessor, Reliance Insurance Company, issued a performance bond on behalf of Essex. Following project completion, the owner experienced water damage to the apartment buildings. After incurring substantial costs in remedying the problem, the owner demanded reimbursement from Essex. The owner also made a claim against the bond. Essex's commercial general liability insurers, OneBeacon Insurance Company and Amerisure Insurance Company, received notice of the claim against Essex, but did not pay it. Ultimately, Travelers paid the project owner $6.25 million to resolve the owner's claim. Travelers, based on its subrogation rights obtained through Essex, subsequently demanded the $6.25 million allegedly due under OneBeacon's and Amerisure's CGL policies, along with attorneys' fees and other expenses. Amerisure filed a third-party action against OneBeacon for a declaration for contribution and subrogation as well as attorney s fees. OneBeacon then moved to dismiss the Amerisure s claims. The court first found that OneBeacon's challenges to the equitable subrogation and contribution claims had no merit. Simply stated, Florida law recognizes an excess insurer's right to pursue an equitable subrogation claim against a primary insurer. Florida law also permits an excess carrier to sue a primary carrier for equitable contribution. Moreover, Florida courts have held that contingent claims of equitable subrogation and contribution can be asserted prior to making payment. Based on those principles, the court found that OneBeacon was not entitled to dismissal of Amerisure's equitable subrogation and contribution claims

19 In contrast, the court stated that Amerisure's ability to seek attorneys' fees pursuant to Fla. Stat was a more difficult question. That statute provides, in pertinent part: (1) Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of any named or omnibus insured or the named beneficiary under a policy or contract executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured's or beneficiary's attorney prosecuting the suit in which the recovery is had. Fla. Stat The court found that it was facially apparent from the text of that an excess insurer is not listed among the persons entitled to recover fees pursuant to the statute. Nevertheless, Amerisure cited Florida appellate decisions which purportedly showed that if an excess carrier is successful in a claim against a primary carrier,... the excess carrier has the right to recover attorney's fees under The Court, however, found that a split of authority existed on this issue, and ultimately determined that better-reasoned view was that, based on the clear text of , insurers are not among those entitled to recover fees. Interestingly, the Court acknowledged that Amerisure had asserted equitable subrogation and contribution claims, in addition to requesting declaratory relief. However, the court explained that this is not a situation where Amerisure can claim that it has expended fees on behalf of an insured in defending an action against the insured that should have been defended by the primary carrier, and that it therefore stands in the shoes of the insured for purposes of In holding as such, the court did not appear to address its earlier view that subrogation claims could be brought on a contingent basis. As shown below, however, the court in the next case relied, at least in part, on precisely that fact to find that an excess carrier could in fact recover attorney s fees under D. U.S. Fid. & Guan. Co. v. Liberty Surplus Ins. Corp., 485 F. Supp. 2d 1326 (M.D. Fla. 2007) In this lawsuit, United States Fidelity & Guaranty Company, served as surety for John T. Callahan & Sons, Inc., a general contractor. After paying to settle construction-related claims against Callahan, USF&G sued two of Callahan's insurers Liberty Surplus (as the primary insurer) and an excess carrier to recover the payments. In turn, Liberty Surplus filed a thirdparty complaint against Callahan's subcontractors and certain insurers, including OneBeacon. Liberty Surplus alleges that the third party insurers provided coverage to Callahan either directly or through policies issued to the subcontractors in which Callahan was named as an additional insured. In its third-party complaint, Liberty Surplus sought contribution from OneBeacon and the other third party insurers. In response, OneBeacon raised three primary arguments against Liberty Surplus claims. First, OneBeacon argued that Florida law simply did not provide a cause of action for Liberty Surplus against OneBeacon. The court rejected this argument flatly, noting that Liberty Surplus based its contribution claims and subrogation claims on the other insurers' provision of coverage