Insurer v. Insurer: The Bases of an Insurer s Right to Recover Payment From Another Insurer* By: Thomas F. Lucas McKenna, Storer, Rowe, White & Farrug Chicago A part of every insurer s loss evaluation is a determination of whether the insurer has the right to recover any payment from a third party. One possible source of recovery is from another insurer which also provided coverage to the insured. This paper will discuss the legal theories which form the basis of the paying insurer s recovery action against another insurer. One would think these concepts are well settled in Illinois, but as the following discussion shows, uncertainties persist. The theories of recovery, which will be addressed herein, are equitable contribution and equitable subrogation. Time and space do not permit an analysis of cases which interpret Other Insurance clauses, or those which address the concept of horizontal and vertical exhaustion. This review of equitable contribution and equitable subrogation is by no means an exhaustive review of claims amongst insurers, but it provides a good starting point. Equitable Contribution A right of equitable contribution among co-insurers was first recognized in Illinois in Royal Globe Insurance Co. v. Aetna Insurance Co. 1 This rule allows one insurer who pays the entire loss on behalf of an insured to seek contribution from other insurers who are also liable for the loss. The rationale for allowing equitable contribution is that the paying insurer has paid a debt, which was equally owed by the non-paying insurer. To recover from the non-payer, the insurer seeking equitable contribution must establish the following: (1) All facts necessary to the claimant s recovery against the insured; (2) The reasonableness of the settlement; (3) Identity between the policies as to parties, insurable interests and risks. 2 While these elements appear to be easily understandable, a review of the cases shows that they are not. The first element to be established, the facts necessary to the claimant s recovery against the insured, seems like a requirement that the paying insurer prove the underlying claim. However, courts addressing this element have interpreted it as requiring the paying insurer establish that the nonpayer s policy covered the claim. For instance, in Insurance Co. of Illinois v. Safeway Insurance Co., 3 the trial court granted an insurer that paid an uninsured motorist (UM) claim equitable contribution from another insurer. On appeal, Safeway, the non-payer, argued that Insurance Company of Illinois Page 1 of 7
(ICI) had failed to prove all facts necessary to the claimant s recovery against the insured. The appellate court agreed, but the rationale for its holding was ICI s failure to show that the provisions of Safeway s uninsured motorist coverage had been met (i.e., that the claimant was a resident of the insured s household and that the insured had supplied written proof of the UM claim to Safeway). 4 Similarly, in Liberty Mutual Insurance Co. v. Westfield Insurance Co., 5 both Liberty and Westfield insured the general contractor on a construction project, with Liberty as the named insured and with Westfield as an additional insured on a policy written for a subcontractor. Both insurers defended the general contractor in a construction injury accident and, prior to trial, Liberty proposed that the insurers settle the claim for $900,000. Westfield refused to contribute to the settlement, on the basis that the settlement figure was too high. Liberty then suggested that Westfield take over the sole defense of the case, and Liberty would pay the first $450,000 of any judgment or settlement. Westfield refused this proposal as well, so Liberty settled with the claimant and sought equitable contribution from Westfield. The trial court granted Liberty s motion for summary judgment, which was affirmed on appeal. Westfield argued on appeal that Liberty had failed to prove the facts necessary for the injured plaintiff s recovery. Rather than address whether Liberty established the general contractor s liability to the claimant, the appellate court approached Westfield s argument from the standpoint of the general contractor s coverage under Westfield s additional insured endorsement, in other words whether the general contractor s liability to the claimant arose out of the subcontractor s work. The appellate court concluded that, as a matter of law, the general contractor s liability to the claimant (which the court presumed) arose out of the subcontractor s work. 6 In American Alliance Insurance Co. v. IARW Insurance Co., Ltd., 7 two insurers provided coverage on a warehouse that sustained a property damage loss. One of the insurers paid the loss and sought equitable contribution from the non-payer. The district court granted summary judgment against the non-payer and, on appeal, the non-payer complained that it was being forced to pay the loss before a finding that the insured was liable. The Seventh Circuit made short work of this argument, noting that the non-payer had the opportunity to show that its policy did not apply to the claim, but failed to do so. 8 The problem with the approach taken by the Seventh Circuit in American Alliance Insurance Co. is that it ignores the elements of an equitable contribution claim. As stated in Royal Globe, it is the paying insurer that has the burden of proof to show that it was not acting as a volunteer. Royal Globe did not put the burden on the non-payer to justify its refusal to pay. In any event, the cases cited above provide valuable insight for insurers on either side of an equitable contribution dispute. For the insurer who paid, it is not enough to simply recite the Royal Globe elements. The paying insurer should also establish that the non-payer s policy covers the claim. For non-paying insurers, there must be a justification for its coverage position; a simple argument that the paying insurer failed to carry its burden of proof will not suffice. Those cases that have interpreted the first element of an equitable contribution claim provide no guidance on how an insurer should establish the insured s liability. For example, no Illinois case addresses the specific question of whether a trial must be held to establish the insured s liability to the claimant before equitable contribution to the paying insurer will be allowed. However, a case which provides guidance on this question is St. Paul Fire and Marine Insurance Co. v. Michelin Tire Corp. 9 St. Paul s insured was involved in a collision, which resulted in several death claims against the insured. St. Paul paid the claims and sought indemnity from Michelin, the manufacturer of the tires on the insured s vehicle, alleging that one of the tires was defective. Michelin argued that in addition to proving the existence of a defect in its tire, which caused the accident, St. Paul was required to prove that its insured was liable to the claimants. The court rejected such a requirement and set down the rule that an indemnitee... need only prove that by settling he was responding to a reasonable anticipation of personal liability rather than acting as a mere volunteer. 10 Page 2 of 7
Although not an equitable contribution case, the rule set forth in St. Paul Fire and Marine should apply in the equitable contribution context. The paying insurer should not be required to prove its insured s liability at a trial, but instead should be allowed equitable contribution if it establishes that it agreed to a settlement with the claimant in reasonable anticipation of the insured s liability. Such a showing ensures that the paying insurer is not acting as a volunteer and promotes the oft-cited public interest of encouraging settlements. The second element an insurer must establish to obtain equitable contribution, the reasonableness of settlement, in most instances, will not be contested. 11 However, the third element, establishing identity between the policies as to the parties, insurable interests and risks has generated its share of disputes. Couch on Insurance contains the following discussion of this requirement: It is not necessary that the policies provide identical coverage in all respects in order for the two policies to be considered concurrent, and each insurer entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed. To illustrate, the fact that the first liability insurer s policy covered only property damage while the second insurer s policy covered bodily injury and property damage did not relieve the first insurer from having to contribute; both policies covered the same risk because both provided coverage for property damage that occurred during their respective policy periods. 12 There is identity of risks when the equitable contribution claim involves two primary insurers, or two excess insurers. American Alliance Insurance Co. v. IARW Insurance Co., 13 However, an excess insurer cannot seek equitable contribution from a primary insurer because the policies insure different risks. Schal Bovis, Inc. v. Casualty Insurance Co. 14 In Insurance Co. of Illinois v. Safeway Insurance Co., 15 Safeway argued that ICI could not seek equitable contribution because ICI and Safeway insured different named insureds. The court rejected this argument, finding that since the claimant was an insured on both policies, there was sufficient concurrence to allow equitable contribution. In Continental Casualty Co. v. Security Insurance Co., 16 a liability insurer for a joint venture sought equitable contribution from the liability insurer, which covered the individual joint venturers. Security Insurance Co., the non-payer, argued that equitable contribution was not available because the policies had different policy periods, different limits and deductibles, and because the scope of coverage was different under the policies. The court rejected Security s arguments, labeling the differences identified by Security as unimportant. 17 For those involved in coverage disputes in the construction area, it is common for a general contractor with its own liability policy to also be an additional insured on liability policies issued to subcontractors, for liability arising out of the subcontractor s work. There is now a split in authority over whether multiple policies providing additional insured coverage to a general contractor for liability arising from the named insured s work cover the same risk. In Schal Bovis, Inc. v. Casualty Insurance Co., 18 the owner and general contractor on a construction project were additional insureds on policies issued to subcontractors by Wausau Insurance, Great American Insurance, Casualty Insurance and American States Insurance. Wausau and Great American settled a personal injury claim brought against the owner and general contractor, and sought equitable contribution from Casualty and American States, both of which had denied coverage. The appellate court ruled that equitable contribution was not available to Wausau and Great American because, even though all policies provided additional insured coverage to the owner and general contractor, the risk insured by each was different. The court reasoned as follows: Page 3 of 7
Although the Great American policy covered Schal and Buck as additional insureds, it did so only to the extent that Schal s and Buck s liability arose out of Rankens work. The Wausau policy covered Schal and Buck from liability, but only when the liability arose out of Ozark s work. Clearly, the risk that a plaintiff might be injured in connection with Rankens work is a different risk than the risk that a plaintiff might be injured in connection with Ozark s work. These risks are, in turn, different than the risks associated with a plaintiff being injured in connection with Alcan s work or in connection with Chicago Forming s work (as is required by the Casualty and American States policies). Thus, because each insurer insured substantively different risks, each is precluded from seeking equitable contribution from the others. 19 In Cincinnati Insurance Co. v. River City Construction Co., 20 the court was faced with the same situation as in Schal Bovis. Cincinnati covered the owner as additional insured for liability arising from Cincinnati s named insured s operations. Auto Owners Insurance also covered the owner as additional insured for liability arising from its named insured s work. Cincinnati settled a construction injury claim brought against the owner and sought equitable contribution from Auto Owners. Relying on Schal Bovis, Auto Owners argued that equitable contribution was not available because the policies covered different risks. The court, however, refused to follow Schal Bovis because both policies provided coverage to the owner and by settling, Cincinnati had provided a benefit to Auto Owners. Therefore, Cincinnati had the right to seek equitable contribution from Auto Owners. 21 It would seem that the approach taken in Cincinnati Insurance Co. is correct. Where two or more policies cover the same additional insured under an endorsement that provides the additional insured with coverage for liability arising out of the named insured s work or operations, if the non-paying insurer has a defense to an equitable contribution claim, it is not that the policies cover different risks, but that the facts do not establish coverage to the additional insured under the non-payers endorsement. This approach is supported by Insurance Co. of Illinois v. Safeway Insurance Co., where the court rejected Safeway s argument that the policies covered different risks because they covered different named insureds, but reversed a grant of equitable contribution in favor of Insurance Company of Illinois (ICI), because ICI had failed to establish that the claim was covered under Safeway s policy. 22 Equitable Subrogation Insurers who are cut off from equitable contribution because they cover different risks are not left without a remedy if they can establish that they are entitled to equitable subrogation. In North American Insurance Co. v. Kemper National Insurance Co., 23 a group health insurer sought to recover payments made on medical bills from a worker s compensation insurer. The court acknowledged that equitable contribution was unavailable because the policies covered different risks. However, the court ruled that the group health insurer could recover under an equitable subrogation theory, so long as the insurer could show that it was not a volunteer, meaning that payment was made in reasonable anticipation of liability. 24 The court in North American Insurance Co. set forth the following prerequisites to an equitable subrogation claim: (1) A third-party must be primarily liable to the insured for the loss; (2) The insurer must be secondarily liable to the insured for the loss under an insurance policy; (3) The insurer must have paid the insured under that policy, thereby extinguishing the debt of the third party. 25 Page 4 of 7
In Schal Bovis, Inc. v. Casualty Insurance Co., 26 the court allowed an excess insurer to seek reimbursement from primary insurers who had refused to contribute to a settlement paid on behalf of a mutual insured. The court stated that an action by an excess insurer seeking reimbursement from a primary insurer is distinct from a claim for equitable contribution. In discussing this theory of liability, the Schal Bovis court does not use the term equitable subrogation; nevertheless, the cases cited leave little doubt that what the court calls a claim for reimbursement is actually a claim for equitable subrogation. 27 To recover under this theory, the excess insurer would be required to establish that the claim was covered by the primary policies and therefore, the excess insurer should not have been required to pay until the primary policies were exhausted. 28 In cases where an excess insurer seeks to recover from a primary insurer for negligent or bad-faith failure to settle within the primary limits, the excess insurer s claim is founded on equitable subrogation. Schal Bovis, Inc. v. Casualty Insurance Co. 29 The rationale for characterizing the excess insurer s claim as one based on subrogation is that the excess insurer would be subrogated to the insured s rights upon payment of a claim, and since the insured would have a claim against the primary carrier for negligent or bad-faith failure to settle, the excess insurer, stepping into the insured s shoes, is allowed to pursue this claim. 30 Currently there exists a split in authority over whether a primary insurer has a direct duty of care to an excess insurer. In Schal Bovis, Inc. v. Casualty Insurance Co., the court recognized a tripartite relationship amongst the insured, the primary insurer and the excess insurer, which created a threeway duty of care to act reasonably. 31 However, in U.S. Fire Insurance Co. v. Zurich Insurance Co., 32 the court characterized the Schal Bovis discussion of a direct duty owed by the primary to the excess carrier as dicta, and held that Illinois does not recognize a direct duty by the primary insurer to the excess insurer in connection with the defense and settlement of a claim. 33 Until this conflict is resolved, an excess insurer with a claim against the primary insurer for negligent or bad-faith failure to settle should raise both theories of recovery. According to Schal Bovis, to establish that the primary insurer breached a duty of care to the excess carrier, the excess carrier must plead and prove that the probability of an adverse verdict against the insured was great, and the expected liability exceeded the primary limits. It is not sufficient to merely allege that the primary refused to settle, thereby exposing the excess insurer to potential liability. 34 In Twin City Fire Insurance Co. v. Country Mutual Insurance Co., an equitable subrogation case, the court held that to obtain equitable subrogation for a primary insurer s failure to settle, the excess insurer must establish: (1) That the primary insurer knew that the claim was worth more than its primary limits; and (2) There was an opportunity to settle the case within the primary limits. 35 California Union Insurance Co. v. Liberty Mutual Insurance Co. 36 contains an excellent discussion of the duty of care owed by the primary insurer to the insured, the breach of which can support an equitable subrogation claim by an excess insurer. In California Union, a second-layer excess insurer sought equitable subrogation from the insurer who wrote the primary and first-layer excess policies. A catastrophic injury suit was brought against the insured and Liberty Mutual, the primary and first-layer excess insurer (with total limits of $2 million), refused to offer more than $800,000 in settlement. The case proceeded to trial and resulted in a $16 million verdict against the insured. California Union paid its policy limits ($4 million), and then brought an equitable subrogation action against Liberty Mutual for bad faith or negligent failure to settle within the underlying limits. Liberty Mutual argued that it could not be liable because there was never a firm policy limits demand from the plaintiff. However, the district court ruled that whether a policy limits demand had been made was only one factor to consider to determine whether the insurer s settlement efforts were reasonable. The district court Page 5 of 7
concluded that all of the evidence established that Liberty Mutual acted unreasonably, therefore California Union was entitled to recoup the amount it paid to satisfy the judgment. 37 Conclusion The theories of equitable contribution and equitable subrogation provide a means by which an insurer who has paid a loss can recover from other insurers who are also liable for the loss. To determine which theory applies depends in large measure on whether the insurers provide concurrent coverage to the insured. This will often require a close examination of the Other Insurance clauses in both policies. However, if there is any doubt as to whether concurrent coverage is provided, prudence dictates pleading both equitable contribution and equitable subrogation. Endnotes 1 Royal Globe Insurance Co. v. Aetna Insurance Co., 82 Ill. App. 3d 1003, 403 N.E.2d 680 (1st Dist. 1980). 2 82 Ill. App. 3d at 1005, 403 N.E.2d at 682. 3 Insurance Co. of Illinois v. Safeway Insurance Co., 233 Ill. App. 3d 1021, 600 N.E.2d 43 (1st Dist. 1992). 4 233 Ill. App. 3d at 1023, 600 N.E.2d at 45. 5 Liberty Mutual Insurance Co. v. Westfield Insurance Co., 301 Ill. App. 3d 49, 703 N.E.2d 439 (1st Dist. 1998). 6 301 Ill. App. 3d at 55, 703 N.E.2d at 443. 7 American Alliance Insurance Co. v. IARW Insurance Co., 165 F.3d 558 (7th Cir. 1999). 8 165 F.3d at 560. 9 St. Paul Fire and Marine Insurance Co. v. Michelin Tire Corp., 12 Ill. App. 3d 165, 298 N.E.2d 289 (1st Dist. 1973). 10 12 Ill. App. 3d at 169, 298 N.E.2d at 292. Additional support for the argument that the paying insurer need not establish the insured s actual liability to obtain equitable contribution can be found in United States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598, 626, 643 N.E.2d 1226, 1244 (1st Dist. 1995), where the court applied the reasonable anticipation of liability standard in an insured s action to recover settlement payments from its insurers. 11 In Liberty Mutual Insurance Co. v. Westfield Insurance Co., 301 Ill. App. 3d 49, 703 N.E.2d 439 (1st Dist. 1998), Westfield complained that Liberty paid too much to settle the case, but the court ruled that Westfield waived its opportunity to challenge the reasonableness of the settlement when it refused Liberty s offer to take over the defense of the case. The court also noted that Westfield failed to produce evidence indicating that the amount paid was unreasonable, thus shifting the burden to the non-payer to prove equitable contribution should not be allowed. 12 Couch on Insurance, 218: 6, quoted in Schal Bovis, Inc. v. Casualty Insurance Co., 315 Ill. App. 3d 353, 732 N.E.2d 1179, 1186 (1st Dist. 2000). 13 American Alliance Insurance Co. v. IARW Insurance Co., 165 F. 2d 558, 559 (7th Cir. 1999). 14 Schal Bovis, Inc. v. Casualty Insurance Co., 315 Ill. App. 3d 353, 732 N.E.2d 1179, 1187 (1st Dist. 2000). 15 Insurance Co. of Illinois v. Safeway Insurance Co., 233 Ill. App 3d 1021, 1024, 600 N.E.2d 43, 45 (1st Dist. 1992). 16 Continental Casualty Co. v. Security Insurance Co., 279 Ill. App. 3d 815, 665 N.E.2d 374 (1st Dist. 1996). 17 279 Ill. App. 3d at 820, 665 N.E.2d at 377. 18 Schal Bovis, Inc. v. Casualty Insurance Co., 315 Ill. App. 3d 353, 732 N.E.2d 1179 (1st Dist. 2000). 19 315 Ill. App. 3d at 363, 732 N.E.2d at 1187. 20 Cincinnati Insurance Co. v. River City Construction Co., 325 Ill. App. 3d 267, 757 N.E.2d 676 (3rd Dist. 2001). 21 325 Ill. App. 3d at 274-75, 757 N.E.2d at 682. 22 233 Ill. App. 3d 1021, 1023-24, 600 N.E.2d 45. 23 North American Insurance Co. v. Kemper National Insurance Co., 325 Ill. App. 3d 477, 758 N.E.2d 856 (1st Dist. 2001). 24 325 Ill. App. 3d at 481, 758 N.E.2d at 859. 25 Id. 26 Schal Bovis, Inc. v. Casualty Insurance Co., 315 Ill. App. 3d 353, 732 N.E.2d 1179 (1st Dist. 2000). 27 315 Ill. App. 3d at 364, 732 N.E.2d at 1187. Page 6 of 7
28 Id. 29 314 Ill. App. 3d 562, 732 N.E.2d 1082 (1st Dist. 1999). 30 314 Ill. App. 3d at 571, 732 N.E.2d at 1090. 31 314 Ill. App. 3d at 572, 732 N.E.2d at 1090. 32 U.S. Fire Insurance Co. v. Zurich Insurance Co., 329 Ill. App. 3d 987, 768 N.E.2d 288 (1st Dist. 2002). 33 329 Ill. App. 3d at 1004, 768 N.E.2d at 300. 34 315 Ill. App. 3d at 576, 732 N.E.2d at 1093. 35 Twin City Fire Insurance Co. v. Country Mutual Insurance Co., 23 F.3d 1175, 1181-1182 (7th Cir. 1994). 36 California Union Insurance Co. v. Liberty Mutual Insurance Co., 920 F. Supp. 908 (N.D. Ill. 1996). 37 Among the pertinent facts noted by the district court were that the insured, Liberty s appointed defense counsel, Liberty s claims personnel, the excess insurer and the settlement judge all believed that the probability of an adverse verdict was great and that damages would exceed the underlying limit. Furthermore, while plaintiff s counsel never made a policy limits demand to Liberty, Liberty never moved above the $800,000 figure and plaintiff s attorney testified that if Liberty had offered its limits they would have been accepted. ABOUT THE AUTHOR: Thomas F. Lucas is a partner in the Chicago office of McKenna, Storer where he concentrates his practice in insurance coverage and the defense of insureds and self-insureds. He received his B.S. from the University of Illinois and his J.D. from Loyola University. He is a member of the IDC and DRI. * This article is a revised version of a presentation given by the author at the seminar entitled, The Parameters of the Tripartite Relationship, Litigation Management and Beyond, co-sponsored by the Insurance School of Chicago and the Illinois Association of Defense Trial Counsel. The version handed out at the seminar included a section on targeted tenders, which has been omitted. Page 7 of 7