Trinity Universal Ins.Co. v. Employers Mut. Cas. Co., # 08-20532 (5th Cir. January 4, 2010) see Decision
"The more, the merrier" doesn't always hold true in the complicated game of liability insurance. When you are sued, you would think that having two or more insurers covering your liability would be a good thing, for both you and the insurers, who would be able to share the risk among themselves. However, in 2007, the Texas Supreme Court stirred up a dust storm in Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007), when it held that an insurer that paid all of a settlement on behalf of its insured, both its own share and the shares owed by other insurers covering the risk, had no remedy to recover the overpayment from the other insurers.
The situation in Mid-Continent is very common. Multiple insurers do not always agree on what is a just settlement or what each insurer's share should be (although usually the insurance policies contain "other insurance" clauses that pre-allocate the share owed -- usually on a pro-rata or equal-share basis). So often, one insurer, more risk averse than the others, will take a lead and settle the entire claim. Then the settling insurer will seek contribution from the others, either by agreement or through litigation. Either way the policyholder benefits by getting the lawsuit resolved with a minimum of wrangling.
I won't go into the legal reasons for the Mid-Continent result (see my discussion of the case here). It seemed to be like the traveler in Maine asking for directions and hearing, "You can't get there from here."
Do I have a right of contribution? No, you lost that when you put an "other insurance" clause in your policy.
Well, can I enforce my "other insurance" clause against the other insurers? No, they never signed a contract with you (which is English for "You don't have privity with them").
Then I will seek subrogation from them. Sorry, the insured was made whole by the settlement, so stepping into the insured's shoes (i.e., subrogation) is not available.
You can't get there from here. Make no mistake, Mid-Continent is a major pain for insurers, but it is, arguably, really bad for insureds, who now have to rodeo to the bitter end because no one insurer will take the lead. In fact, one holdout can result in settlement gridlock.
So, what does that have to do with the Trinity Universal case? The Fifth Circuit Court held that Mid-Continent does not limit the right of an insurer that takes the lead and defends the insured from recovering shares of the defense costs owed by other insurers who also have a duty to defend the insured. In this case, Employers Mutual decided to take a shot at denying a duty to defend, even though at least two other insurers with similar policies had recognized the futility of Employers' line of argument and agreed to defend.
Employers was immediately sued by the other insurers (who no doubt hoped to get a ruling on the duty to defend before they faced the Mid-Continent dilemma of settling without everybody on board). The lower court threw the case out accepting Employers' argument that Mid-Continent applied to the duty to defend as well as the duty to indemnify. The 5th Circuit reversed.
"Other insurance" clauses, reasoned the appellate court, apply only to "loss," which does not include defense costs. Moreover, unlike the duty to indemnify, an obligation that is "several and independent," the duty to defend is broader and creates "a debt which is equally and concurrently due by" all of the insurers. Each insurer that owes a duty to defend is obligated to defend the entire case, including uncovered claims. So, Employers must contribute to the defense.
Trinity Universal may mitigate some of the hardship from the Mid-Continent decision. Insurers will find no benefit in taking a wild swing at denying a duty to defend and so will more likely take a seat at the table early in the game. A seat at the table gives all insurers the same access to defense counsel's evaluations of the merits of the case and the likely damages a jury could award. Thus, the insurers will be more likely to work together. They may even agree to participate in any settlement agreed to by a majority of the defending insurers, thus obviating Mid-Continent at the settlement stage.
In for a penny. We'll see.
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