A Dog in the Fight: Policyholder Interest in Inter-Insurer Disputes

When an insurer pays a policyholder’s claim, the insurer sometimes seeks to off-load that payment “vertically”, that is, by suing other insurance companies that issued lower-layer coverage, or “horizontally”, that is, by suing other insurance companies that issued coverage in other policy periods.

When a performing insurer sues an underlying insurer, it typically does so on the theory of equitable subrogation. In those types of claims, the insurer “steps into the shoes” of the policyholder and pursues the policyholder’s chose in action against the nonperforming insurer. E.g., Greater New York Mut. Ins. Co. v. North River Ins. Co., 85 F.3d 1088, 1096 (3d Cir. 1996). The policyholder’s chose typically is assigned contractually or at equity by subrogation to the performing insurer
In any circumstance where one insurer is suing another entity for performance, the insured will have an interest in the policy proceeds to the extent that it has not been “made whole.” Under the “made whole” or “make whole” doctrine, an insurer pursuing a subrogation claim retain the recovery unless and until the policyholder’s loss has been fully indemnified. Thus, in the event the policyholder’s loss exceeds the combined limits of all its coverage, that an overlying insurer has performed and sued a recalcitrant underlying insurer does not mean that that insurer is able to pocket the money from the nonperforming insurer. Instead, as should be reasonably obvious, the policyholder would be entitled to receive the money from the non-performing carrier, even if the overlying performing carrier is the one that brought suit. If the performing carrier succeeds in this suit, then the only consequence to the policyholder should be that the underlying carrier’s payment is to be debited against its policy limits, and the limits of the performing carrier should be refreshed (to the extent that the policyholder has been fully indemnified and there is money left over from the proceeds from the underlying carrier). Cf. Alta California Regional Center v. Fremont Indemnity Co., 25 Cal. App. 4th 455, 466 (1994), overruled on other grounds, 11 Cal. 4th 1, 34 (1995). Once “made whole,” however, most courts are uncomfortable with allowing the prospect that an insured might obtain more than complete recovery, Burns v. Cal. Fair Plan, __ Cal. App. 4th __ (Ct. App. June 25, 2007), but this issue more properly is policed through the collateral-source rule.
When a performing carrier instead brings an action against other insurers that issued policies in successive or prior policy years, its claim can be brought as a subrogation claim (asserting the rights of the insured) or as a contribution or indemnity claim (depending on whether the insurer is seeking partial recovery or full recovery from the nonperforming carriers). Most courts will look to the insurer’s other-insurance clauses as guidance in determine the relative obligations of the different insurers.
The other-insurance clause does not limit the policyholder’s right in the first instance, see Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 72 (1997) (“Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers.”); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 909 (2000) (“The other-insurance clause . . . does not excuse the insurer from discharging its independent obligation to indemnify the insured up to policy limits.”). Indeed, there is authority holding that it is bad-faith for an insurer to deny performance to the insured by pointing to another insurer. Silberg v. California Life Ins. Co., 11 Cal. 3d 452, 460 (1974). An other-insurance clause is not a “sue other insurance” obligation on the insured. Rhone-Poulenc Inc. v. International Ins. Co., 71 F.3d 1299 (7th Cir. 1996).
When an insurer pays the insured’s claim, it may want to look around to other insurers to see whether the policies they issued also have an obligation to perform. Insureds may have an interest, however, in the dispute between one insurer and another. That it has an interest does not mean that the insured necessarily can preclude contribution actions.
Some states allow an insured to target its insurance coverage and in effect preclude one insurer from suing another horizontally. For example, in Casualty Indem. Exchange Ins. Co. v. Liberty National Fire Ins. Co., 902 F. Supp. 1235 (D. Mont. 1995), the insured failed to provide notice of a suit to one of its insurers yet obtained recovery from another. The performing insurer sought contribution but the court ruled that principles of equity did not allow it to force contribution from an insurer with a valid notice defense. Id. at 1239. Rather than simply failing to provide notice, sometimes insureds make the deliberate choice not to select an insurer to provide performance; in such circumstances, the question is whether that election precludes a contribution claim. In Illinois, for example, the answer clearly is yes. Under Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App. 3d 70 (1992), the court upheld a “targeted tender” of the defense and insulated the non-targeted insurer from equitable contribution/indemnity claims.
Most courts, however, have found that one insurer should be permitted to seek recovery against another. E.g., Insurance Co. of North America v. Travelers Ins. Co., 118 Ohio App. 3d 302, 314 (1997) (“applying the principles of equity and natural justice, the secondary insurer possesses an equitable right to recover from the primary insurer, as well as a right to recover by way of subrogation under the policy.”). But does an insurer have any obligation relative to its own insured not to seek contribution? In Mitchell, Silberberg & Knupp v. Yosemite, 58 Cal. App. 4th 389 (1997), the insured had been sued and several of its insurers agreed to settle the claim, subject to a reservation of rights among the insurers. In the later contribution action, one of the insurers contended that its policy never provided coverage to begin with, and thus it was entitled to contribution/indemnification. The insurer against which contribution was sought at the same time also was providing coverage for other claims against the insured. If it paid the contribution claim, the insurer would not have any limits available to pay for these other claims. The insured in response brought suit against Yosemite (the carrier that sought contribution), contending that it had breached its duty of good faith and fair dealing by paying to settle and then contending it had no obligation whatsoever, with the result being that its other coverage was unduly impaired. The court rejected the contention that the excess insurer’s failure to reserve its rights against its own insured when paying the original settlement effected a waiver of its right to deny its coverage obligation ab initio in the subsequent litigation with the other carriers.
Consequently, an insurer in general breaches no duty to its insured when it seeks to pursue contribution against another insurance company issuing similar coverage at the same layer/risk. E.g., Illinois Emcasco Co. v. Continental Cas. Co., 487 N.E.2d 1110 (Ill. App. 1985); cf. Guaranty Nat’l Ins. Co. v. American Motorists Ins. Co., 981 F.2d 1108, 1109 (9th Cir. 1992) (discussing primary, true excess and “excess by coincidence” coverages). This is true when the effect on the policyholder from the contribution action is indirect, that is, a successful contribution action affects the policyholder’s ability to obtain performance with respect to other claims.
An insurer, however, may not obtain contribution from “other insurance” when if successful the contribution action would result in a money award that comes from the policyholder’s own pocket, at least in part. While it may not be bad faith for an insurer to pursue contribution, the insurer can obtain contribution only from “other insurance.” Many commercial policyholders have various forms of “fronting” arrangements with insurers, so the question arises whether an initially targeted insurer may obtain contribution from an insurer that in turn will demand reimbursement from the policyholder pursuant to a side indemnity agreement, captive reinsurance arrangement, or matching deductible program. See Gabe’s Constr. Co. v. United Capitol Ins. Co., 539 N.W.2d 144, 148 (Iowa 1995).
For example, a Florida appellate court held that an employer’s $1 million deductible was not “other insurance” subject to contribution from a performing insurer. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981); see also Wake County Hospital System v. National Cas. Co., 804 F. Supp. 768 (E.D.N.C. 1992). This has been the result in a number of other jurisdictions, e.g., American Fam. Mut. Ins. Co. v. Missouri Power and Light Co., 517 S.W. 2d 110 (Mo. 1974); USX Corp. v. Liberty Mut. Ins. Co., 645 N.E.2d 396 (Ill. App. 1994); Physicians Ins. Co. v. Grandview Hosp. and Medical Center, 542 N.E.2d 706 (Ohio App. 1988); Hertz Corp. v. Robineau, 6 S.W.3d 332 (Tex. App. 1999). Courts have looked to the economic substance of transactions to determine whether these are insurance – and thus even within the purview of “other insurance” clauses. E.g., Lawyers Title Ins. Co. v. Norwest Corp., 493 S.E.2d 114 (Va. 1997); State v. Continental Cas. Co., 879 P.2d 111, 1116 (Idaho 1994). As the Idaho court explained, “[t]he nature of ‘self-insurance,’ and the fact that it is not a form of insurance, is well-established. . . . Because ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance. [A] payment of . . . losses [that] was a matter of ‘self-insurance’, rather than insurance, . . . did not trigger the ‘other insurance’ clause in Continental’s policy.” Id. at 1116. Cf. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (captive-issued policies are not insurance).
Thus, various forms of fronting arrangements are not considered “other and valid collectible insurance” within the meaning of an other-insurance clause. Citgo Petroleum Corp. v. Yeargin, Inc., 690 So.2d 154 (La. App. 1997). This is true even where the self-insurance or fronted component is administered by an entity other than the insured in the first instance. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981). Accordingly, an insurer that is targeted for performance from the insured cannot pursue contribution from other insurance companies where the result of a successful contribution action would be for the policyholder to pay in part for the claim. Any other result would defeat the substance of the policyholder’s transaction with the originally targeted insurer, whereby it sought to transfer the risk of loss away from itself to its insurers.

One comment on “A Dog in the Fight: Policyholder Interest in Inter-Insurer Disputes

  1. “the court upheld a “targeted tender” of the defense and insulated the non-targeted insurer from equitable contribution/indemnity claims”
    There are a couple of reasons for “targeted tender” — often made not to the “policy holder’s” insurance, but to supplemental insurance.
    However, the practice seems unfair, especially when it is used to change supplemental insurance into sole coverage, which is what this article is really about — how people have used retention agreements to off-load not pro rata or shared risk but 100% of the risk instead when the insurer involved was positioned as supplemental.
    Basically the claimant has obtained cheap primary insurance from someone who did not expect to be providing it.
    Currently people often (but not always) get away with that ploy, but it is important to recognize it for what it often is.

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