The Courts and Equitable Subrogation versus Equitable Contribution (Part
1)1
August 2004
What must an insurer that settled a suit against
its insured prove in order to obtain reimbursement from an insurer that provided
additional insured coverage, but did not pay? This is a question that is the
basis of much recent litigation. When courts confuse equitable subrogation and
equitable contribution, the public interest is not well served; recalcitrant
insurers are rewarded while responsible insurers are punished.
by Joseph
P. Postel
Liberty Mutual Insurance Group
Part 2 focuses on cases of overlapping coverage,
or mutually exclusive coverage where unresolved factual questions make it impossible
to determine which policy applies, but both potentially do. This article examines
the conflicting decisions of the First and Third Districts of the Illinois Appellate
Court and the issues to be resolved by the Illinois Supreme Court. Part 3 examines the conflicting decisions of the
First and Third Districts of the Illinois Appellate Court and the issues to
be resolved by the Illinois Supreme Court.
In Home Ins. Co. v Cincinnati Ins. Co., 345
Ill App 3d 40, 801 NE2d 997 (1st Dist 2003), leave to appeal allowed, a 2–1
majority of the Illinois Appellate Court, First District, held that the insurer
for a subcontractor that paid a loss on behalf of its additional insured general
contractor could not obtain reimbursement from a second subcontractor's insurer
that also provided additional insured coverage to the general contractor, on
the grounds that the two policies covered different risks. In arriving at its
holding, the court reasoned that the "identity of risks" element of an equitable
contribution claim applied also to a claim for equitable subrogation, a claim
that has previously been defined by the fact that the two insurers cover different
risks. Because Home had an excess other insurance clause in its policy, its
coverage for the general contractor was excess over Cincinnati's. Nonetheless,
Home paid $500,000 to settle the suit, and obtained no reimbursement from Cincinnati.
The ready availability, in appropriate cases, of such remedies as equitable
contribution and equitable subrogation is essential to effectuating the important
public policies of promoting settlements and allocating loss payments fairly
and equitably. When courts impose undue burdens on insurers seeking rightful
reimbursement under equitable theories, the public interest is not well served,
and the behavior of recalcitrant insurers is rewarded, while responsible insurers
are punished. This important public policy concern was explained by the California
Court of Appeal in Fireman's Fund Ins. v Maryland Cas.,
65 Cal App 4th 1279, 77 Cal Rptr 2d 296 (Cal App 1998), a case cited by Justice
Hall in her dissenting opinion in this case:
- The result Maryland advocates in this case would actually encourage
primary insurers covering the same risk to delay responding to an insured's
tender of defense or request for indemnification until some other carrier
accepts the tender, in the hope of subsequently making a more advantageous
settlement with the insured. The outcome of a given case could be made to
depend on such chance factors as which insurance carrier the insured happened
to tender its defense to first, or the insured's willingness to pursue its
rights against a recalcitrant insurance carrier, rather than each carrier's
actual obligation under its individual contract with the insured to provide
coverage and a defense. By such fortuities, one insurance carrier could
be unfairly relieved of its rightful obligations while another insurer was
burdened with the entire loss and deprived of its right to contribution,
in derogation of the public policies of encouraging insurers to assume their
duty to defend and promptly indemnify their insureds in good faith. [65
Cal App 4th at 1297, 77 Cal Rptr 2d at 306.]
The appellate court erred in imposing the identity of risks requirement for
an equitable contribution claim on an insurer asserting a claim for equitable
subrogation, which, by definition, is an action between insurers covering different
risks. The principal differences between equitable contribution and equitable
subrogation are in the remedy each provides (sharing for equitable contribution
versus full reimbursement for equitable subrogation), and the situations in
which each applies (same risks for equitable contribution versus different risks
for equitable subrogation).
Equitable Subrogation
Equitable subrogation permits one insurer that is not primarily liable to the insured to shift
the entire loss to another insurer that is primarily liable to the insured. Fireman's Fund Ins., supra. The doctrine applies
in two distinct scenarios: (1) in an action by an excess insurer against a primary
insurer, and (2) in an action by a primary insurer against another primary insurer
that covers a different risk. What both of these scenarios have in common, however,
is that the insurers cover different risks.
Excess Insurer versus Primary Insurer
A right to equitable subrogation among insurers typically arises when an
excess insurer has paid a loss that a primary insurer should have paid. Although
the scope of coverage provided by a primary and an excess policy may be identical,
or may overlap with respect to a particular loss, courts nonetheless view primary
and excess policies as covering different risks.2
This divergence in risks usually occurs where both policies are primary,
but one has an excess clause that operates under the circumstances present,
thus making that policy "excess by coincidence."3 For example, where a person drives another's car with the owner's permission,
he is an insured on the owner's policy for that car, but he also has coverage
under his own policy while driving cars he does not own. The coverage he has
under his own policy for nonowned cars is excess over the coverage the owner
has on the car, however (which is primary). In that very common situation, the
insurance on the car is primary and the insurance on the driver is excess. They
therefore cover different risks.4
Another example would be where a general contractor on a construction project
has a general liability policy, but is also an additional insured on a subcontractor's
policy for liability arising out of that subcontractor's work. Often, the general
contractor's policy will contain an excess clause that operates when the insured
general contractor is an additional insured on a subcontractor's policy.5
The Illinois Supreme Court first recognized an equitable subrogation claim
between insurers in New Amsterdam Cas. Co. v Certain
Underwriters at Lloyd's, London, 34 Ill 2d 424, 216 NE2d 665 (1966).
There, New Amsterdam's insured was involved in an accident while driving a rented
car. After determining that the New Amsterdam policy on the driver was excess
over the Lloyd's policy on the rented car, the court held that New Amsterdam,
which paid the loss, was subrogated to its insured's right to coverage under
the Lloyd's policy, noting that "this is not an action by plaintiff for contribution;
rather, it is an action in subrogation of its insured's right to be fully protected
for damages and costs of defense that Lloyd's was liable to pay." [34 Ill 2d
at 431, 216 NE2d at 669.] "Losses should not fall irrevocably upon that insurer
which first recognizes its obligations, while one neglectful of its duty is
allowed to escape," said the court.
The appellate court, following New Amsterdam,
allowed an excess auto liability insurer to bring an action for equitable subrogation
against a primary auto liability insurer in Aetna Cas.
& Surety v Coronet Ins., 44 Ill App 3d 744, 358 NE2d 914 (5th Dist 1976).
In Northbrook P&C, supra, the appellate court
also permitted a general liability insurer for a general contractor with an
excess "other insurance" clause to obtain equitable subrogation from a subcontractor's
general liability insurer that added the general contractor as an additional
insured. Excess insurers have also been allowed to assert equitable subrogation
claims against primary insurers for negligent failure to settle within policy
limits.6
Primary Insurer versus Primary Insurer of Different Risk
Even where both policies are primary, however, and neither has an excess
clause, the doctrine of equitable subrogation applies where an insurer that
is only secondarily liable has paid a loss for which another insurer covering
a different risk was primarily liable. An example of this is where a group health
insurer paid medical bills incurred by an injured worker and was then allowed
to sue the workers compensation insurer for full reimbursement.7
Another example is where a premises liability insurer paid a loss on behalf
of its insured medical practice group that arose more out of medical malpractice
than out of any use of the insured premises. In State
Farm Fire & Cas. v Cooperative of American Physicians, 163 Cal App 3d
199, 209 Cal Rptr 251 (Cal App 1984), a patient fell off an examination table
after receiving an injection, and sued the medical practice group for malpractice
and for premises liability. The premises liability insurer, which had an exclusion
in its policy for medical malpractice claims, was permitted to shift the entire
loss to the medical malpractice insurers by means of an action for equitable
subrogation.
Equitable Contribution
Equitable contribution, rather than permitting an insurer that paid a loss
to shift the entire loss to another insurer
that did not pay, allows that insurer to shift an equitable share of the loss to the insurer
that did not pay.8 In the venerable Royal Globe Ins. v Aetna Ins., 82 Ill App 3d
1003, 403 NE2d 680 (1st Dist 1980), which was apparently the first reported
equitable contribution action between insurers in Illinois, the court described
the doctrine as follows (with citations omitted):
- In insurance law, contribution is an equitable principle arising among
co-insurers which permits one who has paid the entire loss to be reimbursed
from other insurers who are also liable for the loss. The reason for this
rule is that one insurer has paid a debt which is equally owed by the other
insurers. The fact that an insurer undertakes the burden of a full settlement
payment prior to a possible judgment does not mean that the insurer is a
volunteer. It is therefore not precluded from recovering contribution from
other insurers liable for the same loss. In order for the settling insurer
to recover, however, it must prove all facts necessary to the claimant's
recovery against the insured as well as the reasonableness of the amount
paid. Additionally, in any contribution action, there must be an identity
between the policies as to parties and insurable interests and risks. [Royal
Globe, 82 Ill App 3d at 1005, 403 NE2d at 682.]
The doctrine of equitable contribution has been approved in numerous subsequent
reported decisions.9 Although it is more typical
for claims arising from a construction project injury to involve a general contractor's
own insurer suing a subcontractor's insurer for contribution (where the contractor
whose coverage is in question is the named insured under the policy issued by the plaintiff insurer, and an additional insured on the defendant insurer's
policy), there are also reported decisions where one subcontractor's insurer
sued another with respect to coverage for an entity that was an additional insured
on both policies. That was the scenario
in Cincinnati Ins. Co. v West American Ins. Co. and in Cincinnati Ins. Co. v River City Constr. Co.,
and it is the situation in this case.
Follow these links for Part 2 and Part 3 of this series.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.