Where There Is a Right, There Is a Remedy—Except in Illinois1
February 2001
In a recent opinion, the Illinois Appellate
Court denied pro-rata reimbursement to an insurer whose policy afforded additional
insured status to a project owner and general contractor. This article explains
where the court went wrong when it ruled that the doctrine of equitable contribution
did not apply because the two policies insured different risks.
by Joseph
P. Postel
Liberty Mutual Insurance Group
The Illinois Appellate Court has denied pro rata reimbursement to an insurer
whose policy afforded additional insured status to a project owner and general
contractor. The insurer from which reimbursement was being sought had issued
a policy under which the same project owner and general contractor were also
additional insureds. That second insurer had declined to participate in the
settlement involving its own and the other policy’s insureds. It was not compelled
to do so by the court, which ruled that the doctrine of equitable contribution
did not apply because the two policies insured different risks. Although both
policies covered the same additional insured owner and contractor, each covered
the owner and contractor for liability arising out of a different named insured’s work. Schal-Bovis, Inc. v Casualty Ins. Co., 732 NE2d
1179 (Ill App June 30, 2000), leave to appeal to Illinois Supreme Court denied
November 29, 2000.
An ancient Roman legal maxim states: ubi ius,
ibi remedium. Where there is a right, there is a remedy. Generally, the
law will not countenance a situation where a person has a legal right but no
means of enforcing it. The law will provide a means. Or, in the English common-law
tradition, where the law does not provide a means of enforcing a right, equity
will.
This principle is particularly important in the world of additional insured
coverage. Where a party being sued has multiple policies covering the claim
asserted—usually the insured's own policy, and one or more others on which he
is an additional insured—he will most often turn first to his own insurer for
protection. But of course, it is not in his best interest that his insurer defend
and pay the loss if another insurer is obligated to do so. Rather, the insured
is better served if he keeps the loss off of his loss history, which he will
be able to do if the policy on which he is an additional insured defends and
indemnifies, rather than his own. And, of course, it is also in his insurer's
best interest not to incur the cost of defending and indemnifying his insured
if another insurer must do so.
But how does the first insurer enforce his named insured's rights to additional
insured coverage under the second policy? Not being an insured on that second
policy, the first insurer cannot avail itself of the remedy the law provides:
a suit for breach of contract. Nor does its own other insurance clause entitle
it to sue the second insurer for breach, because the second insurer is not bound
by a term in a contract to which it is not a party.
The contract between the named insured on the first policy and the named
insured on the second policy won't work either, because neither insurer is a
party to that contract. Interestingly, not even the insured can enforce his
own additional insured rights under the second policy if his own insurer (the
first insurer) has paid the loss. This is because, by paying the loss, the first
insurer extinguishes any interest its insured had. [Walker
v Ridgeview Constr. Co., 736 NE2d 1184 (Ill App 2000).]
But what the law does not remedy, equity will. In medieval
England, there were separate courts for law and equity cases. Although no American
jurisdiction maintains separate courts anymore, equitable remedies are still
available where the law does not provide an adequate remedy. Equity enforces
additional insured rights by means of two separate doctrines: equitable subrogation
and equitable contribution.2
These doctrines are separate and distinct, and apply to different situations,
but both are crucial means for enforcing additional insured rights. They both
give an insurer that pays a loss on behalf of its insured the right to be reimbursed
by another insurer that also covered the loss on behalf of the same insured,
despite the absence of any contract between them.
Equity Prevails
The basis of the equitable subrogation and equitable contribution doctrines
is simply the fact that it would be inequitable to allow one insurer to be stuck with the loss when one or more other insurers
also covered it. The courts have explained it this way:
A loss should not fall irrevocably upon that insurer which first recognizes
its obligations, while one neglectful of its duty is allowed to escape.
[New Amsterdam Cas. Co. v Certain Underwriters at
Lloyd's, 34 Ill 2d 424, 216 NE2d 665, 669 (1966).]
Put another way:
It is a bad idea to inform insurance carriers that whichever is least faithful
to its obligation to the insured will escape all liability as long as a responsible
carrier covers the loss. [Western Cas. & Surety Co.
v Western World Ins. Co., 769 F2d 381, 383 (7th Cir 1985) (Illinois law).]
Like any equitable remedy, subrogation and contribution are intended to apply broadly in order to effectuate their remedial
purpose and to do equity. That means courts are supposed to find an excuse to
give the remedy, not an excuse to withhold it.
Space does not permit a thorough discussion of the doctrines or the cases
applying them. For a thorough discussion of the differences between the two,
see, Fireman's Fund Ins. Co. v Maryland Cas. Co.,
77 Cal Rptr 2d 296 (Cal App 1998). In that case, the California Court of Appeal
notes an interesting difference between the two doctrines. Subrogation is generally available in favor
of an excess insurer against a primary insurer; contribution is available between or among insurers at the same level,
e.g., both or all primary, or both or all first-level excess.
Equitable Contribution and the Schal-Bovis Case
The elements of a claim for equitable contribution are well settled, and
were set out by the Schal-Bovis court early in its opinion. As the court noted,
the insurer making the claim must prove the following three things:
- All facts necessary to the claimant's recovery against the insured;
- The reasonableness of the amount paid to the claimant; and
- An identity between the policies as to parties and insurable interests
and risks.
It is this third element that concerned the court.
Without discussing all facts and issues of the case, the dispute we are interested
in involved coverage for the general contractor (Schal) and the owner (Buck).
There was no dispute that Schal and Buck were additional insureds on policies
issued to four different subcontractors by Great American, Wausau, Casualty,
and American States. For ease of reference, here are the four subcontractor's
insurers and their named insureds:
Great American → Ranken Steel
Wausau → Ozark Steel Fabricators
Casualty → Alcan United Contrete
American States → Chicago Forming
Great American and Wausau paid their share of the loss on behalf of Schal
and Buck. They then sought equitable contribution from Casualty and American
States. Casualty and American also covered Schal and Buck as additional insureds
but did not pay on their behalf.
The court analyzed whether the third element for an equitable contribution
claim was satisfied, i.e., did the four policies cover the same risk? The court
began its analysis with a quote from Couch on
Insurance 3d at sec. 218:6:
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 that 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. [732 NE2d at 1186 (emphasis supplied).]
The court concluded that the four policies did not cover the same risk, reasoning
as follows:
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 Ranken's work. The Wausau policy covered Schal and Buck from
liability, but only when that liability arose out of Ozark's work. Clearly,
the risk that a plaintiff might be injured in connection with Ranken's 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 from 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 polices). Thus, because each insurer insured substantively different
risks, each is precluded from seeking equitable contribution from the others.
[732 NE2d at 1187.]
Where the Court Went Wrong
The court's conclusion cannot be justified. First, the court did not even
answer the question that, by quoting the Couch treatise, it accepted as dispositive: Did all of the subcontractors' policies
cover the loss? The court ignored that question. The court also ignored the
facts relevant to that question. Instead, the court looked only at the differing
language in the various additional insured endorsements, concluding that different
language in the endorsements necessarily means different risks insured. But
it doesn't mean that.
To proceed from the premise that the four policies each covered Schal and
Buck for their liability arising out of a different subcontractor's work, to
the conclusion that they therefore covered different risks, is to assume that
the owner's and general contractor's liability could only have arisen out of
one of the subcontractor's work, but not the others' work. This assumption goes
unacknowledged and unexplained in the opinion, however.
In fact, that is a false assumption. There is no reason to assume that the
liability of Schal and Buck could not have arisen out of the work of all four
of the subcontractors. After all, the substantive law applicable to the underlying
claim recognizes that a loss may be proximately caused by more than one tortfeasor.
This concept is called concurrent causation.
Although that concept cannot determine
the insurance issue,3 it is well settled
that the terms "arising out of" in standard additional insured endorsement forms
connote only the loosest connection between the loss and the named insured's
work. (This is referred to as the "but for" causation.) This connection is much
looser than the direct connection required to satisfy the proximate cause standard
applicable to the underlying claim.4 So if, under the stricter standard of causation
applicable to the underlying claim, the loss can be said to have been caused
by more than one subcontractor, it necessarily follows that under the looser
standard applicable to determining additional insured coverage, the loss can
be said to arise out of the work of more than one subcontractor.
From the opinion in this case, it is very difficult to determine whether
such a connection could have been established as to any of these four subcontractors.
The opinion says very little about what specific work each subcontractor did,
whom it contracted with, or even which subcontractor the injured man worked
for. Certainly, however, there is nothing in the opinion to justify the conclusion
that Schal's and Buck's liability did not arise in some way out of the work
of the subcontractors whose insurers did not honor their obligations to Schal
and Buck. And, if it did, then the third element for an equitable contribution
claim was satisfied, because all four policies covered the loss.
It is unfortunate that the Illinois Supreme Court did not
accept this case for review, as it conflicts with a number of cases that took
a broad view of the requirement that there be an identity of interest, insured,
and risk.5 There are, likewise, a large
number of cases taking the same broad view of a closely analogous question:
whether, for purposes of an "other insurance" clause in one policy, a second
policy can be considered "other insurance" when it does not provide coverage
identical to the first. The courts have almost universally determined that where
both policies cover the loss, any differences between them are immaterial, and
the "other insurance clause" in the first policy will apply. [See, e.g., U.S. Fire Ins. Co. v Aetna Life & Cas. Co., 684
NE2d 956 (Ill App 1997).]
How Subcontractors Can Protect Themselves
This decision puts subcontractors' insurers in a damned-if-they do, damned-if
they-don't position when faced with a tender from an additional insured owner
or general contractor. On the one hand, if the insurer steps up and honors its
obligations to its additional insured(s), even though there may be several other
insurers with the same obligations that don't honor them, the responsible insurer
can do nothing to recover any reimbursement from the irresponsible insurers.
On the other hand, in most situations where the subcontractor's insurer receives
a tender of defense on behalf of an owner or general contractor from the owner's
or general contractor's own insurer, the subcontractor's insurer will have to
provide the entire defense and indemnification, not just a share of it.
There are two reasons for this. First, it is already established that the
insurer must provide its insured with a complete defense; it may not respond
to a tender of defense from the insured by offering to provide only a pro-rata share of the defense. This is because
doing so would leave the insured with less than he bargained for: a complete
defense. [Zurich Ins. Co. v Raymark Ind., 514
NE2d 150 (Ill 1987); LaSalle Natl. Trust, N.A. v Schaffner,
818 F Supp 1161 (ND Ill 1993).]
Second, if the owner's or general contractor's own policy contains the 1998
version of the Insurance Services Office, Inc. (ISO), CG 00 01 form, then that
policy will be excess over the subcontractor's policy with respect to coverage
for the owner and general contractor. (See the 1998 edition CG 00 01 form at
Section IV, par. 4(b)(2).) That arguably puts the subcontractor's insurer in
the same position, at least for purposes of this discussion, as if the tender
came from the insured himself. That is, the insurer may not offer only a pro-rata
share, because it bargained to provide a full defense and indemnification, and
no other insurer can be compelled to do so (the owner's and general contractor's
insurers because they are excess, and the other subcontractors' insurers because
they cover different risks).
The result is that the subcontractor's insurer is left with the responsibility
to fund the entire defense and indemnity, up to its limits. Putting the honorable
subcontractor's insurer between this rock and hard place is not the goal of
equity, but it is the result of the Schal-Bovis decision.
If the subcontractor's insurer receives a tender of defense from an owner's
or general contractor's insurer whose obligation to defend is not made excess by the existence of the
subcontractor's insurance, it may respond by offering to provide a pro-rata share. (This would be the case
if the insurer had issued a pre-1998 version of the ISO CG 00 01 form, containing
a pro-rata "other insurance" clause.)
After all, if the owner's or general contractor's insurer must continue to
defend, then the entire burden would not fall on the subcontractor's insurer—but
it would still be paying a bigger share than it should. If the owner's or general
contractor's insurer could take the insurer for a second subcontractor to court
on an equitable contribution claim, it could reduce its pro-rata share from
one-half to one-third, or to one-fourth if there were two other subcontractors
involved, and so on. But the Schal-Bovis decision
won't let the insurer do that.
Really, the only way that a subcontractor's insurer can protect itself from
the effects of the Schal-Bovis decision is to
insert a clause in its additional insured endorsement requiring the additional
insured to tender its defense to any other insurer providing additional insured
coverage. That type of clause would arguably entitle the subcontractor's insurer
to respond to a tender from an additional insured by offering only a pro-rata
share of the defense and indemnity, along with all other insurers furnishing
additional insured coverage. This would shift the burden to the owner and general
contractor to pursue and enforce tenders to all insurers providing them with
additional insured coverage.
Conclusion
Let's be clear about the limit of the damage: this case only prevents one
additional insured insurer from obtaining contribution from another. The case
furnishes no refuge for a subcontractor's insurer that shirks its duties to
its additional insured general contractor, when it finds itself hauled into
court by the insurer for the general contractor.
The second portion of the Couch quote, above,
makes that clear.
The general contractor's own coverage is not limited to liability arising
out of a particular subcontractor's work. It is general coverage for all sums
the general contractor may be legally obligated to pay because of bodily injury
or property damage caused by an occurrence. That coverage is broad enough to
encompass the risk of both the general contractor's own work and that of a subcontractor.
Thus, there is definitely an identity of risks between the two, even under the
inappropriately narrow analysis of the Schal-Bovis decision, and the general contractor's insurer may sue the subcontractor's insurer
for equitable contribution.
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