The Courts and Equitable Subrogation versus Equitable Contribution (Part
2)1
September 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? What happens when the policies
in question provide overlapping coverage? This is a question that is the basis
of much recent litigation.
by Joseph
P. Postel
Liberty Mutual Insurance Group
Part 1 of this series explained the difference
between equitable subrogation and equitable contribution—and how many courts
have confused the two. This article 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.
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.
Duplicating or Overlapping Insurance Policies
"Few areas in the field of insurance law give courts and parties more difficulty
than that of duplicating or overlapping insurance."2
In cases of overlapping coverage, where the two insurers cover different risks
but with respect to the particular loss at issue, they both provide coverage
(or at least potentially do), courts have taken different approaches. Some courts
have regarded the policies as covering the same risk, despite the difference
in the scope of coverage, and have approved of an action for equitable contribution
for partial reimbursement, rather than an action for equitable subrogation for
full reimbursement.3
In Fire Ins. Exch. v American States Ins. Co.,,
39 Cal App 4th 653, 46 Cal Rptr 2d 135 (Cal App 1995), the settling insurer
settled a bodily injury claim arising out of construction work at a home. The
injured man was employed by a subcontractor, and he sued the owners (husband
and wife) and the general contractor (who was the husband's father). The homeowners'
primary and excess insurers, Fire and Truck respectively, covered the owners
and the father/general contractor, since he resided with them during the construction.
The father also had his own personal umbrella policy issued by American States,
but which covered only him, not his son and daughter-in-law. Fire and Truck
settled the underlying injury suit on behalf of the husband, wife, and father,
without any contribution from American States, and then sued American States
for equitable contribution.
American States contended that it was not subject to equitable contribution
without a judicial determination that its only insured, the father, was at fault.
The court of appeal rejected this contention, stating as follows:
- American States has cited no California authority holding that equitable
contribution requires a specific finding of each insured's comparative fault.
Such a rule would hamper settlements and require the defendant to prove
its own fault before the defendant's insurer could seek equitable contribution.
[39 Cal App 4th at 663, 46 Cal Rptr 2d at 140.]
To the same effect is Indiana Ins. Cos. v Granite
State Ins. Co., 689 F Supp 1549 (SD Ind 1988). In that case, after settlement
of a personal injury suit by a person injured in a swimming pool in an apartment
complex, the liability insurer of the owners and managers of the apartment complex
(the Hatfields) sought equitable contribution from the liability insurer for
the builder of the complex (also the Hatfields). The underlying complaint alleged
that the Hatfields were negligent in both their design and construction of the
pool, and also in their maintenance and operation of the pool. The Granite State
policy provided completed operations coverage to the Hatfields for the design
and construction of the pool, and also covered them for the negligent maintenance
and operation of the pool. The Indiana policy did not include completed operations
coverage, however. That policy, therefore, covered only the negligent maintenance
and operation of the pool, and not negligent design and construction.
Despite this difference in causes of loss covered, the court found that the
policies covered identical risks:
- However, identity of casualty or risk does not require identity of coverage
under the applicable policies as Granite State seems to suggest. "The requirement
that there be an identity of risk does not mean that the total coverage
under both policies be the same, but only that with respect to the harm
suffered there be coverage under both policies." [689 F Supp at 1558.]
This is the view taken by Couch on Insurance
3d at 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. [Emphasis supplied.]
Focusing on the Underlying Facts
Some courts have remanded such disputes to trial courts for factual determinations
as to the cause of loss in order to permit a determination as to which insurer
was primarily liable for the loss. For example,
in North American Ins. Co. v Kemper National Ins. Co.,
325 Ill App 3d 477, 758 NE2d 856 (1st Dist 2001), an action for equitable subrogation
by a group health insurer against a workers compensation insurer concerning
medical bills for work-related injuries, where the group health plan excluded
work-related injuries and the workers compensation policy covered only work-related
injuries, the employee in question had a complicated medical history that made
it a difficult factual question whether the disputed medical bills were work-related
or rather, due to preexisting, non-work related conditions.
The court noted that despite the exclusion in the group health insurer's
policy for work-related injuries, "there was a potential for liability against
North American [the group health insurer]." 325 Ill App 3d at 483, 758 NE2d
at 861. The court therefore reversed the summary judgment in favor of the workers
compensation insurer and remanded the case for an evidentiary hearing to determine
which disputed medical bills, if any, were work-related and thus subject to
a right of equitable subrogation, or if, on the other hand, the bills were so
clearly work-related that the group health insurer's payments should be deemed
voluntary, and thus an inadequate basis for subrogation.
The parties agreed that this was not an appropriate case for equitable contribution,
because the policies covered different risks. The court reasoned that there
was an overlap between the two policies, however, because under applicable workers
compensation law, "the fact that a workers compensation claimant may have had
a preexisting condition does not preclude an award of benefits upon her showing
her condition was aggravated or accelerated by the employment." 325 Ill App
3d at 483, 758 NE2d at 860. Thus, under this view,
both insurers may have been responsible
for at least some of the disputed bills, to the extent that they represented
treatment of a non-work related condition aggravated by the on-the-job injury.
It would seem that as to these bills, then, equitable contribution would have
been the appropriate remedy.
Likewise, in State Farm Fire & Cas. Co. v Cooperative
of American Physicians, Inc., 163 Cal App 3d 199, 209 Cal Rptr 251 (Cal
App 1984), where a medical practice group's premises liability insurer settled
a claim by a patient injured by a fall from an examination table, the court
reversed the dismissal of the equitable subrogation claim on the pleadings,
stating as follows:
- The equitable issue of State Farm's right to recover damages from Cooperative
and Mutual does not arise until the legal issue—i.e., whether Smith's injuries
were caused by negligent maintenance of the premises or medical malpractice—is
determined in its favor. We know of no legal impediment to a jury trial
of that preliminary question, and defendants offer none. [163 Cal App 3d
at 206, 209 Cal al Rptr at 254.]
Disregard the Facts—Assume Viability of Underlying Tort Cases
In contrast to the approach taken by the courts in
North American Ins. Co. v Kemper National Ins. Co.
and State Farm Fire & Cas. Co. v Cooperative of American
Physicians, Inc., where the courts remanded the case for factual determinations
as to cause of loss so as to permit a determination of which insurer was
primarily liable for the loss, many courts
finding an identity of risks despite some differences in the coverage or persons
insured have been loathe to engage in fact finding with respect to issues in
the underlying case resolved by the settlement, reasoning instead that they
were entitled to assume that the plaintiff
could have prevailed under either theory alleged in the complaint (where one
theory was covered by one insurer and the other theory by the other insurer).
For example, in Home Ins. Co. v Certain Underwriters
at Lloyd's London, 729 F2d 1132 (7th Cir 1984) (Illinois law), an action
by a general liability insurer for equitable contribution against a professional
liability insurer, the common insured (UOP) was an engineering firm that was
sued by a worker (Pendergraft) injured in an explosion involving an oil company
plant industrial system designed by UOP.
The underlying complaint alleged that UOP negligently designed the industrial
system and also that UOP negligently assembled, controlled, manufactured, constructed,
repaired, tested, and maintained the system. Home issued a general liability
policy to UOP, which covered the allegations that UOP negligently assembled,
controlled, manufactured, constructed, repaired, tested, and maintained the
system, and the British Insurers issued a professional liability policy that
covered the allegation that UOP negligently designed the system. The British
insurers took the position that their policy, covering only the design theory,
did not apply to the loss, since the plaintiff would not have prevailed on that
theory. After Home settled the case without any finding of fact as to which
theory gave rise to UOP's liability, Home sued the British insurers for equitable
contribution. The British insurers argued that as the plaintiff, Home had the
burden of proving which theory led to the liability and the settlement, and
that, without any finding of fact from the court in the underlying case, Home
could not meet its burden. The court rejected this contention, stating as follows:
-
It is plain that the British Insurers are asking the impossible. Home
paid $290,000 to settle the case; there is no way to divide this figure
into constituents representing Pendergraft's "design" theory, "manufacturing"
theory, "construction" theory, and the like. Indeed, the case is in the
same posture as if a general verdict had been returned in favor of Pendergraft.
Thus there are only two possibilities: either Home must bear the entire
$290,000 or Home and the British Insurers will be treated as coinsurers
of the same risk and the $290,000 will be apportioned according to the policies'
other-insurance provisions. Guided by principles of equity and the particular
facts of this case, we select the latter option.
-
First, there was but one explosion and Pendergraft suffered one set of
damages. Although the British Insurers indemnified UOP only against claims
of design negligence, if such negligence was the cause of the explosion,
then the British Insurers' policies would fully apply.
Because we are entitled to assume that Pendergraft
could have prevailed on his design negligence claim, it follows that
Home and the British Insurers had the same maximum exposure from the Pendergraft
suit. [729 F2d at 1134. Emphasis supplied; citations omitted.]
Likewise, in Indiana Ins. Cos. v Granite State Ins.
Co., supra, 689 F Supp. 1549 (SD Ind 1988), the court assumed that the
plaintiff could have prevailed on any theory:
- After settlement, the court is permitted to assume that the plaintiff
could have been successful on any claim still pending at the time of the
settlement; therefore each insurer's exposure is identical, in that the
settlement cannot be apportioned among the theories. [689 F Supp at 1552-53.]
Similarly, in John Alden Life Ins. Co. v North Carolina
Ins. Guar. Assoc., supra, 589 SE2d 908 (NC App 2004), where a group health
insurer, whose policy excluded work-related injuries, paid medical bills for
an employee who suffered a heart attack at work and then sued the workers compensation
insurer for equitable subrogation, rather than remanding the case for a factual
determination as to which bills were work-related and which were not (as the
Illinois Appellate Court did in North American Ins.
Co. v Kemper National Ins. Co., supra), the court simply noted that the
North Carolina Industrial Commission had determined that the heart attack was
work-related, and this determination conferred a right of equitable subrogation
on the group health insurer.
The approach taken by these latter courts is better, because it avoids a
multiplicity of litigation. Most cases settle, as the court observed in
Western Cas. Co. v Western World Ins. Co., 769
F2d 381, 384 (7th Cir 1985), thus making it impossible to determine which theory
of recovery would have prevailed, or which insured was at fault, so it is usually
better to assume that all theories alleged in the underlying complaint were
viable and that all defendants were at fault, and to divide liability equitably
on that basis, rather than to burden the coverage courts with mini-trials of
issues in the underlying tort cases. This is not to say that a court in a subsequent
coverage action should never involve itself in fact finding with respect to
the underlying case, but only that reasonable presumptions and assumptions such
as those employed by these latter courts should be liberally employed in order
to preserve judicial resources, and to avoid imposing undue burdens on responsible
insurers seeking rightful reimbursement from other insurers..
Follow these links for Part 1 and
Part 3 of this series.
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