Excess Insurer Entitled to Equitable Subrogation—Not Equitable Contribution—from
Primary Insurer
June 2005
The decision in Home
Ins. Co. v Cincinnati Ins. Co. is good in the sense that it reaffirms
the right of an insurer that settles a suit to seek reimbursement from one or
more insurers that also owed coverage. It also clarifies the standard whereby
in an action for equitable subrogation, the settling, plaintiff insurer is entitled
to a presumption that the underlying plaintiff
would have prevailed against all defendants under all theories alleged in the
complaint. However, because the court chose a narrow construction of the "identical
risks" element for an equitable contribution claim, this decision will foreclose
that remedy for many insurers, leading to an increase in equitable subrogation
claims, where the stakes are higher (all or nothing), and the issues will be
contested more vigorously.
by Joseph
P. Postel
Liberty Mutual Insurance Group
Fisher, an employee of Aldridge Electric, was injured doing road construction
work on the Kennedy Expressway in Chicago when a car struck him as he installed
lights in an underpass. He filed suit against the general contractor, Allied,
and the safety subcontractor, Western, alleging that they negligently failed
to provide him a safe place to work. Aldridge Electric was also a subcontractor
of Allied.
Allied, the general contractor, was an additional insured on commercial general
liability (CGL) policies issued to both of its subcontractors: Cincinnati's
policy issued to Western, and Home's policy issued to Aldridge Electric. Both
the Cincinnati policy and the Home policy contained CG 20 10 endorsements (11/85
version), making Allied an additional insured for liability arising out of the
respective subcontractor's work for Allied. The Home's policy also contained
an excess other insurance endorsement, which provided that the policy's coverage
for any insured would be excess over any other available primary insurance (such
as Cincinnati's).
The Home and Cincinnati agreed to defend Allied on a 50/50 basis, with each
reserving rights. Cincinnati settled Fisher's claim against its named insured,
Western, prior to suit. The case then proceeded to trial, but during the trial,
Fisher also settled with Allied for $600,000. Of this amount, the Home paid
$500,000 and Cincinnati paid $100,000.
The Home then filed suit against Cincinnati. In Count I of its complaint,
the Home asserted a claim for equitable subrogation, seeking reimbursement of
its entire $500,000 payment on Allied's behalf. In Count II, in the alternative,
the Home asserted a claim for equitable contribution, seeking an equal share
from Cincinnati, which would have been $200,000 (thus equalizing at $300,000
each insurer's contribution to the settlement). The circuit court entered judgment
for Cincinnati, and Home appealed.
The Appeals
On appeal, the court held that the Home was not entitled to recover under
either theory. The court found that the Home could not satisfy the elements
of a claim for equitable subrogation, because the Home and the Cincinnati policies
covered different risks, i.e., they each covered Allied for liability arising
out of a different subcontractor's work. The court found that the Home was also
not entitled to equitable contribution, for two reasons: (1) the identity of
risks element for such a claim was not satisfied, and (2) an excess insurer
is not entitled to contribution from a primary insurer. The court affirmed the
judgment in favor of Cincinnati. Home appealed to the Illinois Supreme Court.
On appeal, the Illinois Supreme Court held that indeed, Home was not entitled
to equitable contribution from Cincinnati, for two reasons: (1) contribution
is not available between a primary and an excess insurer, and (2) the policies
covered different risks, because they insured Allied for liability arising out
of different subcontractors' work. The court, however, held that Home was entitled
to equitable subrogation, because such an action lies whenever two or more policies
cover the same "loss," as the Home and Cincinnati policies clearly did, and
not only where they cover the same "risk," which the court held that they did
not.
The Illinois Supreme Court affirmed in part and reversed in part the judgments
of the circuit and appellate courts in Home Ins. Co.
v Cincinnati Ins. Co., 821 NE2d 269 (Ill 2004).
Analysis
This decision is good in the sense that it reaffirms the right of an insurer
that settles a suit to seek reimbursement from one or more insurers that also
owed coverage. Another good aspect of this decision is that the court adopted
the rationale of a 20-year-old case—Home
Ins. Co. v Certain Underwriters at Lloyds London, 729 F2d 1132 (7th Cir
1984)—and held that in an action for equitable subrogation, the settling, plaintiff
insurer is entitled to a presumption that
the underlying plaintiff would have prevailed against all defendants under all
theories alleged in the complaint. This is extremely helpful because it relieves
the plaintiff insurer of the burden of proving facts that were never adjudicated
in the underlying case, and which may otherwise require a thorough analysis
of the evidence adduced through discovery in that case, in order to establish
that its insured general contractor's liability arose out of the work of the
other insurer's named insured subcontractor. The burden has now been shifted
to the non-settling, defendant insurer to prove that its named insured would
not have been found at fault.
Of course, even if he succeeds in meeting this burden, the non-settling insurer
is not home free, since lack of fault does not establish that the additional
insured's liability did not arise out of the named insured's work. The Illinois
Supreme Court emphasized the importance of this distinction, i.e., the distinction
between the named insured being at fault, and the additional insured's liability
arising out of the named insured's work. Proof of the latter does not require
proof of the former, because "arising out of" is a much broader concept than
fault, and thus, proving fault necessarily establishes "arising out of," but
proving lack of fault does not negate "arising out of." Note, though, that under
the new ISO additional insured endorsements, the named insured's lack of fault will preclude coverage for the additional
insured.
The Caveat
There is, however, an unfortunate aspect to this decision, and that is this:
because the court chose a narrow construction of the "identical risks" element
for an equitable contribution claim, this decision will foreclose that remedy
for many insurers, leading to an increase in equitable subrogation claims, where
the stakes are higher (all or nothing), and the issues will be contested more
vigorously. For example, take the situation in this case, where the two insurers
sold policies to different subcontractors, and both of them covered the general
contractor as an additional insured. If, as happened in this case, one of the
subcontractor's insurers settled the general contractor's liability and the
other did not contribute to the settlement, we now know that the settling insurer
will not be entitled to assert an equitable contribution claim against the non-settling
insurer because they insured different risks.
The settling insurer will, however, be entitled to assert an equitable subrogation
claim. But equitable subrogation, because it shifts the entire burden to one
insurer and completely relieves the other insurer, requires a greater quantum
of proof. In this case, the Home was aided by the presumption that the plaintiff
in the underlying suit would have prevailed on its claim against Cincinnati's
named insured. To determine, then, whether the entire burden should be shifted
to Cincinnati, the court looked to the other insurance clauses, finding that
those clauses rendered the Home excess over Cincinnati. These two factors entitled
the Home to summary judgment on its equitable subrogation claim. (Because the
court found that the Home had waived its right to seek more than pro rata reimbursement
from Cincinnati by failing to inform Cincinnati that its coverage was excess
over Cincinnati's, the Home recovered only a net of half the settlement, but
this waiver factor would not be present in most cases.)
Suppose, however, that both the Home and the Cincinnati policies contained
"matching" other insurance clauses, i.e., both were primary, or both were excess.
This situation would be more common in a contest between two subcontractors'
insurers disputing responsibility for a suit against a general contractor who
is an additional insured on both their policies. Suppose further that, aided
by the presumption adopted by the court, the underlying plaintiff would have
prevailed on his claim against Cincinnati's named insured (had that claim been
tried, rather than settled), then how would the settlement be allocated between
them? Before the decision in this case, and the Schal-Bovis decision from 2000 that it endorsed, both carriers would been equally responsible,
and the settling insurer would have recovered half its payment from the non-settling
insurer by means of equitable contribution. But this decision forecloses that
avenue to the settling insurer. The other insurance clauses do not resolve the
allocation question. So what does?
Who's on First?
The answer lies in the definition of equitable subrogation: the right of
a secondarily liable insurer that paid a loss to assert its insured's claim
against the primarily liable insurer that did not contribute to the payment.
How, in the absence of differing other insurance clauses, is a court to determine
which insurer is primary and which is secondary? The opinion in this case offers
no guidance on this question. It is quite likely, however, that an intensive
factual analysis will need to be undertaken. Unfortunately, because in an equitable
subrogation action, one insurer must end up paying everything and the other
ends up paying nothing, a court will naturally want a fairly high degree of
proof before allowing a full recovery by the settling insurer. Requiring such
a high degree of proof undermines the purpose of the presumption discussed above,
which, of course, is to relieve the settling insurer of unnecessary proof burdens.
It also undermines the public policy of judicial economy.
Of course, this case, and all of this comment so far, involve the scenario
where two subcontractors' insurers have a dispute over responsibility for a
suit against a general contractor that is an additional insured on both their
policies. But this scenario is far less common than the typical scenario, where
it is the general contractor's own insurer that is seeking reimbursement from
one or more subcontractors' insurers who covered the general contractor as an
additional insured. How does this decision impact such a suit? Prior law already
recognized that equitable contribution would not lie in favor of an excess insurer
against a primary insurer, and because, at least since 1997, any general contractor's
CGL policy would have an excess clause applying whenever he is added as an additional
insured to a subcontractor's policy, no action for equitable contribution would
have been available. This decision does not change that analysis.
As for equitable subrogation, this decision actually makes it easier for
the general contractor's own insurer to recover reimbursement from the subcontractor's
insurer (at least if that subcontractor was a defendant in the underlying case),
because of the now mandatory presumption that the underlying plaintiff would
have been able to recover in its suit against that subcontractor. This presumption
operates to satisfy the "arising out of" condition of the general contractor's
coverage under that subcontractor's policy. Prior to the adoption of this mandatory
presumption, the settling insurer would have had the burden of proving that
the general contractor's liability arose out of the subcontractor's work. Of
course, where the subcontractor is the employer (and thus, not a defendant in
the underlying case because of the statutory exclusive remedy provision), this
new presumption is neither applicable nor needed, because prior law already
recognized a presumption that the general contractor's liability arose out of
the employer's work, since the insured plaintiff was doing that work when he
was injured.
Where this decision creates a problem, however, is in cases where both the
general contractor's own policy and the additional insured endorsement of the
subcontractor's policy contain excess "other insurance" language. The result
would be that the full amount of the loss would fall irrevocably on the insurer
that is primarily liable, i.e., whose coverage is "closer to the risk." And
of course, demonstrating which insurer's policy is closer to the risk will generate
lots of litigation. But such a scenario is more the exception than the rule,
because most insurers do not include an excess provision in their additional
insured endorsements, and those that do usually include an exception for when
the underlying contract requires primary coverage.
Thus, although the analysis employed in this case is somewhat problematic,
the practical impact should be relatively minimal.
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