Expert Commentary

Lay a Foundation for Equitable Contribution

If several parties are liable for a claim, and if the insurer for one culpable party steps forward and pays the entire loss, shouldn't the insurers of the other parties be made to pay their fair share? Maybe not.

May 2010

Whether or not the paying insurer in that situation is entitled to equitable contribution depends on whether or not the paying insurer has laid a proper evidence foundation so that a court is able to make the other insurers contribute to the loss.

Great Northern Ins. Co. v. Greenwich Ins. Co., No. 08–4521, 2010 U.S. App. LEXIS 6034 (3d Cir. March 24, 2010), provides an example of what can go wrong if the "white hat" insurer who settles a joint obligation does not adequately prepare its contribution claim against nonpaying insurers. In that case, the Parent corporation owned a well site, and a Subsidiary corporation operated it. The Subsidiary entered into an agreement with a Drilling Contractor. Chubb issued a commercial general liability (CGL) and umbrella to the Parent and named the Subsidiary as an additional insured (AI). Greenwich issued a CGL to the Contractor and also named the Subsidiary as an AI. The drilling contract required the Subsidiary to indemnify the Contractor.

During the work, an explosion occurred, causing much third-party property damage. Chubb stepped forward and paid $1.6 million under its CGL and umbrella policy.

Chubb then brought this action against the Greenwich as the CGL insurer for the Contractor, seeking equitable contribution. To succeed under Pennsylvania law, Chubb had to prove that (1) it was one of several parties liable for a common debt, and (2) it discharged the common debt for the benefit of other parties.

Chubb fulfilled the first part of the test. Both Chubb and Greenwich owed AI coverage to the Subsidiary—a common debt for which both insurers were potentially liable. However, to fulfill the second part of the test, Chubb had to prove that at least some of the $1.6 million was paid was on behalf of the Subsidiary, the common AI, such that its payments discharged the common debt owed by Greenwich. Chubb's evidence on that second point was completely lacking.

  • Apparently, the settlements themselves did not allocate either fault or portions of the payments to the Parent or the Subsidiary.
  • Pre-suit correspondence indicated that Chubb's claim payments were made on behalf of the Parent.
  • Chubb's claim adjuster testified inconsistently about the settlements.
  • During his deposition, he testified that the claim payments were made on behalf of the Parent (which would not have gone to satisfy the joint obligation of Chubb and Greenwich to the Subsidiary as their common AI).

  • During trial, he testified that the payments were really made on behalf of the Subsidiary.

  • Chubb submitted no evidence in the contribution action on which the court could have allocated fault between the Parent and the Subsidiary.

The court really had no idea whether all, some, or none or the claim payments were made on behalf of the Subsidiary—information necessary to fashion an equitable remedy. Therefore, the court held that Chubb failed to prove that it was entitled to equitable contribution. Chubb complained that this ruling would force claim adjusters to apportion liability among their insureds and thereby usurp a court's fact-finding role. The court rejected that argument, reasoning as follows:

A claims adjuster's determination of respective liability, while certainly helpful, would not have been the only evidence that might have aided the district court in its equitable apportionment. Evidence of comparative negligence on the part of the insureds, acknowledgment of shared liability or payment on behalf of a mutual insured, or even a concerted effort by the litigants to reduce general allegations to specific numbers might guide the court's analysis. At bottom, a claim for equitable contribution calls upon the power of the court to design a remedy that is fair. Fairness cannot be fashioned from speculation.

So what could Chubb have done differently to better prepare for its claim for equitable contribution?

  1. The adjuster could have stated in claim correspondence that Chubb was acting on behalf of ALL INSUREDS, instead of just the first named insured (the Parent).
  2. He could have sent a letter to Greenwich before each settlement advising Greenwich that the insurers owed a joint obligation to the Subsidiary as their common AI, that Chubb was intending on paying claims on behalf of the Subsidiary, that such payments would discharge the joint obligation of Greenwich, and that Chubb was reserving its rights to pursue equitable contribution if Greenwich refused to participate.
  3. While the settlements need not have publicly admitted fault, the adjuster could have worded the settlements to specifically allocate some (or all) of the payments to satisfy the claims against the Subsidiary.
  4. The adjuster could have been better prepared for his deposition. Apparently, the adjuster went in without knowing that the critical issue in the case was whether any of the claim payments were made on behalf of the Subsidiary.
  5. In the contribution action, Chubb could have submitted the information in its claim file as to the Subsidiary's potential fault to show that its determination to allocate some (or all) of the claim payments to the Subsidiary was reasonable.

Just because one insurer steps forward and does the right thing by settling claims on behalf of other insurers does not automatically entitle the paying insurer to equitable contribution. Remember: a proper foundation for contribution must still be laid.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.

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