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.
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.1
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 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, 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.
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.
1 On May 26, 2004, the Illinois Supreme Court accepted for review an important additional insured case, Home Ins. v Cincinnati Ins., 801 NE2d 997 (Ill App 2003), leave to appeal allowed. The case has been briefed, and was argued on September 29th, and a decision is expected late this year. Liberty Mutual Insurance Group filed an amicus curiae brief in that case, from which this series of three articles was adapted. This article also serves as an update of Where There Is a Right, There Is a Remedy—Except in Illinois (February 2001).
2Krusinski Constr. v Northbrook P&C, 326 Ill App 3d 210, 219, 760 NE2d 530, 537 (1st Dist 2001) ("Illinois law is clear that primary and excess insurers insure different risks"); The Home Indem. v General Accident Ins. Co. of N. America, 213 Ill App 3d 319, 321, 572 NE2d 962, 963 (1st Dist 1991) ("by their very nature, primary and excess policies do not cover the same risks"); Northbrook P&C Co. v USF&G Co., 150 Ill App 3d 479, 483, 501 NE2d 817, 819 (1st Dist 1986) ("where there are both primary and excess insurance carriers, the various companies are not covering the same risk").
3Employers Mutual Companies/Illinois Emcasco Ins. v Country Cos., 211 Ill App 3d 586, 590, 570 NE2d 528, 530 (1st Dist 1991), citing Michael M. Marick, Excess Insurance: An Overview of General Principles and Current Issues, 24 Tort & Insurance Law Journal 715, 717-18 (1989).
4 See, e.g., Hall v Country Cas. Ins., 204 Ill App 3d 765, 772, 562 NE2d 640, 644 (2nd Dist 1990).
5 See, e.g., Northbrook P&C v USF&G Co., 150 Ill App 3d 479, 501 NE2d 817 (1st Dist 1986).
6Westchester Fire Ins. v General Star Indem., 183 F3d 578 (7th Cir 1999) (Illinois law); Twin City Fire Ins. v Country Mut. Ins., 23 F3d 1175 (7th Cir 1994) (Illinois law); Certain Underwriters at Lloyd's, London v Fidelity & Cas. Ins. Co. of NY, 4 F3d 541 (7th Cir 1993) (Illinois law).
7North American Ins. v Kemper Natl. Ins., 325 Ill App 3d 477, 758 NE2d 856 (1st Dist 2001); John Alden Life Ins. v NC Ins. Guar. Assoc., 589 SE2d 908 (NC App 2004).
8Fireman's Fund Ins., supra, 65 Cal App 4th 1279, 1296, 77 Cal Rptr 2d 296, 305-06 (Cal App 1998).
9 These include: Cincinnati Ins. Co. v West American Ins. Co., 287 Ill App 3d 505, 679 NE2d 91 (2nd Dist 1997), affirmed 183 Ill 2d 317, 701 NE2d 499 (1998); Liberty Mut. Ins. Co. v Westfield Ins. Co., 301 Ill App 3d 49, 703 NE2d 439 (1st Dist 1998); and Cincinnati Ins. Co. v River City Constr. Co., 325 Ill App 3d 267, 757 NE2d 676 (3rd Dist 2001).