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Additional Insured Issues

The Courts and Equitable Subrogation versus Equitable Contribution (Part 3)

Joseph Postel | October 1, 2004

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What is the difference between equitable subrogation and equitable contribution? This question has been answered differently in recent court decisions, particularly in Illinois, where it is now up to the Illinois Supreme Court to end the confusion.

Part 1 of this series explained the difference between equitable subrogation and equitable contribution—and how many courts have confused the two. 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.

In Progressive Ins. Co. v Universal Cas. Co., 347 Ill App 3d 10, 807 NE2d 577 (1st Dist 2004), the court discussed the differences between equitable subrogation and equitable contribution. The court's analysis began with the question of whether both policies were primary, or whether one of them was excess. The court explained (with various omissions not noted below):

Equitable contribution is an insurer's right to recover from a co-obligor that shares the same liability. Equitable subrogation, on the other hand, refers to a situation where an insurer has paid the principal debtor's obligation to the common underlying claimant, and thereafter succeeds to the claimant's rights against the principal debtor. This doctrine encompasses actions in which an excess insurer sues a primary insurer for reimbursement.

Were we to find that both other insurance clauses apply to Pizza Nova in this case, the clauses would cancel each other out and the insurers would essentially be rendered co-insurers. The proper cause of action would then be one based in equitable contribution and the loss could be prorated between the companies based on policy limits. To the contrary, were we to find that Progressive's "other insurance" clause rendered it an excess insurer, the proper theory of recovery would be based in equitable subrogation and the insured would be required to exhaust its primary insurance prior to using its excess coverage. [807 NE2d at 585-86.]

It is obvious that these doctrines are meant to be complimentary. Where one does not apply, the other will. If the risks are the same, equitable contribution is available. If the risks are different, equitable subrogation is available. A court in doubt as to whether the risks are the same or different should incline toward finding them to be the same, so that the loss can be shared, rather than visited on one insurer while the other avoids liability. Generally speaking, an action for equitable subrogation lies in favor of an excess insurer against a primary insurer. Where two primary policies cover the loss, they should both contribute, regardless of any differences in their scope of coverage.

Identity of Risks

It is completely illogical to impose the "identity of risks" requirement of an equitable contribution claim on an insurer asserting an equitable subrogation claim, as the appellate court did in Home Ins. v Cincinnati Ins., 801 NE2d 997 (Ill App 2003). The "identity of risks" requirement is the very thing that distinguishes the two, and determines which remedy is afforded. At least one court has specifically rejected an insurer's attempt to defeat an equitable subrogation claim by imposing the "identity of risks" requirement on such a claim. See State Farm Fire & Cas. Co. v Cooperative of American Physicians, Inc., 163 Cal App 3d at 204, 209 Cal Rptr at 253 (Cal App 1984) ("[n]or are we impressed with the arguments of Cooperative and Mutual that equitable subrogation is available only in the case of double insurance, i.e., where both the insured and the risks covered are identical in each policy").

To impose the requirement on both types of actions, therefore, is necessarily to obliterate the distinction between them, and to leave courts without any guidance as to which remedy to provide. Moreover, it is to deny justice and to encourage irresponsible behavior by insurers.

Thirty-eight years ago, the Illinois Supreme Court said, "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).

The Seventh Circuit echoed that theme 19 years later: "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. & Sur. 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 to effectuate their remedial purpose and to do equity. Therefore, the "identity of risks" requirement for an equitable contribution claim does not apply to an equitable subrogation claim.

The Problem with Schal Bovis, Inc. v Casualty Insurance Co.

In arriving at its conclusion that the Home could not meet the requirements for an equitable contribution claim in Home Ins. v Cincinnati Ins., 801 NE2d 997 (Ill App 2003), the Illinois Appellate Court relied on Schal Bovis, Inc. v Casualty Ins. Co., 315 Ill App 3d 353, 732 NE2d 1179 (1st Dist 2000). The court in Schal Bovis held that the liability insurers for four different subcontractors—each of which furnished additional insured coverage to the owner and general contractor for liability arising out of the named insured subcontractor's work—covered different risks, because their named insureds were different.

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: (1) all facts necessary to the claimant's recovery against the insured; (2) the reasonableness of the amount paid to the claimant; and (3) an identity between the policies as to parties and insurable interests and risks. It is this third element, of course, that was the focus of the court's analysis.

The dispute in Schal-Bovis 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, the following chart provides the four subcontractor's insurers and their named insureds.

four subcontractor's insurers and their named insureds
Figure 2: Figure 1

Great American and Wausau paid their share of the loss on behalf of Schal and Buck, and sought equitable contribution from Casualty and American States, which 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? It 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. [315 Ill App 3d at 363, 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. [315 Ill App 3d at 363, 732 NE2d at 1187].

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 and 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 meant different risks insured.

But it does not 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. 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. See I.P.I. Civil (2000 ed.), Instruction 15.00, Proximate Cause:

When I use the expression "proximate cause," I mean [that] [a] [any] cause which, in natural or probable sequence, produced the injury complained of. It need not be the only cause, nor the last or nearest cause. It is sufficient if it concurs with some other cause acting at the same time, which in combination with it, causes the injury.

In contrast to the proximate cause standard applicable to the underlying tort action, the condition for the general contractor's additional insured coverage under a subcontractor's policy is merely that the additional insured's liability "arise out of the named insured's work." 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 ("but for" causation)—much looser than the direct connection required to satisfy the proximate cause standard applicable to the underlying claim. Maryland Cas. Co. v Chicago & North Western Transp. Co., 126 Ill App 3d 150, 154, 466 NE2d 1091, 1094 (1st Dist 1984) ("the phrase 'arising out of' is both broad and vague, and must be liberally construed in favor of the insured; accordingly, 'but for causation,' not necessarily proximate causation, satisfies this language").

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.

It is very difficult to determine from the opinion in Schal-Bovis whether such a connection could have been established as to any of these four subcontractors, because 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 are no facts recited 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 carriers did not honor their obligations to Schal and Buck. And if it did, then the identity of risks requirement for an equitable contribution claim was satisfied, because all four policies covered the loss. Indeed, the court would have been entitled to assume that the owner and general contractor's liability arose out of the subcontractors' work, because the underlying complaint alleged exactly that. [Home Ins. Co. v Certain Underwriters at Lloyd's London, 729 F2d 1132 (7th Cir 1984); Indiana Ins. Cos. v Granite State Ins. Co., 689 F Supp 1549 (SD Ind 1988).]

River City Gets It Right

It is therefore not surprising that in the year after Schal-Bovis was decided, the Third District Appellate Court rejected its central holding with respect to the identity of risks requirement for equitable contribution claims. [Cincinnati Ins. Co. v River City Constr. Co., 325 Ill App 3d 267, 757 NE2d 676 (3rd Dist 2001).] The River City court said as follows:

Because the rule in Schal Bovis would unfairly protect Auto-Owners from paying for the benefit it received—release from liability—we refuse to follow Schal Bovis. The Cincinnati policy insures Caterpillar for liability arising out of Illinois Piping's operations, and the Auto-Owners policy insures Caterpillar for liability arising out of River City's work. Cincinnati settled the Modugnos' claim against Caterpillar and paid out insurance proceeds for Cincinnati's benefit and for the benefit of Auto-Owners. While the Auto-Owners and Cincinnati policies have different sets of insureds, Caterpillar was insured for Modugno's injuries under both policies. Consequently, dismissal of Cincinnati's claim for equitable contribution was error. [325 Ill App 3d at 275, 757 NE2d at 682.]

Clearly, the River City decision is consistent not only with the great weight of authority, but also with the broad nature of equitable remedies. The purpose of the identity of risks requirement for an equitable contribution claim is not to erect an insurmountable barrier to a rightful recovery, but merely to determine which remedy is appropriate: sharing (if the risks are identical) or full reimbursement (if the risks are different and therefore one insurer is primarily liable and the other only secondarily so). If an action for equitable contribution does not lie because the policies cover different risks, then the result is that the settling insurer has an action for equitable subrogation, not that the insurer goes without a remedy.

In Schal-Bovis it was apparent that all four of the subcontractors' policies at least potentially covered the general contractor as an additional insured, because the plaintiff's complaint alleged that all four subcontractors were negligent and proximately caused the loss, and they therefore all owed coverage equally. These factors satisfied the identity of risks requirement, because they established that the insurers owed coverage equally, as opposed to one or more being primarily liable and one or more being only secondarily so.

The Illinois Supreme Court ought, therefore, to approve of River City and overrule Schal-Bovis. To be sure, the court can decide this case simply by holding that it was error to engraft the identity of risks requirement on to an action for equitable subrogation, without resolving the conflict between the First and Third Districts of the appellate court on equitable contribution claims, but the court should resolve that conflict in the interest of providing needed clarity and guidance to bench, bar, and public in this difficult area of the law.

Follow these links for Part 1 and Part 2 of this series.

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).>

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