In a recent opinion, the Illinois Appellate Court denied pro-rata reimbursement to an insurer whose policy afforded additional insured status to a project owner and general contractor. This article explains where the court went wrong when it ruled that the doctrine of equitable contribution did not apply because the two policies insured different risks.1
The Illinois Appellate Court has denied pro rata reimbursement to an insurer whose policy afforded additional insured status to a project owner and general contractor. The insurer from which reimbursement was being sought had issued a policy under which the same project owner and general contractor were also additional insureds. That second insurer had declined to participate in the settlement involving its own and the other policy's insureds. It was not compelled to do so by the court, which ruled that the doctrine of equitable contribution did not apply because the two policies insured different risks. Although both policies covered the same additional insured owner and contractor, each covered the owner and contractor for liability arising out of a different named insured's work. Schal-Bovis, Inc. v Casualty Ins. Co., 732 NE2d 1179 (Ill App June 30, 2000), leave to appeal to Illinois Supreme Court denied November 29, 2000.
An ancient Roman legal maxim states: ubi ius, ibi remedium. Where there is a right, there is a remedy. Generally, the law will not countenance a situation where a person has a legal right but no means of enforcing it. The law will provide a means. Or, in the English common-law tradition, where the law does not provide a means of enforcing a right, equity will.
This principle is particularly important in the world of additional insured coverage. Where a party being sued has multiple policies covering the claim asserted—usually the insured's own policy, and one or more others on which he is an additional insured—he will most often turn first to his own insurer for protection. But of course, it is not in his best interest that his insurer defend and pay the loss if another insurer is obligated to do so. Rather, the insured is better served if he keeps the loss off of his loss history, which he will be able to do if the policy on which he is an additional insured defends and indemnifies, rather than his own. And, of course, it is also in his insurer's best interest not to incur the cost of defending and indemnifying his insured if another insurer must do so.
But how does the first insurer enforce his named insured's rights to additional insured coverage under the second policy? Not being an insured on that second policy, the first insurer cannot avail itself of the remedy the law provides: a suit for breach of contract. Nor does its own other insurance clause entitle it to sue the second insurer for breach, because the second insurer is not bound by a term in a contract to which it is not a party.
The contract between the named insured on the first policy and the named insured on the second policy won't work either, because neither insurer is a party to that contract. Interestingly, not even the insured can enforce his own additional insured rights under the second policy if his own insurer (the first insurer) has paid the loss. This is because, by paying the loss, the first insurer extinguishes any interest its insured had. [Walker v Ridgeview Constr. Co., 736 NE2d 1184 (Ill App 2000).]
But what the law does not remedy, equity will. In medieval England, there were separate courts for law and equity cases. Although no American jurisdiction maintains separate courts anymore, equitable remedies are still available where the law does not provide an adequate remedy. Equity enforces additional insured rights by means of two separate doctrines: equitable subrogation and equitable contribution.2
These doctrines are separate and distinct, and apply to different situations, but both are crucial means for enforcing additional insured rights. They both give an insurer that pays a loss on behalf of its insured the right to be reimbursed by another insurer that also covered the loss on behalf of the same insured, despite the absence of any contract between them.
The basis of the equitable subrogation and equitable contribution doctrines is simply the fact that it would be inequitable to allow one insurer to be stuck with the loss when one or more other insurers also covered it. The courts have explained it this way:
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).]
Put another way:
It is a bad idea to inform insurers that whichever is least faithful to its obligation to the insured will escape all liability as long as a responsible insurer covers the loss. [Western Cas. & Surety 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 in order to effectuate their remedial purpose and to do equity. That means courts are supposed to find an excuse to give the remedy, not an excuse to withhold it.
Space does not permit a thorough discussion of the doctrines or the cases applying them. For a thorough discussion of the differences between the two, see, Fireman's Fund Ins. Co. v Maryland Cas. Co., 77 Cal Rptr 2d 296 (Cal App 1998). In that case, the California Court of Appeal notes an interesting difference between the two doctrines. Subrogation is generally available in favor of an excess insurer against a primary insurer; contribution is available between or among insurers at the same level, e.g., both or all primary, or both or all first-level excess.
Equitable Contribution and the Schal-Bovis Case
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 the following three things:
All facts necessary to the claimant's recovery against the insured;
The reasonableness of the amount paid to the claimant; and
An identity between the policies as to parties and insurable interests and risks.
It is this third element that concerned the court.
Without discussing all facts and issues of the case, the dispute we are interested in 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, here are the four subcontractor's insurers and their named insureds:
Great American → Ranken Steel
Wausau → Ozark Steel Fabricators
Casualty → Alcan United Contrete
American States → Chicago Forming
Great American and Wausau paid their share of the loss on behalf of Schal and Buck. They then sought equitable contribution from Casualty and American States. Casualty and American 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? The court 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. [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. [732 NE2d at 1187.]
Where the Court Went Wrong
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. The court 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 means different risks insured. But it doesn't 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' work. 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. This concept is called concurrent causation.
Although that concept cannot determine the insurance issue,3 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. (This is referred to as the "but for" causation.) This connection is much looser than the direct connection required to satisfy the proximate cause standard applicable to the underlying claim.4 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.
From the opinion in this case, it is very difficult to determine whether such a connection could have been established as to any of these four subcontractors. 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 is nothing 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 insurers did not honor their obligations to Schal and Buck. And, if it did, then the third element for an equitable contribution claim was satisfied, because all four policies covered the loss.
It is unfortunate that the Illinois Supreme Court did not accept this case for review, as it conflicts with a number of cases that took a broad view of the requirement that there be an identity of interest, insured, and risk.5 There are, likewise, a large number of cases taking the same broad view of a closely analogous question: whether, for purposes of an "other insurance" clause in one policy, a second policy can be considered "other insurance" when it does not provide coverage identical to the first. The courts have almost universally determined that where both policies cover the loss, any differences between them are immaterial, and the "other insurance clause" in the first policy will apply. [See, e.g., U.S. Fire Ins. Co. v Aetna Life & Cas. Co., 684 NE2d 956 (Ill App 1997).]
How Subcontractors Can Protect Themselves
This decision puts subcontractors' insurers in a damned-if-they do, damned-if they-don't position when faced with a tender from an additional insured owner or general contractor. On the one hand, if the insurer steps up and honors its obligations to its additional insured(s), even though there may be several other insurers with the same obligations that don't honor them, the responsible insurer can do nothing to recover any reimbursement from the irresponsible insurers. On the other hand, in most situations where the subcontractor's insurer receives a tender of defense on behalf of an owner or general contractor from the owner's or general contractor's own insurer, the subcontractor's insurer will have to provide the entire defense and indemnification, not just a share of it.
There are two reasons for this. First, it is already established that the insurer must provide its insured with a complete defense; it may not respond to a tender of defense from the insured by offering to provide only a pro-rata share of the defense. This is because doing so would leave the insured with less than he bargained for: a complete defense. [Zurich Ins. Co. v Raymark Ind., 514 NE2d 150 (Ill 1987); LaSalle Natl. Trust, N.A. v Schaffner, 818 F Supp 1161 (ND Ill 1993).]
Second, if the owner's or general contractor's own policy contains the 1998 version of the Insurance Services Office, Inc. (ISO), CG 00 01 form, then that policy will be excess over the subcontractor's policy with respect to coverage for the owner and general contractor. (See the 1998 edition CG 00 01 form at Section IV, par. 4(b)(2).) That arguably puts the subcontractor's insurer in the same position, at least for purposes of this discussion, as if the tender came from the insured himself. That is, the insurer may not offer only a pro-rata share, because it bargained to provide a full defense and indemnification, and no other insurer can be compelled to do so (the owner's and general contractor's insurers because they are excess, and the other subcontractors' insurers because they cover different risks).
The result is that the subcontractor's insurer is left with the responsibility to fund the entire defense and indemnity, up to its limits. Putting the honorable subcontractor's insurer between this rock and hard place is not the goal of equity, but it is the result of the Schal-Bovis decision.
If the subcontractor's insurer receives a tender of defense from an owner's or general contractor's insurer whose obligation to defend is not made excess by the existence of the subcontractor's insurance, it may respond by offering to provide a pro-rata share. (This would be the case if the insurer had issued a pre-1998 version of the ISO CG 00 01 form, containing a pro-rata "other insurance" clause.)
After all, if the owner's or general contractor's insurer must continue to defend, then the entire burden would not fall on the subcontractor's insurer—but it would still be paying a bigger share than it should. If the owner's or general contractor's insurer could take the insurer for a second subcontractor to court on an equitable contribution claim, it could reduce its pro-rata share from one-half to one-third, or to one-fourth if there were two other subcontractors involved, and so on. But the Schal-Bovis decision won't let the insurer do that.
Really, the only way that a subcontractor's insurer can protect itself from the effects of the Schal-Bovis decision is to insert a clause in its additional insured endorsement requiring the additional insured to tender its defense to any other insurer providing additional insured coverage. That type of clause would arguably entitle the subcontractor's insurer to respond to a tender from an additional insured by offering only a pro-rata share of the defense and indemnity, along with all other insurers furnishing additional insured coverage. This would shift the burden to the owner and general contractor to pursue and enforce tenders to all insurers providing them with additional insured coverage.
Let's be clear about the limit of the damage: this case only prevents one additional insured insurer from obtaining contribution from another. The case furnishes no refuge for a subcontractor's insurer that shirks its duties to its additional insured general contractor, when it finds itself hauled into court by the insurer for the general contractor. The second portion of the Couch quote, above, makes that clear.
The general contractor's own coverage is not limited to liability arising out of a particular subcontractor's work. It is general coverage for all sums the general contractor may be legally obligated to pay because of bodily injury or property damage caused by an occurrence. That coverage is broad enough to encompass the risk of both the general contractor's own work and that of a subcontractor. Thus, there is definitely an identity of risks between the two, even under the inappropriately narrow analysis of the Schal-Bovis decision, and the general contractor's insurer may sue the subcontractor's insurer for equitable contribution.
This article is intended solely for informational and educational purposes and does not constitute legal advice. The views contained in this article are solely those of the author and should not be attributed to the Liberty Mutual Group or its policyholders.
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 This article is intended solely for informational and educational purposes and does not constitute legal advice. The views contained in this article are solely those of the author and should not be attributed to the Liberty Mutual Group or its policyholders.
2 There is also the doctrine of contractual subrogation, which we won't discuss here, but this is also a creature of equity, despite its grounding in the contract itself.
3Oakley Transport, Inc. v Zurich Ins. Co., 648 NE2d 1099 (Ill App 1995) ("Coverage determination is subject to the rules of contract construction, and not tort principles.")
4Maryland Cas. Co. v Chicago & North Western Transp. Co., 466 NE2d 1091 (Ill App 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"). Most jurisdictions have held that "arising out of" as used in standard additional insured endorsements connotes "but for" causation, or something like it. See, e.g., the following cases:
Merchants Ins. Co. of NH v USF&G Co., 143 F3d 5, 9 (1st Cir 1998) ("Under Massachusetts law the phrase 'arising out of' denotes a level of causation that lies between proximate and actual causation")
Township of Springfield v Ersek, 660 A2d 672 (Pa App 1995) ("Arising out of" means "causally connected with, not proximately caused by")
Container Corp. of America v McKenzie Tank Lines, Inc., 680 S2d 509 (Fla App 1996) ("A showing of proximate cause ... is not required[;] only a minimal causal connection ... is required for coverage to apply)
McIntosh v Scottsdale Ins. Co., 992 F2d 251 (10th Cir 1993) (Predicting Kansas law would hold "arising out of" "imparts a more liberal concept than proximate cause," but "rejecting strict 'but for causation' ")
Hormel Foods Corp. v Northbrook Prop. & Cas. Co., 938 F Supp 555 (D Minn 1996), aff'd., 1997 WL 752559 (8th Cir 1997) (Under Minnesota law, "'but for' causation satisfies the requirements of an insurance policy which specifies that only liabilities 'arising out of the use' are covered")
Accord, Pennzoil Co. v USF&G, 50 F3d 580 (8th Cir 1995) (Under North Dakota law, oil well owner's liability to testing service's employee injured at well arises out of separate contractor's operation, even though no contractual relationship between testing service and contractor and no evidence contractor negligent, because contractor had done substantial work on the well and it was therefore part of contractor's operation).