The Privity Rule: Anachronistic or Still Relevant?

On August 8, 1840, while delivering mail from the village of Hartford in England to the town of Holyhead in Wales, a gentleman named Winterbottom was ejected from his seat when the coach that he was driving broke down due to defects in its construction. The accident left Mr. Winterbottom lame for the rest of his life. He found himself without a legal remedy, however, when his suit against Mr. Wright, the supplier of mail coaches to the Postmaster General, was dismissed by the Court of Exchequer because he had no contractual relationship with Mr. Wright. The case, Winterbottom v. Wright, 152 Eng. Rep. 402 (Ex. 1842), established the English common law rule that privity of contract must exist for a duty to extend from one party to another.

In granting judgment to the defendant, Lord Abinger wrote that “[u]nless we confine the operation of such contracts as this to the parties who entered into them, the most absurd and outrageous consequences, to which I can see no limit, would ensue.” Baron Alderson concurred, writing that “[t]he only safe rule is to confine the right to recover to those who enter into the contract: if we go one step beyond that, there is no reason why we should not go fifty.” Both judges were quoted by the Supreme Court of the United States in National Savings Bank of D.C. v. Ward, 100 U.S. 195 (1879), which introduced the so-called “privity rule” to this country. Writing for the Court, Justice Clifford recognized that in the context of attorney negligence actions not involving fraud or collusion, “the obligation of the attorney is to his client and not to a third party[.]” Id. at 200.

Evolution of (and Away from) the Privity Rule

Privity has been defined as “[t]he connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property).” Black’s Law Dictionary (9th ed. 2009). See also id. (defining privity of contract as “[t]he relationship between the parties to a contract, allowing them to sue each other but preventing a third party from doing so”). Under Winterbottom and Ward, privity was long a prerequisite to suit for breach of a duty arising from a contractual relationship. In the early 1900s, courts began to relax the privity requirement in certain cases. For example, in a famous opinion written by Justice Cardozo, the New York Court of Appeals in 1916 abolished the requirement in product liability cases. SeeMacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916). The privity rule nevertheless persisted in attorney negligence cases until the 1960s when California became the first state to relax the rule in professional negligence actions against estate-planning attorneys. Lucas v. Hamm, 56 Cal. 2d 583, 364 P.2d 685 (1961). In the decades since, most other states have followed suit.

The groundwork for California’s relaxation of the privity rule was laid in a case involving, not an attorney, but a notary public. In Biakanja v. Irving, a will was denied probate for lack of sufficient attestation. 49 Cal. 2d 647, 648, 320 P.2d 16, 17 (1958). The plaintiff, who would have received the entirety of the decedent’s property had the will been properly attested, received only one-eighth of the property via intestate succession. Id. She asserted a claim against the notary public who prepared and notarized the will. Id. The Supreme Court of California, in finding that the plaintiff should be permitted to recover despite the absence of privity, declared:

The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.

Id. at 650, 320 P.2d at 19.

This “balancing of factors” test would subsequently become the model for many states’ analysis of estate-planning malpractice claims, including California. InLucas, the court extended the reasoning of Biakanja to attorneys, holding that “[t]he same general principle must be applied in determining whether a beneficiary is entitled to bring an action for negligence in the drafting of a will when the instrument is drafted by an attorney rather than by a person not authorized to practice law.” 56 Cal. 2d at 588, 364 P.2d at 687–88. In doing so, the court overruled an earlier case in which it had held that “an attorney is liable for negligence in the conduct of his professional duties, arising only from ignorance or want of care, to his client alone . . . and not to third parties.” Buckley v. Gray, 110 Cal. 339, 342, 42 P. 900, 900 (1895).

Modern Approaches to the Privity Rule

Today, only a minority of states continue to apply the traditional privity rule. Most states now permit disappointed beneficiaries to pursue claims against estate-planning attorneys, though they have not settled on a consensus alternative to strict privity. As discussed below, some states permit tort claims, while other states permit third-party beneficiary contract claims. Another group allows both types of claims, and a few states have yet to take a definitive position.

Privity Rule Retained as a Complete Bar

Seven or eight states—Alabama, Colorado, Maryland, Massachusetts, Nebraska, Ohio, Virginia, and perhaps Vermont—retain the common law privity rule as a complete bar to most negligence actions against attorneys. See Robinson v. Benton, 842 So. 2d 631 (Ala. 2002); Glover v. Southard, 894 P.2d 21 (Colo. App. 1994); Noble v. Bruce, 349 Md. 730, 709 A.2d 1264 (1998); Miller v. Mooney, 431 Mass. 57, 725 N.E.2d 545 (2000); Lilyhorn v. Dier, 214 Neb. 728, 335 N.W.2d 554 (1983); Shoemaker v. Gindlesberger, 118 Ohio St. 3d 226, 2008-Ohio-2012, 887 N.E.2d 1167 (2008); Johnson v. Hart, 279 Va. 617, 692 S.E.2d 239 (2010).See also Hedges v. Durrance, 2003 VT 63, 175 Vt. 588, 834 A.2d 1 (2003) (favoring the privity rule in a different context). One state—Arkansas—has codified the common law privity rule. See Ark. Code Ann. § 16-22-310. See also generally Born v. Hosto & Buchan, PLLC, 2010 Ark. 292, 372 S.W.3d 324 (2010) (recognizing the state’s codification of the common law rule).

Privity Rule Retained with Personal Representative Exception

Three states—Maine, New York, and Texas—retain the common law privity rule but make a narrow exception allowing suit to be brought against the drafting attorney by the personal representative of the client’s estate. See Nevin v. Union Trust Co., 1999 ME 47, 726 A.2d 694 (1999); Estate of Schneider v. Finmann, 15 N.Y.3d 306, 933 N.E.2d 718 (2010); Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 192 S.W.3d 780 (Tex. 2006).

Privity Rule Relaxed in Favor of Tort Claims

Six states—Idaho, Missouri, Montana, West Virginia, Wisconsin, and Wyoming—as well as the District of Columbia allow disappointed beneficiaries to bring suit against estate-planning attorneys in tort notwithstanding the lack of privity. SeeHarrigfield v. Hancock, 140 Idaho 134, 90 P.3d 884 (2004); Donahue v. Shughart, 900 S.W.2d 624 (Mo. 1995); Stanley L. & Carolyn M. Watkins Trust v. Lacosta, 2004 MT 144, 321 Mont. 432, 92 P.3d 620 (2004); Calvert v. Scharf, 217 W. Va. 684, 619 S.E.2d 197 (2005); Auric v. Cont’l Cas. Co., 111 Wis. 2d 507, 331 N.W.2d 325 (1983); In re Estate of Drwenski, 2004 WY 5, 83 P.3d 457 (Wyo. 2004); Needham v. Hamilton, 459 A.2d 1060 (D.C. 1983). Some of these jurisdictions use the “balancing of factors” test enunciated in Biakanja, while others, such as West Virginia, use a pure negligence analysis. See, e.g., Calvert, 217 W. Va. at 694, 619 S.E.2d at 207 (holding that “direct, intended, and specifically identifiable beneficiaries of a will have standing to sue the lawyer who prepared the will where it can be shown that the testator’s intent, as expressed in the will, has been frustrated by negligence on the part of the lawyer so that the beneficiaries’ interest(s) under the will is either lost or diminished”).

Privity Rule Relaxed in Favor of Third-Party Beneficiary Contract Claims

Thirteen states—Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Michigan, Minnesota, New Hampshire, Oklahoma, Pennsylvania, Rhode Island, and South Dakota—permit suits against estate-planning attorneys under a third-party beneficiary contract theory. See Espinosa v. Sparber, Shevin, Shapo, Rosen & Heilbronner, 612 So. 2d 1378 (Fla. 1993); Young v. Williams, 285 Ga. App. 208, 645 S.E.2d 624 (2007); Pelham v. Griesheimer, 92 Ill. 2d 13, 440 N.E.2d 96 (1982); Walker v. Lawson, 526 N.E.2d 968 (Ind. 1988); Goodman v. Goldberg & Simpson, P.S.C., 323 S.W.3d 740 (Ky. Ct. App. 2009); Woodfork v. Sanders, 248 So. 2d 419 (La. Ct. App. 1971); Mieras v. DeBona, 452 Mich. 278, 550 N.W.2d 202 (1996); Francis v. Piper, 597 N.W.2d 922 (Minn. Ct. App. 1999); Simpson v. Calivas, 139 N.H. 1, 650 A.2d 318 (1994); Hesser v. Cent. Nat’l Bank & Trust Co., 1998 OK 15, 956 P.2d 864 (1998); Guy v. Liederbach, 501 Pa. 47, 459 A.2d 744 (1983); Credit Union Cent. Falls v. Groff, 966 A.2d 1262 (R.I. 2009); Friske v. Hogan, 2005 SD 70, 698 N.W.2d 526 (2005). According to this theory, which is often grounded in section 302 of the Restatement (Second) of Contracts, a beneficiary may sue the drafting attorney if he or she can establish that he or she was an intended beneficiary of the contractual relationship between the attorney and his or her client. See, e.g., Guy, 501 Pa. at 51, 459 A.2d at 746 (holding that “a named legatee of a will may bring suit as an intended third party beneficiary of the contract between the attorney and the testator for the drafting of a will which specifically names the legatee as a recipient of all or part of the estate”).

Privity Rule Relaxed in Favor of Both Tort and Third-Party Beneficiary Contract Claims

Ten states—California, Connecticut, Delaware, Hawaii, Iowa, Kansas, New Mexico, Oregon, South Carolina, and Washington—permit both tort and third-party beneficiary contract claims against estate-planning attorneys. See Lucas v. Hamm, 56 Cal. 2d 583, 364 P.2d 685 (1961); Stowe v. Smith, 184 Conn. 194, 441 A.2d 81 (1981); Pinckney v. Tigani, 02C-08-129FSS, 2004 WL 2827896 (Del. Super. Ct. Nov. 30, 2004); Blair v. Ing, 95 Haw. 247, 21 P.3d 452 (2001);Schreiner v. Scoville, 410 N.W.2d 679 (Iowa 1987); Pizel v. Zuspann, 795 P.2d 42 (Kan. 1990); Leyba v. Whitley, 120 N.M. 768, 907 P.2d 172 (1995); Hale v. Groce, 304 Or. 281, 744 P.2d 1289 (1987); Fabian v. Lindsay, 410 S.C. 475, 765 S.E.2d 132 (2014); Stangland v. Brock, 109 Wash. 2d 675, 747 P.2d 464 (1987). A single state—Mississippi—has legislatively abolished the privity rule, thus opening the door to tort claims and probably third-party beneficiary contract claims as well.See Miss. Code Ann. § 11-7-20. See also generally Century 21 Deep S. Properties, Ltd. v. Corson, 612 So. 2d 359 (Miss. 1992) (recognizing that Miss. Code Ann. § 11-7-20 applies to legal malpractice actions and abolishing the requirement of an attorney-client relationship where a third party foreseeably and detrimentally relies on an attorney’s work).

Privity Rule Not Directly Addressed

The remaining eight states do not appear to have addressed whether a disappointed beneficiary may bring a claim against an estate-planning attorney squarely. Those states include Alaska, Arizona, Nevada, New Jersey, North Carolina, North Dakota, Tennessee, and Utah.

Considerations Supporting the Various Approaches

The variety of approaches to the privity rule demonstrates that courts have struggled to address conflicting interests and public policy concerns. The traditional rule has historically been justified by three primary considerations. First, the privity rule has been said to protect “the attorney’s duty of loyalty to and effective advocacy for his or her client.” Noble, 709 A.2d at 1270. Exposing estate-planning attorneys to lawsuits by disappointed beneficiaries would, in the view of courts adhering to the privity rule, “create a conflict during the estate planning process, dividing the attorney’s loyalty between his or her client and the third-party beneficiaries.” Barcelo v. Elliott, 923 S.W.2d 575, 578 (Tex. 1996). See alsoNoble, 709 A.2d at 1277 (“Adopting a new rule that would subject an attorney to liability to disappointed beneficiaries interferes with the attorney’s ability to fulfill his or her duty of loyalty to the client and compromises the attorney’s ability to represent the client zealously.”). The privity rule is believed to guard against this danger because it is “rooted in the attorney’s obligation to direct attention to the needs of the client, not to the needs of a third party not in privity with the client.”Shoemaker, 2008-Ohio-2012 at ¶ 9, 118 Ohio St. 3d at 228, 887 N.E.2d at 1170.

Second, the privity rule is said to protect attorneys against the potential for unlimited liability. As the Court of Appeals of Maryland opined, “absent the strict privity rule there would be no limit as to whom a lawyer would be obligated.”Noble, 709 A.2d at 1270. That court’s sentiments echoed those of Lord Abinger and Baron Alderson:

Unless we confine the operation of such contracts as this to the parties who entered into them . . . the most absurd [and outrageous] consequences, to which no limit can be seen, will ensue[.] . . . [I]f we hold that the plaintiff can sue in such a case, there is no point at which such actions will stop. The only safe rule is to confine the right to recover to those who enter into the contract; if we go one step beyond that, there is no reason why we should not go fifty.

Ward, 100 U.S. at 203 (quoting Winterbottom). See also Shoemaker, 2008-Ohio-2012 at ¶ 15, 118 Ohio St. 3d at 230, 887 N.E.2d at 1171 (“Rather than expose the lawyer to the 50 [steps referenced by Winterbottom and Ward], we conclude that lawyers should know in advance whom they are representing and what risks they are accepting.”).

Third, the privity rule is said to protect attorney-client confidentiality. Without the rule, an attorney defending a malpractice suit brought by a disappointed beneficiary could be put in the position of having to reveal confidential client communications—as permitted by Rule 1.6(b)(5) of the Model Rules of Professional Conduct—that the client may not have wanted disclosed. For example, a client might tell a relative that he or she will receive a portion of the client’s estate even though the client secretly dislikes the relative and desires that the relative take nothing. The client may confide his or her feelings to his or her attorney and request the preparation of estate-planning instruments, omitting the disliked relative. Knowing that his or her attorney may later reveal such sensitive and confidential disclosures in the context of a lawsuit brought by the omitted relative may harm the attorney-client relationship by causing the client to withhold vital information. The privity rule protects against this scenario by prohibiting lawsuits by non-clients.

The principle objection to the privity rule is, of course, its potential to lead to circumstances that violate the maxim that “[e]quity will not suffer a wrong without a remedy.” Indep. Wireless Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 472 (1926). If an estate-planning attorney is negligent in drafting a will, for example, the client’s intent may be frustrated, with the loss falling on an innocent third party, an intended beneficiary who is accidentally disinherited. Under the privity rule, only the client may sue, but because the negligence is typically not discovered until after the client’s death, there is no one with standing to bring a claim. Of course, courts applying the privity rule are aware of this potential for inequity, but they have determined that the potential for perceived unfairness is justified by the important public policy considerations embodied within the rule. For example, Baron Rolff wrote in Winterbottom:

This is one of those unfortunate cases in which there certainly has been damnum, but it is damnum absque injuria; it is, no doubt, a hardship upon the plaintiff to be without a remedy, but, by that consideration we ought not to be influenced. Hard cases, it has been frequently observed, are apt to introduce bad law.

See also Barcelo, 923 S.W.2d at 578 (“We believe the greater good is served by preserving a bright-line privity rule which denies a cause of action to all beneficiaries whom the attorney did not represent.”).

The majority of courts see things differently than Baron Rolff. They believe that the privity rule’s advantages—which they generally recognize—are outweighed by the importance of providing a remedy in instances of estate-planning malpractice. In Lucas, for example, the Supreme Court of California wrote: “We are of the view that the extension of [an attorney’s] liability to beneficiaries injured by a negligently drawn will does not place an undue burden on the profession, particularly when we take into consideration that a contrary conclusion would cause the innocent beneficiary to bear the loss.” 56 Cal. 2d at 589, 364 P.2d at 688.

Those courts that have relaxed or abandoned the privity rule in the estate-planning context may disagree about the nature of the remedy. Compare Donahue v. Shughart, Thomson & Kilroy, P.C., 900 S.W.2d 624 (Mo. 1995) (permitting only a tort claim), with Guy v. Liederbach, 501 Pa. 47, 459 A.2d 744 (1983) (permitting only a third-party beneficiary claim). They may also disagree whether extrinsic evidence should be permitted to show the client’s intent, or whether the client’s intent must be determined from the instrument alone.Compare Simpson v. Calivas, 139 N.H. 1, 650 A.2d 318 (1994) (permitting the use of extrinsic evidence), with Espinosa v. Sparber, Shevin, Shapo, Rosen & Heilbronner, 612 So. 2d 1378 (Fla. 1993) (prohibiting the use of extrinsic evidence and restricting the analysis to the four corners of the instrument). However, they all agree that “[p]ublic policy supports the imposition of liability on an attorney who acts negligently in drafting or supervising the execution of a will” and that “the lack of privity should not be a bar to this action.” Auric, 111 Wis. 2d 507, 514, 331 N.W.2d 325, 329 (1983).

Responding to the Retreat from the Privity Rule

The privity rule’s fall from grace over the last half century has undoubtedly been frustrating to estate-planning attorneys. Even in those states where the rule remains viable, counsel should not rely on its continued applicability because it could be further relaxed or abrogated at any time. Given the modern trend, plaintiffs’ attorneys are no doubt eager to see their cases become the vehicles through which the rule is washed away for good. It probably goes without saying, but estate planners—as well as their insurers and defense counsel—must vigilantly follow legal developments in this rapidly changing area of the law. There are also several practical steps which are worthy of consideration by estate-planning attorneys.

  • Spell out the scope of the engagement in a detailed representation agreement and scrupulously adhere to its terms.
  • Ask each client to complete a questionnaire regarding his or her testamentary intent. Such a document may bolster the argument that the client’s intent was properly expressed in the instrument. Of course, if an error is made, a questionnaire will only bolster the plaintiff’s case, so the lawyer must carefully abide by it.
  • In lieu of or in addition to a questionnaire, have each client sign a separate document of intent. This may seem redundant, but it could prove useful, especially if it establishes that a client rejected any advice imparted by his or her attorney.
  • Make any intentional disinheritance or other seemingly unusual decisions explicit in the instrument. For example, a will might say, “I am intentionally not providing for my nephew, John Doe.” Language of this sort would all but foreclose a lawsuit by the disinherited relative.
  • Be certain that insurance policies with appropriate limits are in place, and consider clientele when applying for insurance. A practitioner planning estates for clients worth millions of dollars should not have a policy with limits in the hundreds of thousands of dollars.

Whether it is loved or hated, seen as still relevant or as an anachronism, the indisputable fact is that the number of states that continue to apply the traditional privity rule is dwindling. Its days as a viable legal principle in the United States—at least with respect to estate-planning malpractice claims—appear to be numbered. However, by staying attentive to changes in the legal landscape and implementing practical suggestions such as those enumerated here, estate-planning attorneys may be able to mitigate losses in the unfortunate event of a lawsuit even in those jurisdictions where the privity rule no longer applies.

Matthew G. Gerrald is a partner with Barnes, Alford, Stork & Johnson, LLP in Columbia, South Carolina. He practices primarily in the fields of civil litigation and appeals, general and professional liability defense, and insurance coverage, along with collections, construction law, real estate, and church law.

This article originally appeared under the title “Anachronistic or Still Relevant? The Privity Rule as a Bar to Attorney Malpractice Actions” in the April 2015 issue of For the Defense, a publication of DRI.

Personal or Collective: Division of the Duty to Defend

Jurisdictions throughout the country have long debated whether insurers with duties to defend a common insured are obligated to pay only their pro rata share of defense costs and whether such insurers may seek contribution from one another for defense payments. These issues often arise in so-called “progressive damage” cases in which the insured is alleged to have caused injury to the claimant during a period of time spanning multiple policy periods, such as chemical exposure and construction defect cases. See generally Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878 (1995) (addressing coverage issues arising as a result of long-term chemical exposure); Joe Harden Builders, Inc. v. Aetna Cas. & Sur. Co., 326 S.C. 231, 486 S.E.2d 89 (1997) (adopting a modified continuous trigger theory in progressive damage cases in the construction defect context).

Courts that last confronted these questions in the 1970s or earlier often responded in the negative. For example, in our home state of South Carolina, the Supreme Court found in Sloan Construction Co. v. Central National Insurance Co. of Omaha, 269 S.C. 183, 236 S.E.2d 818 (1977), that because “[t]he duty to defend is personal to each insurer,” an insurer “is not entitled to divide the duty nor require contribution from another absent a specific contractual right.” Id. at 186, 236 S.E.2d at 820. Other states agreed. See e.g. Argonaut Ins. Co. v. Maryland Cas. Co., 372 So. 2d 960, 963 (Fla. Dist. Ct. App. 1979) (“The duty of each insurer to defend its insured is personal and cannot inure to the benefit of another insurer. Contribution is not allowed between insurers for expenses incurred in defense of a mutual insured.”) (citations omitted).

Beginning in the 1970s and 80s, however, courts in a number of jurisdictions reexamined these issues—or perhaps confronted them for the first time—with an apparent majority of them finding that insurers may, in fact, divide the duty to defend and seek contribution from each other for defense costs.

The Modern Trend Favors Allocation of Defense Costs

In one of the earliest decisions rejecting the principle that the duty to defend is personal to each insurer, the Supreme Court of Alaska held in 1970 that “defense costs must be shared pro rata between concurrent insurers in proportion to the amounts of coverage they have provided.” Marwell Const., Inc. v. Underwriters at Lloyd’s, London, 465 P.2d 298, 313 (Alaska 1970). The court found that viewing the duty to defend as independent of and severable from the duty to indemnify would lead to profoundly negative consequences.

“The insurer who wrongfully breached its duty to defend would be awarded a bonus for having done so, by having another company bear the entire cost. This would make it attractive for insurance companies to disavow responsibilities, and to find reasons, in the inevitable ambiguity of the fine print of their policies, to deny coverage to the insured. This is contrary to the important principle that the policy should be construed liberally to provide coverage to the insured.”


California was also something of a trendsetter in the debate over division of the duty to defend and contribution for defense costs. In 1982, that state’s Third District Court of Appeal held that “all obligated carriers who have refused to defend should be required to share in costs of the insured’s defense, whether such costs were originally paid by the insured himself or by fewer than all of the carriers.” Ins. Co. of N. Am. v. Liberty Mut. Ins. Co., 128 Cal. App. 3d 297, 305, 180 Cal. Rptr. 244, 249–50 (1982). As is often the case, other courts have followed California’s lead. For example, in Great American Insurance Co. of New York v. North American Specialty Insurance Co., 542 F. Supp. 2d 1203 (D. Nev. 2008), the United States District Court for the District of Nevada relied on California law to predict how the Nevada Supreme Court would address “the duty of an insurer to contribute to an insured’s defense by another insurer.” Id. at 1211.

“The Nevada Supreme Court has often turned to California decisions when faced with issues of first impression. Accordingly, this court will also turn to California law in this case. As a general rule, [under California law] an insured’s loss should be equitably distributed among those who share liability for it in direct ratio to the portion each insurer’s coverage bears to the total coverage provided by all the insurance policies.”

Id. as 1211–12 (citations and quotations omitted).

Courts in a number of other jurisdictions have likewise held that insurers may pursue contribution claims for defense payments made on behalf of a common insured. For example, the Court of Appeals of Arizona found that where multiple insurance policies cover the same parties, in the same interest, in the same property, against the same casualty, each insurer that undertook the defense or indemnification of the insured has standing to assert a contribution claim. Nucor Corp. v. Employers Ins. Co. of Wausau, 231 Ariz. 411, 296 P.3d 74 (Ct. App. 2012). In Utah, contribution claims are allowed in situations where one insurer paid more than its “fair share” of defense costs. See, e.g., Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127, 137–38 (Utah 1997) (“Where it can be shown that a co-insurer failed to defend or failed to pay its share of the defense expenses, that insurer should not be rewarded and payment excused when another co-insurer has taken upon itself the provision of that defense.”). And in Colorado, an insurer that undertakes the defense of a common insured is entitled to pro rata contribution from other insurers notwithstanding a lack of contractual relations between the insurers. Nat’l Cas. Co. v. Great Sw. Fire Ins. Co., 833 P.2d 741, 747–48 (Colo. 1992). See also Nautilus Ins. Co. v. Lexington Ins. Co., 132 Haw. 283, 297, 321 P.3d 634, 648 (2014) (“[W]e conclude that the better approach is to allow one insurer to obtain contribution from another co-insurer that is also contractually obligated to defend the insured.”); Potomac Ins. Co. of Illinois ex rel. OneBeacon Ins. Co. v. Pennsylvania Mfrs.’ Ass’n Ins. Co., 215 N.J. 409, 412–13, 73 A.3d 465, 467 (2013) (affirming the trial court’s decision to allocate defense costs and permit one insurer to make a contribution claim against another);Cargill, Inc. v. Ace Am. Ins. Co., 784 N.W.2d 341 (Minn. 2010) (co-primary liability insurer that had a duty to defend, and whose policy was triggered for defense purposes, had an equitable right to seek contribution for defense costs from any other insurer who also had a duty to defend the insured, and whose policy had been triggered for defense purposes, even though there was no privity between insurers); Pennsylvania Gen. Ins. Co. v. Park-Ohio Indus., 2010-Ohio-2745, ¶ 24, 126 Ohio St. 3d 98, 105–06, 930 N.E.2d 800, 808 (2010) (“When loss or damage occurs over time and involves multiple insurance-policy periods and multiple insurers, a claim may be made by the targeted insurer against a non-targeted insurer with applicable insurance policies for contribution.”);Rubenstein v. Royal Ins. Co. of Am., 44 Mass. App. Ct. 842, 852, 694 N.E.2d 381, 388 (1998) aff’d in part, 429 Mass. 355, 708 N.E.2d 639 (1999) (“[T]here is no bar against an insurer obtaining a share of indemnification or defense costs from other insurers under the doctrine of equitable contribution.”); Nationwide Mut. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 122 N.C. App. 449, 454, 470 S.E.2d 556, 559 (1996) (holding that an insurer may not recover defense costs or settlement payments under a subrogation theory but that it may assert a claim for contribution); Frankenmuth Mut. Ins. Co. v. Cont’l Ins. Co., 450 Mich. 429, 449, 537 N.W.2d 879, 887 (1995) (“While one insurer may not require the other to join in defense with it or in its place, an insurer who has provided a defense may seek contribution from the non-defending insurer.”); Cont’l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 655, 609 N.E.2d 506, 514 (1993) (“When more than one policy is triggered by a claim, pro rata sharing of defense costs may be ordered[.]”); Sacharko v. Ctr. Equities Ltd. P’ship, 2 Conn. App. 439, 447, 479 A.2d 1219, 1224 (1984) (“The general rule is that all insurers providing primary coverage to an insured are duty bound to defend the insured and will be required to contribute their pro rata share of the cost of defense.”).

One of the primary arguments in favor of permitting division of defense costs between insurers of a common insured—which was articulated by the Supreme Court of Alaska in Marwell—is that the alternative would incentivize insurers to wrongly deny coverage and unfairly reward them for doing so by requiring another insurer to bear the full cost of defending the insured. The Supreme Court of New Jersey in Potomac Insurance listed this and three additional supporting arguments.

“First, permitting such a claim [for contribution among insurers for defense costs] creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources of insurers, litigants and the court. If a carrier anticipates that it will be responsible for a portion of the defense costs, it is more likely to invest in a vigorous defense. . . .

“Second, recognition of a direct claim by one insurer against another promotes early settlement. An insurer that anticipates paying an allocated portion of the policyholder’s defense costs may factor those costs into a potential resolution of the underlying claim. . . .

“Third, the allocation of defense costs creates an additional incentive for individuals and businesses to purchase sufficient coverage every year. If each insurer’s obligation to contribute to a defense is apportioned in accordance with the scope of its coverage . . . the policyholder is motivated to purchase coverage that is continuous, at a level commensurate to the policyholder’s personal or business risks. . . .

“Fourth, the allocation of defense costs among all insurers that cover the risk, enforced by a right of contribution between the co-insurers of a common insured, serves the principle of fairness . . . . [A]n insurer that refuses to share the burden of a policyholder’s defense is rewarded for its recalcitrance, at its co-insurer’s expense, unless the insurer who pays more than its share of the costs has an effective remedy.”

Potomac Ins., 215 N.J. at 426–27, 73 A.3d at 475–76.

It’s Not Unanimous

Though most courts that have addressed the issue have permitted pro rata allocation of defense costs and contribution claims therefor, a number of jurisdictions continue to adhere to the opposite view. South Carolina and Florida, as previously noted, prohibit division of the duty to defend on the basis that the duty to defend is personal to each insurer. See Sloan Const. and Argonaut Ins. Co., supra. South Carolina, however, last confronted the issue nearly forty years ago and has, in the interim, endorsed pro rata allocation of indemnity payments in progressive damage cases. See generally Crossmann Communities of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717 S.E.2d 589 (2011). Only time will tell if this decision signaled that change is on the horizon with respect to contribution claims for defense costs.

In addition to South Carolina and Florida, at least New Mexico, Oklahoma, and perhaps Texas prohibit division of the duty to defend or contribution claims between insurers of a common insured for defense payments. In one of the oldest cases on the subject, Rallis v. Connecticut Fire Insurance Co., 46 N.M. 77, 120 P.2d 736 (1941), the New Mexico Supreme Court found that “[w]here each policy stipulates to pay the proportion of the loss which the amount insured by it bears to the whole amount of insurance on the property, the contracts are independent, and each insurer binds itself to pay its own proportion without regard to what may be paid by others and no right of contribution exists in favor of either of them.” 120 P.2d at 738 (citation and quotation omitted). The court even went so far as to label its conclusion the “universal rule” in 1941. Id.

In Fidelity & Casualty Co. of New York v. Ohio Casualty Insurance Co., 1971 OK 31, 482 P.2d 924 (1971), the Supreme Court of Oklahoma, using language that would later be echoed by the Supreme Court of South Carolina, found that “[t]he duty to defend is personal to each insurer” and  “the carrier is not entitled to divide the duty nor require contribution from another absent a specific contractual right.” 482 P.2d at 926.

Finally, a Texas Court of Appeal suggested in Texas Property & Casualty Insurance Guaranty Association/Southwest Aggregates, Inc. v. Southwest Aggregates, Inc., 982 S.W.2d 600 (Tex. App. 1998), that Texas law also prohibits division of the duty to defend. See id. at 607 (finding that an insurer’s duty to defend its insured on a claim occurring partially within and partially outside of the policy period is not reduced pro rata by the insurer’s “time on the risk” or by any other formula).

Courts that refuse to permit proration of defense costs and/or contribution claims between insurers typically reason that each insurer has a separate contractual duty to defend its insured and that the existence of other insurance does not affect that duty. For example, the Sloan Construction court wrote:

“When Liberty undertook the defense of the [underlying] action, it was doing no more than it was obligated to do under the terms of its contract with [the insured]. The fact that Central also had a duty to defend was irrelevant to the rights and duties existing between Liberty and [the insured] by reason of their insurance contract. Central’s refusal to defend [the insured] did not affect Liberty’s obligations to [the insured], and when Liberty undertook the defense it was acting not for Central but for its insured[.]”

269 S.C. at 186–87, 236 S.E.2d at 820. Addressing the objection that its holding would result in inequities between the insurers, the court noted that such inequities “can be obviated by rewriting the terms of the insurance contracts or by the obligee actually incurring a legal obligation to pay and seeking recovery on a pro-rata basis if it so desires.” Id. at 189, 236 S.E.2d at 821. The Argonaut court further justified its view on the basis that permitting contribution claims between insurers for defense costs would give insurers “no incentive to settle and protect the interest of the insured, since another law suit would be forthcoming to resolve the coverage dispute between the insurance companies.” 372 So. 2d at 964.

A Middle Ground?

A few states have adopted what could be considered a “middle ground.” Under this view, insurers may seek contribution for defense costs, but only against other insurers to whom the insured has tendered the defense. The theory underpinning this perspective is that the duties of defense and indemnity are not contractually triggered until the insured tenders a claim to its insurer. The Supreme Court of Washington analyzed the issue as follows:

“An insurer cannot be expected to anticipate when or if an insured will make a claim for coverage; the insured must affirmatively inform the insurer that its participation is desired. Thus, breach of the duty to defend cannot occur before tender. The duties to defend and indemnify do not become legal obligations until a claim for defense or indemnity is tendered. Further, the insurer who seeks contribution does not sit in the place of the insured and cannot tender a claim to the other insurer. Thus, if the insured has not tendered a claim to an insurer prior to settlement or the end of trial, other insurers cannot recover in equitable contribution against that insurer.”

Mut. of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash. 2d 411, 421, 191 P.3d 866, 873 (2008) (citations and quotations omitted). The court noted that its “selective tender” rule preserves the right of the insured to choose whether to invoke any or all of its insurance policies, offering several reasons—such as avoiding premium increases, preserving policy limits for other claims, or safeguarding the insurer/insured relationship—why an insured may choose not to tender a claim and found that “[w]hatever its reasons, an insured has the prerogative not to tender to a particular insurer.” Id. at 421–22, 191 P.3d at 873. The United States District Court for the District of Montana employed similar reasoning in predicting that the Montana Supreme Court would permit equitable contribution claims among insurers for defense costs while simultaneously finding that the duty to defend is not triggered until the insured tenders the claim. See Cas. Indem. Exch. Ins. Co. v. Liberty Nat. Fire Ins. Co., 902 F. Supp. 1235, 1239 (D. Mont. 1995). (“[W]here the insured has failed to tender the defense of an action to its insurer, the latter is excused from its duty to perform under its policy or to contribute to a settlement procured by a coinsurer.”).

Resolve the Issue Up Front

Because this is a continuously evolving area of the law, insurers and their outside counsel must remain vigilant about developments in each jurisdiction where they have a business presence. Though many states have not yet squarely addressed these issues, it seems likely, in light of the modern trend, that more and more courts—potentially including those that have previously concluded otherwise—will determine that defense costs can and should be allocated among insurers of a common insured. No insurer should assume that it may avoid payment of defense costs simply because another insurer may also have a duty to defend the insured. In most cases, the wise course will be to reach out to other insurers and attempt to reach an agreement to share defense costs at the outset of the claim. By doing so, prudent insurers will be able to avoid costly and protracted contribution litigation regardless of the current state of the law in any particular jurisdiction.

This article originally appeared under the title “Personal or Collective: May the Duty to Defend Be Divided Among Multiple Insurers of a Common Insured?” in the Fall 2015 issue of In-House Defense Quarterly, a publication of DRI.