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.