Contribution Between Insurers is an Equitable Decision
When more than one insurer is obligated to defend and indemnify an insured after an incident causing bodily injury to a third person, the sharing is usually an easy allocation of pro rata sharing. When courts get involved, however, confusion often reigns.
In Nationwide Mutual Fire Insurance Company v. Erie Insurance Exchange, Record No. 180572, Circuit Court No. CL00-108820, Supreme Court of Virginia (July 18, 2019) Nationwide Mutual Fire Insurance Company and Nationwide Mutual Insurance Company (collectively, Nationwide) sued Erie Insurance Exchange for equitable contribution.
Both Nationwide and Erie had issued insurance policies allegedly covering a defendant sued in a wrongful death action arising out of an automobile accident. Nationwide had issued three policies: a commercial general liability policy with a $1 million coverage limit; a business automobile policy with a $1 million coverage limit; and a commercial umbrella liability policy with a $1 million coverage limit. Erie had issued two policies: a commercial automobile policy with a $1 million coverage limit and a business catastrophe policy with a $5 million coverage limit. In the original declaratory judgment action, the insurers disputed the policy coverages and priorities.
The circuit court in the first case, Nationwide I, held that Nationwide had primary coverage for the first $3 million in liability and that Erie’s policies provided excess coverage beyond that amount. Shortly after this ruling, the tort claimant’s counsel in the wrongful death action offered to settle the claim with Nationwide for $2.9 million. The tort claimant’s counsel warned that if Nationwide were to refuse the settlement, he would seek $10 million in damages at trial. Nationwide requested that Erie contribute toward the $2.9 million settlement. Erie, based on a court decision that Nationwide owed the first $3 million refused. Nationwide paid the settlement in full and secured a full release of liability for its insured.
The Supreme Court reversed the circuit court’s declaratory judgment holding. It held that Nationwide’s commercial general liability policy provided no coverage, that Erie’s commercial automobile policy provided primary coverage for up to $1 million, that Nationwide’s business automobile policy provided excess coverage for up to $1 million, and that Nationwide’s commercial umbrella policy and Erie’s business catastrophe policy provided excess coverage on a pro rata basis after that.
Although the Supreme Court was aware of the underlying settlement of the tort claim at the time of the decision, the Supreme Court offered no opinion regarding whether Erie had any obligation to reimburse Nationwide for any part of the $2.9 million settlement given the reversal of the circuit court’s coverage determination.
Nationwide then filed suit against Erie seeking equitable contribution of $1.75 million for Erie’s alleged share of the $2.9 million settlement, which was calculated based upon our reordering of the coverages on appeal. The trial court reasoned, Nationwide had “made the unilateral and voluntary decision to accept” the $2.9 million settlement. Second, Nationwide’s complaint did not assert that either of the conditions precedent to Erie’s obligation to pay a claim (a judgment or Erie’s consent to settle) had been satisfied. Erie, moreover, “did not waive its consent-to-settlement provisions” because “[r]efusal to consent to a settlement by a co-insurer is not the same as denial of coverage overall to the [insured tortfeasor].” The court thus held that Nationwide had failed to state a cause of action for equitable contribution against Erie.
Nationwide argues on appeal that its allegations were sufficient to state a claim against Erie for equitable contribution.
Equitable principles, not common-law precedents, govern whether Erie is obligated to contribute toward Nationwide’s settlement with the tort claimant. Equitable contribution does not arise out of any express contract or agreement between the parties to indemnify each other, but is based on the broad principles of equity that where two or more persons are subject to a common burden it shall be borne equally, since the law implies a contract between them to contribute ratably towards the discharge of the obligation. In order to enforce contribution the payment must have been made by one obligated to pay the whole, as between himself and the payee, but only bound to pay a proportionate part as between himself and his co-obligors.
Nationwide settled with the tort claimant for an amount for which it was then wholly liable, based upon the circuit court’s holding that Nationwide was liable to cover the first $3 million. The Supreme Court later reversed the circuit court’s holding, That decision reconfigured the insurers respective obligations.
The purpose of equitable contribution is to spread the ultimate liability in a fair proportion among the jointly liable obligors. Even when a payor misapprehends the law governing the payment, the court need not mechanically apply the rule of voluntariness based on mistake of law where to do so would lead to a wholly inequitable result.
Erie refused to contribute toward the settlement because, armed with a circuit court order confirming its view, it took the position that Nationwide was exclusively responsible for the first $3 million in coverage. The settlement amount, $2.9 million, was within that amount of Nationwide’s exclusive coverage, and thus, Erie was not responsible to contribute anything toward the settlement. For this reason, Erie effectively denied any obligation to cover claims under $3 million. Erie’s refusal to contribute toward a settlement under $3 million had nothing to do with Erie’s right to agree to the settlement but was instead based upon Erie’s then-existing right to refuse to pay anything toward a settlement exclusively within Nationwide’s, not Erie’s, coverage.
Under settled principles, an insurer that denies coverage waives any contractual right to participate in a settlement of the claim and cannot later refuse to pay a covered claim on this basis. An insurance company’s erroneous belief that there is no coverage or only limited coverage under the policy does not justify the company’s refusal to settle in an appropriate case.
As one court stated nearly a century ago: “The insurance company’s initial repudiation of the contract in denying liability under the policy relieved the insured of strict performance of those provisions intended for the protection of the insurer only if it recognized the liability and assumed charge of the matters relating to the claim.” Murphy & Co. v. Manufacturers’ Cas. Co., 89 Pa. Super. 281, 286 (1926). This refusal of the company to recognize any claim is treated as waiving a strict compliance with the condition as to the preliminary notice and proof, both in respect to form and time.
The circuit court erred by granting Erie’s demurrer and dismissing Nationwide’s claim for equitable contribution.
The Supreme Court, therefore, vacated the court’s final judgment and remanded the case to the circuit court to determine the reasonableness of the settlement and to enter an order awarding contribution to Nationwide consistent with the Supreme Court’s allocation of coverage liability in Nationwide I and with the views expressed in its opinion.
The purpose of the law of equity is to be fair. The Supreme Court of Virginia concluded it must deal with the two insurers fairly because equitable contribution is to spread the ultimate liability in a fair proportion among the jointly liable obligors.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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