- Minnesota Federal Court Upholds Defending Insurer’s Contribution Rights Against Fronting Insurer
- April 4, 2013 | Author: Karen Ventrell
- Law Firm: Troutman Sanders LLP - Washington Office
In a long-running battle involving allocation of costs to defend chemical exposure claims, Continental Casualty Company (Continental) obtained summary judgment on its contribution claim against National Union Fire Insurance Company (National Union). In Continental Casualty Company v. National Union Insurance Company of Pittsburgh, PA, the United States District Court for the District of Minnesota held that Continental had a right of contribution against National Union for costs paid by Continental to defend benzene lawsuits against The Valspar Corporation (Valspar). The decision is significant to insurers given the emergence of allocation disputes involving "fronting" insurance programs under which policyholders have significant self-insured retentions and indemnification obligations.
Continental issued several general liability insurance policies to Valspar in the early 1970s. National Union issued primary general liability policies to Valspar from 1990 to 2004. National Union and Valspar also had a number of side agreements (the “National Union Program”) pertaining to self-insured retentions, risk retention, premium, claims handling and reimbursement and indemnity obligations. National Union and Valspar disclaimed any duty to share defense costs with Valspar’s general liability insurers. National Union argued it had no duty to defend or to pay costs to defend Valspar because Valspar ultimately was responsible under the National Union Program for the costs of its defense. Valspar argued that because Valspar ultimately bore the obligation to pay such expenses under the National Union Program, no share of defense costs should be allocated to any National Union insurance period because to do so would make the policyholder responsible for a share of defense costs.
The court rejected these arguments and ruled in favor of Continental. In sum, the court found that: (1) the duty to defend is distinct from the duty to pay defense costs; (2) the National Union policies issued to Valspar plainly imposed a duty to defend on National Union; (3) although Valspar ultimately bore the obligation to pay defense costs under the National Union Program, National Union retained the duty to defend and none of the Program documents (consisting of indemnity agreements, policy funding schedules, deductible liability endorsements, large loss risk retention agreements, and direct pay agreements) eliminated or negated the duty to defend imposed by the National Union policies; (4) under Cargill, Inc. v. Ace Am. Ins. Co., (Minn. 2010), Continental had standing to seek contribution from National Union; (5) Continental substantially fulfilled its obligation to pay reasonable defense costs and its refusal to pay a small amount of disputed defense costs did not affect its right to contribution; and (6) defense costs are to be shared equally among primary insurers with a duty to defend.
First and foremost, the court essentially rejected efforts by National Union and Valspar to thwart Continental’s right of contribution. The court found that by virtue of the Minnesota Supreme Court’s decision in Cargill recognizing a right of equitable contribution, a defending insurer has standing to bring a claim for contribution, reasoning: “The fundamental question in an equitable contribution action is precisely the question Continental seeks to have determined here - does National Union owe an obligation to Valspar such that National Union can be liable to Continental for contribution? The right to seek contribution would be meaningless if a co-insurer could stymie attempts to seek contribution by asserting it does not have a duty to defend, and then preventing the paying insurer from examining the insurance policy to challenge that assertion.”
Notably, the court was not swayed by the post-dispute construction of the National Union Program documents proffered by the parties to those contracts. National Union and Valspar argued that a “direct pay” agreement executed in 2000 was intended to amend all of the National Union policies issued to Valspar prior to 2000 and thereby make Valspar, not National Union, responsible for Valspar’s defense. The court agreed with Continental that the Program documents did not support such an interpretation. The court painstakingly reviewed the mountain of policies and Program documents. It found that each of the National Union policies plainly stated that National Union had the “right and duty to defend” and that neither the direct pay agreements nor any other Program documents negated or eliminated National Union’s duty to defend. The court held that the duty to defend is distinct from the duty to reimburse. While under the Program, Valspar assumed the obligation to indemnify or reimburse National Union for costs incurred in defending Valspar, National Union still retained the duty to defend and its accompanying obligations.
The court also rejected the argument that Continental’s contribution claim was barred by its failure to pay the rates charged by counsel selected by Valspar or by its failure to pay a small amount of disputed charges. The court reasoned that the equitable principles underlying contribution claims are designed to accomplish substantial justice and not allow a non-defending insurer to profit at the expense of a defending insurer. Relying on case law barring an insurer from obtaining contribution only where the insurer had failed to defend at all, the court concluded that because Continental had defended Valspar, its contribution claim was not barred.
Accordingly, the court held that Continental is entitled to recover a per capita share of defense costs from National Union.