Minnesota Supreme Court Overrules Iowa National: Co-Primary Insurers Can Be Held Equally Liable For Defense Costs Despite Lack Of Privity
July, 2010
fThe Minnesota Supreme Court has overruled Iowa Nat’l Ins. Co. v. Universal Underwriters Ins. Co., (Minn. 1967), which held that absent a loan receipt agreement, "...an insurer that defends or participates in the defense of an insured has no basis for seeking recovery of defense costs from another insurer." Cargill Inc. v. ACE American Ins. Co., 2010 WL 2606020 (Minn. June 30, 2010). In Cargill, the Court holds that primary insurers, who insure the same insured for the same risks, and whose policies are triggered for defense purposes, can be equally liable for defense costs based on equitable contribution principles where there is otherwise no privity between insurers.
Facts
After suit was filed in February 2007, several of Cargill's insurers, including Liberty Mutual, offered to pay Cargill's reasonable and necessary defense costs in various private party and governmental actions relating to Cargill's alleged liability for contamination ina and around the Illinois River Watershed. The defense was offered subject to a full reservation of rights under the policies, including the enforcement of deductibles, retrospective premiums, etc. and contingent upon Cargill executing a loan receipt agreement. Cargill refused to execute the loan receipt agreement. Thereafter, Cargill demanded that Liberty Mutual alone fund its defense. In October 2007, Liberty Mutual sent Cargill a check for partial payment for past defense costs and requested that Cargill execute a loan receipt agreement. Liberty Mutual offered to pay Cargill's defense costs in the underlying actions if Cargill permitted Liberty Mutual to seek recovery of defense costs from other insurers whose policies owed a duty to defend. Cargill refused and returned the check because if Liberty Mutual proceeded against the other primary policies – many of which were "fronting" policies, or were fully reinsured by a Cargill-owned captive, or were subject to a retrospective premium – it could result in Cargill bearing part of its own defense costs.
The trial court held that Liberty Mutual had the right to seek contribution from other carriers who are determined to have a duty to defend and that such costs are to be shared equally among participating carriers. Noting that Liberty Mutual was not in privity with the other carriers, and citing Iowa National, the trial court held that Liberty Mutual needed either a loan receipt agreement to proceed against the other carriers or a court order requiring that defense costs be shared. The trial court found it inequitable for Cargill to take the position that it was justified in refusing to enter into the loan receipt agreement because such would, at the end of the day, require Cargill to pay a portion of its defense costs. The trial court found that a loan receipt was not necessary, or in the alternative, that it could impose a constructive loan receipt upon Cargill so as to enable Liberty Mutual to proceed against other primary carriers.
The Court of Appeals found that under Iowa National, Liberty Mutual lacked contractual privity with co-primary duty-to-defend insurers. The Court of Appeals determined that where multiple primary insurers have offered a defense contingent upon a loan receipt agreement, good-faith and fair-dealing principles required Cargill to cooperate and enter into a "neutral" loan receipt agreement providing for equitable apportionment among the primary insurers, and that Cargill's refusal to do so amounted to bad faith.
The Minnesota Supreme Court granted review.
Analysis
The Supreme Court first addressed Iowa National, noting that the case involved a vehicular accident where the employer's insurer refused to defend the employee driver of a company owned vehicle. The driver's own insurer defended him and settled the case. The driver's insurer then sought to recover defense costs from the company's insurer. In finding that the driver's insurer could not recover, the Supreme Court noted that there was no contractual privity between the two insurers that would make one accountable to the other. The Court observed that the obligation of defending an insured is a separate obligation existing exclusively between the insurer and insured, emphasizing that the lack of a contractual relationship between the insurers does not alter their individual duties to the insured with whom they do have a contract.
The Iowa National Court also rejected the driver's insurer's claim for recovery based upon contribution. In so doing, the Court found that the two insurers did not have a joint or common obligation, but were each separately obligated to defend. The Court noted that Iowa National is factually distinguishable from this case, but the principles underlying its broad prohibition against an insurer having a right to recover defense costs would still be applicable.
The Supreme Court mentioned cases where it had found several exceptions to the Iowa National rule so as to limit its applicability, but found none of the exceptions applicable here – and rejected Liberty Mutual's request that it carve out yet another exception. The Court found that in a case such as this which involves claims against Cargill that extend beyond the period covered by any one insurance policy and pertain to co-primary insurers, it could not be said that any insurer who undertakes to defend Cargill would be answering for only its just and proper share of the defense. Here Cargill had notified primary insurers other than Liberty Mutual, which triggered those other policies. Thus although Liberty Mutual may have an obligation to defend, there is a common liability among all of the primary insurers who have a duty to defend.
The Supreme Court found that the Iowa National rule did little to encourage insurers to resolve promptly the duty to defend issue, but rather, encourages any insurer whose policy is arguably triggered to deny its insured a defense and play the odds that among all insurers on the risk, it will not ultimately be selected by the insured to defend. The Court concluded that the Iowa National rule is no longer an appropriate result when multiple insurers may be obligated to provide a defense.
While extremely reluctant to overrule longstanding precedent, the Court expressed its belief that the Iowa National rule is contrary to principles of equity, at odds with some prior Court statements in other cases and can hardly be said to promote prompt responses from insurers to fulfill their duty to defend. The Court also concluded that a co-primary's right to contribution from other primary insurers that have a duty to defend is supported by public policy. The Court concluded that when the pro-rata-time-on-the-risk method applies to allocation of liability, and insurers participate in providing a defense to a common insured, defense costs are apportioned equally among insurers whose policies are triggered.
At the end, the Court stated that breach of a duty to defend precludes application of any equitable right to contribution. The Court remanded the case to the trial court to determine whether Liberty Mutual breached its duty to defend Cargill. The Court did state in a footnote, however, that they were not suggesting that Liberty Mutual's actions did in fact constitute a breach of the duty to defend and that the issue was not before it.
Learning Point:
Under Cargill, primary insurers who insure the same insured for the same risks and whose policies are triggered for defense purposes, can now be held equally liable for defense costs based on equitable contribution principles where there is otherwise no privity between insurers – and regardless of whether the insured is willing to enter into a loan receipt agreement or not.
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