Posted on: 6/26/2012
John T. Harding, Rachel M. Davison
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One of the hottest topics in the world of insurance litigation is how a non-settling insurer can and should approach the issue of obtaining a “credit” for the settlements reached between the policyholder and other insurers sued for coverage in connection with mass tort, asbestos, environmental and other high-stakes litigation. In such claims it is, of course, quite common for a policyholder to bring suit against a large number of primary and excess carriers whose policies span several decades. Not surprisingly, in the course of such litigation many carriers will fall by the wayside, electing to settle with the policyholder for amounts that are typically maintained as confidential, but are assumed to be less than the full policy limits (Otherwise, why would they bother to settle?). For the carrier that elects to proceed to trial and beyond, this can create a scenario under which the carrier faces the potential for being tagged with what it considers an inequitable share of the potential liability. In the event that it does lose, what should it do? What options are open in terms of seeking to recoup some portion of the judgment from the carriers that entered into good faith settlements with the policyholder, but have not been released from claims by other insurers that they paid less than their “fair share”?
As this co-author and many others have discussed in prior DRI programs and publications over the course of the past several years (see "The Outer Limits: Excess Insurer Disputes" by John Harding from the 2011 ICCI conference), the remedies that an allegedly aggrieved insurer may pursue against other insurers are numerous but equally fraught with peril. The types of arguments that the insurer may have to advance in order to “win” the contribution suit against another insurer can result in making law that is favorable to policyholders on key coverage issues. Such litigation pitting insurer against insurer also puts the court in the unenviable position of considering whether an insurer has any right to “go behind” a good faith settlement, which could serve to reduce the odds that insurers and policyholders will be willing to enter into such settlements. If the settling insurer can be faced with the prospect of expensive second tier litigation with insurers that elected not to settle, will such litigation undermine the policy favoring settlements?
A decision recently issued by the Sixth Circuit Court of Appeals aptly illustrates these issues and the associated perils for primary and excess insurers. In OneBeacon America Insurance Company v. American Motorists Insurance Company, __ F.3d __, No. 10-4530, 2012 WL 1728757 (6th Cir. May 17, 2012) the Sixth Circuit affirmed the district court’s judgment in favor of the settling primary insurer, rejecting the non-settling excess insurer’s claim for “equitable contribution” or a further settlement credit. The decision arose from B.F. Goodrich’s claim for coverage for environmental cleanup costs associated with soil and groundwater contamination at its plant in Calvert City, Kentucky. Prior to the coverage litigation in state court, B.F. Goodrich had settled with a number of its insurers, including AMICO, which had provided primary insurance with total limits of $55 million. OneBeacon provided excess insurance to B.F. Goodrich that attached once AMICO’s liability exceeded $20 million, but did not reach a settlement with B.F. Goodrich prior to litigation.
In the coverage action, the jury returned a verdict against OneBeacon and another insurer for $42 million in compensatory damages and ruled that B.F. Goodrich was entitled to recover its attorneys' fees as well. The two insurers were held to be jointly and severally liable for the compensatory damages and 88 percent of the attorneys’ fees, and OneBeacon was solely liable for the remaining 12 percent of attorneys’ fees because it had engaged in bad faith in handling B.F. Goodrich’s claim. OneBeacon did receive a “set off” of $20 million to reflect the excess nature of its coverage and the fact that it attached, once $20 million of underlying coverage had been exhausted.
Following the jury verdict, OneBeacon sought to reduce its liability through settlement credits for the amounts that B.F. Goodrich had received from the settling insurers. However, the trial court cited two alternative grounds for not giving OneBeacon settlement credits. First, the settling insurers had finally resolved their entire dispute with B.F. Goodrich by discharging their liability for future costs and obligations, as well as for past costs incurred in the environmental cleanup. Because OneBeacon was found liable only with respect to past costs, the settled claims were determined not to be co-extensive with the OneBeacon claims. Alternatively, because OneBeacon was found to have acted in bad faith, the district court determined that it was precluded from receiving the equitable benefit of settlement credits.
After the Ohio Court of Appeals affirmed the jury’s verdict in favor of B.F. Goodrich and the denial of settlement credits, OneBeacon commenced a separate declaratory judgment action against AMICO on the theory that it was entitled to seek equitable contribution notwithstanding the determinations that were made in the state court proceedings. Specifically, OneBeacon sought a declaration that the failure to apply settlement credits for the amounts received by the policyholder would result in an unequal distribution of liability among B.F. Goodrich’s insurers. However, the district court viewed OneBeacon’s complaint as an effort to evade the trial court’s determination that it was not entitled to settlement credits. The district court granted AMICO’s motion for summary judgment, adopting the trial court’s logic that the damages awarded by the jury were not identical to the claims settled by AMICO and the alternative holding that OneBeacon’s bad faith in handling B.F. Goodrich’s claim precluded the equitable application of settlement credits. In addition, the district court concluded that OneBeacon failed to meet its burden of persuasion because Ohio law was not clear as to whether a non-settling insurer could, in fact, seek equitable contribution from a settling insurer.
OneBeacon appealed from the district court’s holding that, as a targeted non-settling insurer, it has no right to seek equitable contribution from a settling insurer. OneBeacon did not press the issue of whether it was entitled to settlement credits on appeal. In response to the equitable contribution arguments advanced on appeal by OneBeacon, AMICO argued that Ohio’s policy of favoring settlements required that the district court’s judgment be affirmed. Although AMICO also argued that Ohio law does not permit contribution actions between excess insurers and primary insurers and that OneBeacon should be estopped from seeking equitable relief because of the state court’s finding of bad faith, the Sixth Circuit did not pass on those additional arguments and decided the case based solely on Ohio’s policy favoring settlements.
The central issue on appeal was whether Ohio law permits targeted insurers to seek contribution from non-targeted insurers, so that no single insurer is responsible for more than its “fair share” of the loss. Because this issue had not been addressed definitively under Ohio law, the Sixth Circuit looked for guidance to various decisions from the Ohio state courts, district courts within the circuit and other federal courts. In particular, the Sixth Circuit was guided by the following principles:
? Ohio applies the “all sums” method of allocation, which allows the insured to “target” one insurer (up to the limits of the insurer’s policy) while permitting the targeted insurer(s) to seek contribution from other responsible parties, including under other applicable primary insurance. See Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835, 841 (Ohio 2002).
? The doctrine of equitable contribution should be liberally applied under the “all sums” approach and leaving a targeted insurer with the entire obligation for a claim where there is coverage available from other insurers would be inequitable. See Pennsylvania Gen. Ins. Co. v. Park-Ohio Indus., Inc., 902 N.E.2d 53, 58-59 (Ohio Ct. App. 2008), aff’d, 930 N.E.2d 800 (Ohio 2010).
? Non-settling excess insurers cannot seek equitable contribution from settling primary insurers because the settlements of the primary insurers extinguish all claims against them and they have no remaining liability to the insured. See GenCorp., Inc. v. AIU Ins. Co., 297 F. Supp. 2d 995, 1007 (N.D. Ohio 2003), aff’d, 138 Fed. Appx. 732 (6th Cir. 2005).
? Allowing non-settling insurers to seek contribution from settling insurers would undermine the finality of settlements, but non-settling insurers are entitled to seek credit for the amounts paid by the settling insurers to avoid a windfall to the insured and to limit the non-settling insurers’ liability to their fair share. See Bondex Int’l, Inc. v. Hartford Acc. & Indem. Co., No. 03-01322, 2007 WL 405938, at *4 (N.D. Ohio Feb. 1, 2007), aff’d on other grounds, 667 F.3d 669 (6th Cir. 2011).
? In order to preclude a double recovery by the insured and to ensure that no one insurer pays more than its fair share of liability, a non-settling insurer is either entitled to a reduction in the judgment by settlement credits that account for the settling insurers’ apportioned share of liability, or the right to seek contribution from the settling insurers, who, in turn, could seek reimbursement from the insured. See Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1452 (3d Cir. 1996). However, the Third Circuit predicted that the Pennsylvania Supreme Court would choose the first option, which effectively bars a non-settling insurer from seeking equitable contribution from settling insurers. Id.
? A settling insurer that paid more than its fair share is entitled to recover from a non-settling insurer. Maryland Cas. Co. v. W.R. Grace & Co., 218 F. 3d 204, 210 (2d Cir. 2000).
Based upon these principles, the Sixth Circuit held that settlement can exhaust a settling insurer’s policy and that such exhaustion precludes a non-settling insurer from seeking equitable contribution from the settling insurer. This holding comports with Ohio law favoring the compromise and settlement of litigation. The Sixth Circuit further noted that allowing a non-settling insurer to pursue equitable contribution from a settling insurer would actually discourage settlements because an insurer would have no incentive to settle a claim by an insured if the possibility of liability to another insurer loomed. Had OneBeacon’s request for equitable contribution been granted, AMICO would have been required to pay more than its fair share because it would have been liable to OneBeacon (for contribution) and also to B.F. Goodrich (under the settlement agreement), which would also undermine the certainty achieved by settlement. Accordingly, the Sixth Circuit affirmed summary judgment in favor of AMICO with the hope of not undermining current settlements and encouraging future settlements.
The OneBeacon decision thus illustrates the conundrums faced by insurers and the courts in resolving these complex disputes, particularly in a jurisdiction such as Ohio that permits the targeting of liability for long-tail losses in a single policy period by virtue of the “all sums” doctrine. While earlier decisions such as Park-Ohio Industries endorse the ability of the targeted insurer to pursue non-targeted insurers under an equitable contribution theory, in the end the court appeared more concerned about whether adopting the arguments presented by OneBeacon would undermine the finality of settlements where there was nothing to suggest anything other than a good-faith resolution of a dispute between an insurer and the policyholder. In such circumstances, the court ultimately concluded, the odds are definitely not in “favor” of the excess insurer who legitimately believes that it has paid more than its “fair share.”
John T. Harding
Rachel M. Davison
Morrison Mahoney LLP
Boston, MA