Excess Insurer Entitled to Equitable Subrogation—Not Equitable Contribution—from Primary Insurer

The Appeals

On appeal, the court held that the Home was not entitled to recover under either theory. The court found that the Home could not satisfy the elements of a claim for equitable subrogation, because the Home and the Cincinnati policies covered different risks, i.e., they each covered Allied for liability arising out of a different subcontractor's work. The court found that the Home was also not entitled to equitable contribution, for two reasons: (1) the identity of risks element for such a claim was not satisfied, and (2) an excess insurer is not entitled to contribution from a primary insurer. The court affirmed the judgment in favor of Cincinnati. Home appealed to the Illinois Supreme Court.

On appeal, the Illinois Supreme Court held that indeed, Home was not entitled to equitable contribution from Cincinnati, for two reasons: (1) contribution is not available between a primary and an excess insurer, and (2) the policies covered different risks, because they insured Allied for liability arising out of different subcontractors' work. The court, however, held that Home was entitled to equitable subrogation, because such an action lies whenever two or more policies cover the same "loss," as the Home and Cincinnati policies clearly did, and not only where they cover the same "risk," which the court held that they did not.

The Illinois Supreme Court affirmed in part and reversed in part the judgments of the circuit and appellate courts in Home Ins. Co. v Cincinnati Ins. Co., 821 NE2d 269 (Ill 2004).

Analysis

This decision is good in the sense that it reaffirms the right of an insurer that settles a suit to seek reimbursement from one or more insurers that also owed coverage. Another good aspect of this decision is that the court adopted the rationale of a 20-year-old case—Home Ins. Co. v Certain Underwriters at Lloyds London, 729 F2d 1132 (7th Cir 1984)—and held that in an action for equitable subrogation, the settling, plaintiff insurer is entitled to a presumption that the underlying plaintiff would have prevailed against all defendants under all theories alleged in the complaint. This is extremely helpful because it relieves the plaintiff insurer of the burden of proving facts that were never adjudicated in the underlying case, and which may otherwise require a thorough analysis of the evidence adduced through discovery in that case, in order to establish that its insured general contractor's liability arose out of the work of the other insurer's named insured subcontractor. The burden has now been shifted to the non-settling, defendant insurer to prove that its named insured would not have been found at fault.

Of course, even if he succeeds in meeting this burden, the non-settling insurer is not home free, since lack of fault does not establish that the additional insured's liability did not arise out of the named insured's work. The Illinois Supreme Court emphasized the importance of this distinction, i.e., the distinction between the named insured being at fault, and the additional insured's liability arising out of the named insured's work. Proof of the latter does not require proof of the former, because "arising out of" is a much broader concept than fault, and thus, proving fault necessarily establishes "arising out of," but proving lack of fault does not negate "arising out of." Note, though, that under the new ISO additional insured endorsements, the named insured's lack of fault will preclude coverage for the additional insured.

The Caveat

There is, however, an unfortunate aspect to this decision, and that is this: because the court chose a narrow construction of the "identical risks" element for an equitable contribution claim, this decision will foreclose that remedy for many insurers, leading to an increase in equitable subrogation claims, where the stakes are higher (all or nothing), and the issues will be contested more vigorously. For example, take the situation in this case, where the two insurers sold policies to different subcontractors, and both of them covered the general contractor as an additional insured. If, as happened in this case, one of the subcontractor's insurers settled the general contractor's liability and the other did not contribute to the settlement, we now know that the settling insurer will not be entitled to assert an equitable contribution claim against the non-settling insurer because they insured different risks.

The settling insurer will, however, be entitled to assert an equitable subrogation claim. But equitable subrogation, because it shifts the entire burden to one insurer and completely relieves the other insurer, requires a greater quantum of proof. In this case, the Home was aided by the presumption that the plaintiff in the underlying suit would have prevailed on its claim against Cincinnati's named insured. To determine, then, whether the entire burden should be shifted to Cincinnati, the court looked to the other insurance clauses, finding that those clauses rendered the Home excess over Cincinnati. These two factors entitled the Home to summary judgment on its equitable subrogation claim. (Because the court found that the Home had waived its right to seek more than pro rata reimbursement from Cincinnati by failing to inform Cincinnati that its coverage was excess over Cincinnati's, the Home recovered only a net of half the settlement, but this waiver factor would not be present in most cases.)

Suppose, however, that both the Home and the Cincinnati policies contained "matching" other insurance clauses, i.e., both were primary, or both were excess. This situation would be more common in a contest between two subcontractors' insurers disputing responsibility for a suit against a general contractor who is an additional insured on both their policies. Suppose further that, aided by the presumption adopted by the court, the underlying plaintiff would have prevailed on his claim against Cincinnati's named insured (had that claim been tried, rather than settled), then how would the settlement be allocated between them? Before the decision in this case, and the Schal-Bovis decision from 2000 that it endorsed, both carriers would been equally responsible, and the settling insurer would have recovered half its payment from the non-settling insurer by means of equitable contribution. But this decision forecloses that avenue to the settling insurer. The other insurance clauses do not resolve the allocation question. So what does?

Who's on First?

The answer lies in the definition of equitable subrogation: the right of a secondarily liable insurer that paid a loss to assert its insured's claim against the primarily liable insurer that did not contribute to the payment. How, in the absence of differing other insurance clauses, is a court to determine which insurer is primary and which is secondary? The opinion in this case offers no guidance on this question. It is quite likely, however, that an intensive factual analysis will need to be undertaken. Unfortunately, because in an equitable subrogation action, one insurer must end up paying everything and the other ends up paying nothing, a court will naturally want a fairly high degree of proof before allowing a full recovery by the settling insurer. Requiring such a high degree of proof undermines the purpose of the presumption, which, of course, is to relieve the settling insurer of unnecessary proof burdens. It also undermines the public policy of judicial economy.

Of course, this case, and all of this comment so far, involve the scenario where two subcontractors' insurers have a dispute over responsibility for a suit against a general contractor that is an additional insured on both their policies. But this scenario is far less common than the typical scenario, where it is the general contractor's own insurer that is seeking reimbursement from one or more subcontractors' insurers who covered the general contractor as an additional insured. How does this decision impact such a suit? Prior law already recognized that equitable contribution would not lie in favor of an excess insurer against a primary insurer, and because, at least since 1997, any general contractor's CGL policy would have an excess clause applying whenever he is added as an additional insured to a subcontractor's policy, no action for equitable contribution would have been available. This decision does not change that analysis.

As for equitable subrogation, this decision actually makes it easier for the general contractor's own insurer to recover reimbursement from the subcontractor's insurer (at least if that subcontractor was a defendant in the underlying case), because of the now mandatory presumption that the underlying plaintiff would have been able to recover in its suit against that subcontractor. This presumption operates to satisfy the "arising out of" condition of the general contractor's coverage under that subcontractor's policy. Prior to the adoption of this mandatory presumption, the settling insurer would have had the burden of proving that the general contractor's liability arose out of the subcontractor's work. Of course, where the subcontractor is the employer (and thus, not a defendant in the underlying case because of the statutory exclusive remedy provision), this new presumption is neither applicable nor needed, because prior law already recognized a presumption that the general contractor's liability arose out of the employer's work, since the insured plaintiff was doing that work when he was injured.

Where this decision creates a problem, however, is in cases where both the general contractor's own policy and the additional insured endorsement of the subcontractor's policy contain excess "other insurance" language. The result would be that the full amount of the loss would fall irrevocably on the insurer that is primarily liable, i.e., whose coverage is "closer to the risk." And of course, demonstrating which insurer's policy is closer to the risk will generate lots of litigation. But such a scenario is more the exception than the rule, because most insurers do not include an excess provision in their additional insured endorsements, and those that do usually include an exception for when the underlying contract requires primary coverage.

Thus, although the analysis employed in this case is somewhat problematic, the practical impact should be relatively minimal.