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INSURANCE NOTES

Insurer Seeking Contribution Must Show It Paid More Than Its Share Under the Agreed Allocation Method, Not Just That The Other Insurer Paid Nothing

07.27.2010

In Scottsdale Insurance Company v. Century Surety Company, 182 Cal.App.4th 1023 (2010), the California Court of Appeal held that an insurer seeking equitable contribution from a non-participating insurer must prove that it paid more than its “fair share” of defense and indemnity costs for the common insureds under allocation agreements it made with other participating insurers. 

Scottsdale Insurance Company and other insurers agreed to share the costs of defense and settlement of 17 common insureds in hundreds of construction defect actions. Scottsdale sued for equitable contribution from Century Surety Company, which did not participate in the defense and indemnity.
Following a bench trial, the trial court ruled that Scottsdale was entitled to one-half of the sums it paid to defend and indemnify the common insureds in those actions in which the trial court determined that Century owed defense and indemnity. The Court of Appeal reversed, finding that the trial court abused its discretion in its calculations of the sums owed.
The Court determined that, except in cases where a single insurer bears the entire defense and indemnity burden, it is not enough for an insurer seeking equitable contribution to merely show that it paid for defense and indemnity while the other insurer did not. The Court held that “[a]n insurer can recover equitable contribution only when that insurer has paid more than its fair share; if it has not paid more than its fair share, it cannot recover, even against an insurer who has paid nothing.”

The Court observed that the participating insurers’ agreements to equal shares for defense costs and “time on the risk” for indemnity costs were “patently reasonable” and that Scottsdale should be bound by its agreements. The Court held that Scottsdale could recover only on evidence that it paid more than its “fair share” under the allocation agreements it made with the other participating insurers. In other words, Scottsdale could not recover an amount from Century that would result in it paying less than its fair share under those same agreements.

The Court illustrated with an example. If Scottsdale had agreed to share the defense costs equally with three other insurers, each insurer would pay 25%. Under Scottsdale’s theory, which the trial court adopted, Scottsdale and Century would split equally the 25% paid by Scottsdale (12.5% each), while the other three insurers would still have paid 25% each. Under that scenario, the other three insurers would be able to pursue both Century and Scottsdale for equitable contribution. The Court disapproved of the ruling, explaining that the “trial court does not do equity with a method of allocation that provides the other insurers with an equitable contribution action against Scottsdale.” 

On the other hand, if Scottsdale equally shared the defense costs with three other insurers, in amounts of 25% each, adding Century would result in each of the five insurers being responsible for 20% of the total costs. Scottsdale would then be entitled to equitable contribution only if it could present evidence that it paid “more than its fair share under the allocation methods it had voluntarily adopted with the other participating insurers,” i.e., the difference between the amount Scottsdale paid (25%) and the amount Scottsdale would have paid had Century participated in the defense (20%), or 5% of the total defense costs.

The Court stated that “the trial court had no discretion to award Scottsdale damages under any other method of allocation.”  This decision highlights the importance of weighing prospective benefits and costs before pursuing contribution, as recovery is determined by not only principles of equity but also the agreed method of allocation.

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