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Insurers' Settlement With Insured Does Not Preclude Contribution Action By Coinsurer

In Employers Ins. Co. of Wausau v. The Travelers Indemnity Co., 141 Cal.App.4th 398 (2006), the California Court of Appeal was asked to determine whether an insurer was entitled to contribution from other primary insurers (the "settling insurers") for the costs of defending environmental tort suits filed after the settling insurers had entered into comprehensive settlements with their mutual insured arising from an earlier suit. The Court held that the settling insurers were required to contribute to defense costs under the principles articulated in Fireman's Fund Ins. Co. v. Maryland Cas. Co. ("Fireman's Fund"), 65 Cal.App.4th 1279 (1998).

As is common in such actions, the parties did not dispute the facts and proceeded to a bench trial. The facts were that various insurers insured a succession of companies that allegedly released hazardous contaminants from a manufacturing plant in Northern California. Whitman Corporation, a successor corporation to the company which operated the facility, sued numerous insurers and settled with a number of insurers, including the settling insurers. As part of the settlement, Whitman released the settling insurers from "any obligation to defend or indemnify it against past, present and future environmental actions and agreed to indemnify the settling carriers against any claims under their policies, including other insurers' claims for contribution."

Then, several hundred plaintiffs sued Whitman and others in two actions, called Avila and Arlich, for bodily injury and property damage from alleged chromium contamination from the manufacturing site. Wausau and the settling insurers were primary general liability insurers, each for different and sometimes overlapping policy periods. Whitman tendered the defense of the Avila and Arlich actions to Wausau, which agreed to defend pursuant to a full reservation of its rights. Wausau then filed the current declaratory relief and equitable contribution action against the settling insurers seeking to recover its costs of defense in Avila and Arlich.

The settling insurers contended that Wausau's contribution action was barred by the settling insurers' settlements with Whitman. The Court of Appeal disagreed. The Court determined the Fireman's Fund decision governed the contribution responsibility of the settling insurers. Fireman's Fund held that an insurer could not avoid contribution to other insurers by settling with the insured because equitable contribution rights belong to the individual insurer and is not based on any rights of the insured. In other words, equitable contribution is not equivalent to standing in the shoes of the insured (as in equitable subrogation), but is a reciprocal contribution right of coinsurers.

The settling insurers attempted to distinguish Fireman's Fund on the grounds that they settled with Whitman before the Avila and Arlich actions were filed, while the settlement in Fireman's Fund was reached only after the underlying suit had commenced. The Court found that to be a distinction without a difference, as each insurer's obligation to its insured arose at the time of loss and did not depend on when settlement occurred relative to the filing of the underlying suit.

Then, the settling insurers asserted Wausau was a third party beneficiary whose rights were terminated by their settlements with the insured. The Court unequivocally held that the right to contribution is grounded in equity, not contract. As such, settlements, or asserted "buybacks," of the settling insurers' insurance contracts with Whitman had no impact on Wausau's right to contribution.

Next, the settling insurers contended that their settlements with Whitman modified the insurance policies to reflect those policies' limits were exhausted. The Court stated that "merely saying a policy is exhausted does not make it so." While Whitman and the settling insurers could, as between themselves, deem policy limits exhausted, no evidence was presented that the settlements in fact exhausted the coverage available. To the contrary, the settlements were for less than policy limits and thus could not have exhausted those policies.

Finally, the settling insurers contended that the public policy of encouraging settlements would be contravened by following Fireman's Fund in this case. However, the Court determined that that public policy should not outweigh the longstanding rules of equitable distribution of loss among those who share liability for it. The Court noted that the settling insurers had anticipated the possibility they could be liable for contribution from other insurers, as they had required Whitman to indemnify them for such claims.

This case is another example of the California Courts of Appeal determining that a co-insurer cannot evade its share of the defense burden or cut off the rights of another insurer by separately settling with the insured.


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