In Axis Surplus Insurance Company v. Glencoe Insurance Ltd. 204 Cal.App.4th 1214 (4/11/2012), the California Court of Appeal for the Fourth Appellate District held that when a nonparticipating insurer is on notice that an insured will satisfy the self-insured retention ("SIR") of a general liability policy through payment of a settlement, the timing of the payment does not prevent a settling insurer from establishing the nonparticipating insurer’s legal obligation to cover the underlying claim.
Axis and Glencoe each issued primary general liability policies to a contractor. The contractor was sued for construction defects and tendered the suit to both insurers. Axis agreed to defend under a reservation of rights. Glencoe declined the tender on the basis that it had no duty to defend or indemnify until the insured satisfied the $250,000 SIR under its policy, but monitored the suit and asked the contractor to inform it once the SIR was satisfied. After advising Glencoe of a prospective settlement that would satisfy the SIR on the Glencoe policy, the contractor and Axis eventually settled the lawsuit for $1 million, with $750,000 paid by Axis and $250,000 paid by the contractor.
After the settlement, Axis sued Glencoe for equitable contribution seeking to recover some of the $750,000 it paid in the settlement. Following a bench trial, the trial court ruled in favor of Axis and allocated 60% of Axis’ settlement payment to Glencoe and 40% to Axis.
Glencoe appealed, arguing that the trial court erred in finding there was a potential for coverage under its policy and that the $750,000 settlement should have been split equally under the “other insurance” clauses of Axis’ and Glencoe’s policies.
The Court of Appeal rejected Glencoe's arguments and affirmed the judgment. The Court noted that equitable contribution is available to apportion a loss among several insurers when each of those insurers is obligated to indemnify or defend the same loss or claim and one insurer has paid more than its share of the loss or defended the action without any participation by the other. Its purpose is to accomplish substantial justice by equalizing the common burden shared by co-insurers and to prevent one insurer from profiting at the expense of others.
The Court acknowledged case law holding that an insurer seeking equitable contribution must show that the nonparticipating co-insurer was legally obligated to defend or indemnify for the claim before the settlement, but stated that, based on the facts of the case, allowing Glencoe to defeat the equitable contribution claim based merely on the timing of the payment of the SIR would “award Glencoe for its inaction and work an injustice.”
The Court noted that Glencoe had been aware of the lawsuit, acknowledged the potential for coverage under its policy (subject to payment of the SIR), and even approved of the contractor’s payment as part of the settlement, but never made any effort to secure authority to contribute to the settlement even though it was aware that the insured was facing a settlement demand with a deadline. The Court observed that Glencoe appeared to be “hiding behind the SIR requirement in its policy, gambling that [the contractor] would not satisfy it because Axis was providing [the contractor] with a defense.” The Court declined “to adopt a rule sanctioning such gamesmanship.”
According to the Court, the unique facts of the case warranted the creation of a “limited exception” to the general rule regarding the timing of an insurer’s legal obligation to provide coverage. The Court announced that “[w]hen the insured has tendered a claim to the nonparticipating insurer, the nonparticipating insurer’s duty to defend is subject to the insured satisfying an SIR, and the insured satisfies the SIR as payment of a settlement of which the nonparticipating insurer was aware, the timing of the insured’s payment of the SIR does not prevent the settling insurer from establishing the nonparticipating insurer’s legal obligation to cover the underlying claim.”
The Court held that the trial court did not abuse its discretion in allocating liability 60/40 in favor of Axis, even though the “other insurance” clauses in the policies stated that each insurer would share with other primary insurance on an equal basis. The Court reasoned that equitable contribution claims among insurers are based on equitable considerations, not contract. The Court noted that in allocating among co-insurers, trial courts may consider the nature of the claim, the relationship of the insured to the insurers, the particulars of each policy, and “any other equitable considerations.” The Court approved of the trial court’s “time on the risk” allocation between Glencoe’s three years of policies and Axis’ two years of policies, which resulted in the 60/40 split.