Marion County Court Denies Right of Contribution to Non-Settling Insurer

On July 15, 2002, the Marion County Superior Court, by the Honorable Robyn Moberly, entered an order of great significance for all policyholders. Judge Moberly held that holdout insurers may not reduce policyholders’ net recoveries by bringing subsequent "contribution" actions against other insurers which previously have settled with the policyholder. This eliminates the incentive for insurers to hold out to the end of a coverage dispute because it eliminates any capacity to recover from previously settling insurers if the holdout insurer is held liable for the full outstanding liability. Together with the recent "all sums" victory in the recent Dana II case which allows policyholders to collect the full amount of the loss from any triggered policy, Indiana policyholders now have powerful tools to compel insurers to meet their obligations.

In Aetna Casualty Surety Company, Case No. 490012-0102CP-000243, the policyholder, represented by Plews Shadley Racher & Braun, is suing its excess insurers seeking to recover the costs of environmental cleanups. The policyholder has now settled with all but one of its insurers.

That insurer took the position – as many insurers do – that even if a judgment was entered against it, it would file an action for "contribution" against the insurers who had settled with the policyholder. Contribution is a right that gives one of several persons who are liable on a common debt or obligation the ability to recover a share of the debt from the others. The holdout insurer contended it could recover from the settling insurers a portion or all of any judgment entered against it. Effectively, this would allow non-settlors to "reallocate" costs to settling insurers on some unspecified basis, usually a "pro-rata" allocation. Because, as a part of settlement, insurers insist on indemnification so they are not harmed if other parties sue them on the claims, any recovery from the settling insurers would reduce the policyholder’s net recovery under its policies of insurance. Insurers have relied on such arguments in many jurisdictions in justifying holdouts on claims.

The policyholder sought a ruling from the court that a recalcitrant insurer was not entitled to obtain contribution from the settling insurers. The court agreed with the policyholder. Judge Moberly relied in part upon the Indiana Supreme Court’s recent decision in another case where the policyholder was represented by Plews Shadley Racher & Braun, Allstate Insurance Company v. Dana Corporation, 759 N.E.2d 1049 (Ind. 2001) ("Dana II"). In Dana II, the Indiana Supreme Court held that the "all sums" promise in comprehensive general liability policies – the promise that the insurer will pay on behalf of policyholders "all sums" for which the policyholder is liable – means exactly what it says: that a policyholder may recover from its insurer "all sums" which the policyholder must pay. The Supreme Court rejected the insurer’s argument that it need only pay the portion of the damages that occurred during its policy period, and no others. There is no language in the policies, the Supreme Court found, which supports such a "pro rata" allocation when multiple policies are triggered. Judge Moberly found that allowing contribution would allow non-settlors to impose the "pro rata" regime rejected in Dana.

The court also found that the right of contribution proposed by the holdout insurer could harm the policyholder’s interest by eliminating the incentive for early or partial settlements. Without indemnification, insurers would refuse to settle. If insurers could obtain contribution from settling insurers, policyholders would refuse to give indemnification. In addition, allowing a nonsettling insurer to obtain contribution from settling insurers would contravene the fundamental purpose of insurance, which is to fully indemnify the policyholder for the loss.

As an additional basis for her ruling, Judge Moberly also held that in Indiana a nonsettling insurer may seek a contribution from other insurers only under the legal theory of equitable subrogation. Under this theory, upon paying a claim, an insurer steps into the shoes of the policyholder, and obtains only the policyholder’s rights to recover from the policyholder’s other insurers. Thus, if the policyholder has settled with another insurer and, in that settlement, released or agreed to indemnify the insurer, the holdout insurer has no right to any further recovery from the settling insurer. Thus, the holdout insurer had no right to recovery from those insurers that the policyholder had settled with and released or agreed to indemnify.

The court’s ruling is significant because it removes the impediment to settlement imposed by the threat of "contribution" actions, and creates incentives for insurers to settle valid claims. It eliminates the incentive to persist in nonpayment of a claim in the hope that the policyholder will get the claim paid in full by other insurers. Recalcitrants run the risk of paying more than a "pro rata" share if they are liable. This will encourage prompt attention to claims.