Case Briefs

Excess Insurer Not Obligated to Share in Defense Costs

In Lexington Insurance Co. v. General Accident Insurance Co. of America, ___ F.3d ___; 2003 WL 21782276 (1st Cir. 2003), the First Circuit considered the obligation of an excess liability insurer to contribute to the cost of defending an underlying insured. The insured was a law firm that placed a professional responsibility insurance contract with the primary insurer with a $10 million limit of liability and also placed coverage with excess insurers for liability exceeding the $10 million primary layer. The insured was later implicated in a securities fraud suit and the primary insurer paid $5.5 million toward defense costs. The primary insurer then demanded that the excess insurers share pro rata in these defense costs. While the primary insurer reached an accord with most of the excess insurers, it was unable to reach agreement with the first excess layer insurer.

The first excess insurer's contract provided that it would indemnify the insured “in accordance with the applicable insuring agreements, terms, conditions and exclusions of the Underlying Policy” except for “the obligation to … defend and for costs and expenses incident to the same … and any other provision inconsistent with” the excess contract. The court concluded that this language excused the excess insurer from any obligation to share in the underlying defense costs.

The court rejected several alternative positions proposed by the primary carrier. First, the primary carrier pointed to language in the primary insurance contract indicating that the primary carrier would only be responsible for the payment of “that proportion of claim expenses as the amount of damages paid by the [primary carrier] bears to the total amount of damages,” suggesting that this language created a duty for the excess carriers to share in defense costs. However, the court concluded that the language in the excess contract disclaiming the obligation to pay defense costs was clear and that the clause in the primary insurance contract ' which did “no more than disclaim any obligation on [the primary insurer's] part to pay more than its proportionate share of [the insured's] defense costs” ' did not suggest an ambiguity in the excess wording.

The court also rejected the primary insurer's argument that the separate primary and excess insurance contracts must be read together as an integrated insurance program.

Finally, the court rejected the primary insurer's bid to impose an obligation based on the concept of “equitable contribution,” which arises in some jurisdictions when “several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss …”

Service of Suit Clause Trumps Arbitration Clause

In Boghos v. Lloyd's of London, 2003 LEXIS 980 (Cal. Ct. App. May 29, 2003, publication ordered June 30, 2003), a California Court of Appeal addressed whether an insured may arbitrate under a policy that contains a “binding arbitration” clause and a “service of suit” clause. The insured contended that certain underwriters at Lloyd's, London, had wrongfully refused to pay him disability benefits. He sued. In response, the underwriters contended that the policy required arbitration. The court disagreed. It noted that if the arbitration clause were enforced, it “would either render the service of suit clause surplusage or make it unlawful.” The court observed that under the service of suit clause, the underwriters had agreed that, at the request of the insured, they would “submit to the jurisdiction of a court of competent jurisdiction within the United States.” The court rejected the underwriters' argument that the service of suit clause should be construed to apply only to confirmation of arbitration awards based upon claims for failure to pay. The court also rejected the underwriters' argument that its view of the service of suit clause would mean that the arbitration clause would never apply. It reasoned that if the service of suit clause were “interpreted according to its plain terms, then it allows the insured to utilize the courts for claims involving the insurer's 'failure … to pay any amount claimed to be due under the insurance. … ' Other claims ' not involving the insurer's failure to pay ' would still be subject to the arbitration clause.” The court also accepted the insured's argument that the arbitration clause was unconscionable because it required him to pay one-half of the costs of the arbitration. The court relied upon a line of cases recognizing that “arbitration costs can present significant barriers to vindication of statutory rights” and found that those cases would apply “where a disability claimant seeks to make the insurer pay disability benefits, and the insurer seeks to compel arbitration of those claims, and make the insured share the costs of arbitration.” The court cited these cases for the proposition that an arbitration agreement “cannot generally require [the plaintiff] to bear any type of expense that [she] would not be required to [bear] if [she] were free to bring the action in court.” Therefore, the court concluded that because the insured should not be forced to share in the cost of arbitration, the “Lloyd's arbitration clause, which requires that the parties split the costs, is unconscionable.”

Excess Insurer Not Obligated to Share in Defense Costs

In Lexington Insurance Co. v. General Accident Insurance Co. of America , ___ F.3d ___; 2003 WL 21782276 (1st Cir. 2003), the First Circuit considered the obligation of an excess liability insurer to contribute to the cost of defending an underlying insured. The insured was a law firm that placed a professional responsibility insurance contract with the primary insurer with a $10 million limit of liability and also placed coverage with excess insurers for liability exceeding the $10 million primary layer. The insured was later implicated in a securities fraud suit and the primary insurer paid $5.5 million toward defense costs. The primary insurer then demanded that the excess insurers share pro rata in these defense costs. While the primary insurer reached an accord with most of the excess insurers, it was unable to reach agreement with the first excess layer insurer.

The first excess insurer's contract provided that it would indemnify the insured “in accordance with the applicable insuring agreements, terms, conditions and exclusions of the Underlying Policy” except for “the obligation to … defend and for costs and expenses incident to the same … and any other provision inconsistent with” the excess contract. The court concluded that this language excused the excess insurer from any obligation to share in the underlying defense costs.

The court rejected several alternative positions proposed by the primary carrier. First, the primary carrier pointed to language in the primary insurance contract indicating that the primary carrier would only be responsible for the payment of “that proportion of claim expenses as the amount of damages paid by the [primary carrier] bears to the total amount of damages,” suggesting that this language created a duty for the excess carriers to share in defense costs. However, the court concluded that the language in the excess contract disclaiming the obligation to pay defense costs was clear and that the clause in the primary insurance contract ' which did “no more than disclaim any obligation on [the primary insurer's] part to pay more than its proportionate share of [the insured's] defense costs” ' did not suggest an ambiguity in the excess wording.

The court also rejected the primary insurer's argument that the separate primary and excess insurance contracts must be read together as an integrated insurance program.

Finally, the court rejected the primary insurer's bid to impose an obligation based on the concept of “equitable contribution,” which arises in some jurisdictions when “several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss …”

Service of Suit Clause Trumps Arbitration Clause

In Boghos v. Lloyd's of London, 2003 LEXIS 980 (Cal. Ct. App. May 29, 2003, publication ordered June 30, 2003), a California Court of Appeal addressed whether an insured may arbitrate under a policy that contains a “binding arbitration” clause and a “service of suit” clause. The insured contended that certain underwriters at Lloyd's, London, had wrongfully refused to pay him disability benefits. He sued. In response, the underwriters contended that the policy required arbitration. The court disagreed. It noted that if the arbitration clause were enforced, it “would either render the service of suit clause surplusage or make it unlawful.” The court observed that under the service of suit clause, the underwriters had agreed that, at the request of the insured, they would “submit to the jurisdiction of a court of competent jurisdiction within the United States.” The court rejected the underwriters' argument that the service of suit clause should be construed to apply only to confirmation of arbitration awards based upon claims for failure to pay. The court also rejected the underwriters' argument that its view of the service of suit clause would mean that the arbitration clause would never apply. It reasoned that if the service of suit clause were “interpreted according to its plain terms, then it allows the insured to utilize the courts for claims involving the insurer's 'failure … to pay any amount claimed to be due under the insurance. … ' Other claims ' not involving the insurer's failure to pay ' would still be subject to the arbitration clause.” The court also accepted the insured's argument that the arbitration clause was unconscionable because it required him to pay one-half of the costs of the arbitration. The court relied upon a line of cases recognizing that “arbitration costs can present significant barriers to vindication of statutory rights” and found that those cases would apply “where a disability claimant seeks to make the insurer pay disability benefits, and the insurer seeks to compel arbitration of those claims, and make the insured share the costs of arbitration.” The court cited these cases for the proposition that an arbitration agreement “cannot generally require [the plaintiff] to bear any type of expense that [she] would not be required to [bear] if [she] were free to bring the action in court.” Therefore, the court concluded that because the insured should not be forced to share in the cost of arbitration, the “Lloyd's arbitration clause, which requires that the parties split the costs, is unconscionable.”