In a Case of First Impression, District Court Finds an Insurer May Not Seek a Declaration as to Another Insurer’s Duty to Defend

more+
less-

An insurance company may not seek to require another insurer to defend its insured via declaratory judgment according to the United States District Court for the District of South Carolina in Auto-Owners Insurance Company v. Travelers Casualty and Surety Company of America, No. 4:12-cv-3423-RBH, 2014 WL 3687338 (D.S.C. Jul. 22, 2014).

The plaintiff in the underlying litigation owned condominiums in the Hyperion Towers Horizontal Property Regime and brought suit against the Hyperion Towers HOA among others for the breach of various duties. Auto-Owners insured the HOA pursuant to a CGL policy. Travelers insured the HOA pursuant to a non-profit management and organization liability policy. Auto-Owners accepted the defense of the HOA in the underlying action; however, Travelers refused to defend.

Auto-Owners filed an action against Travelers seeking a declaration that Travelers had a duty to defend the HOA in underlying litigation, and asserted causes of action for contribution, unjust enrichment, and equitable subrogation. Travelers moved for summary judgment on the grounds that Auto-Owners could not compel it to defend the underlying suit.

Declaratory judgment claim:  The court first addressed the issue of whether it could order Travelers to defend the underlying action, basing its reasoning almost entirely on Sloan Construction v. Central National Insurance Company of Omaha, 269 S.C. 183, 236 S.E.2d 818 (1977). In Sloan, an insurer sought contribution from another for defense costs expended in defending a shared insured. The SC Supreme Court held that, “where two companies insure the identical risk and both policies provide for furnishing the insured with a defense, neither company, absent a contractual relationship, can require contribution from the other for the expenses of the defense where one denies liability and refuses to defend.” The court explained the insurer who defended “was not damaged by [the other’s] refusal to defend since it was a stranger to the contract” between the other insurer and its insured. The insurer who defended “was doing no more than it was obligated to do under its insurance contract.” Thus, based on the general principles of contract law, no right to recovery existed.

Noting Sloan concerned a situation where two insurers insured an identical risk and one sought contribution from the other, the district court acknowledged the SC Supreme Court has not addressed whether an insurer may seek to require another insurer to defend its insured via declaratory judgment while the underlying litigation is still pending, nor has it addressed whether the same principles apply where different risks are insured. Nonetheless, based on Sloan, the court concluded Auto-Owners was not entitled to declaratory judgment because it was not a party to the Travelers policy:

[T]he general principles set forth in Sloan dictate that the Supreme Court of South Carolina would find the present action to be inappropriate. Particularly relevant is the language from Sloan explaining that the insurer seeking to compel the other insurer to defend was not damaged: “since it was a stranger to the contract” between the other company and its insured. The Court finds that this language is equally applicable to a situation where the insurers insure different risks, and where a declaratory judgment is sought rather than contribution. Moreover, this Court’s rationale in Assurance [Co. of Am. v. Penn-America Ins. Co., No. 4:11-cv-03425-RBH, 2013 WL 1282141 (D.S.C. Mar. 27, 2013),] is also applicable here: the claims asserted by Auto-Owners arise out of a contractual or special relationship that does not exist between Auto-Owners and Travelers in this case.

Accordingly, the court granted Travelers motion for summary judgment on the declaratory judgment claim.

Contribution, unjust enrichment, and equitable subrogation claims:  The court also relied on broad language in Sloan in addressing Auto-Owners’ claims for contribution, unjust enrichment, and equitable subrogation:

[T]he Court notes that while the facts of Sloan differed from the present case, the broad language used by the Supreme Court of South Carolina indicates that it would not allow Auto-Owners to seek contribution in this case. In Sloan, the Supreme Court explicitly held that one insurer is not entitled to require contribution from another absent a specific contractual right. Although the policies in Sloan insured an “identical risk” the Court gave no indication that this principle would be any less valid in other contexts.

Thus, the court concluded Auto-Owners could not seek contribution from Travelers for defense costs.

The court also determined that Auto-Owners’ claims for equitable subrogation and unjust enrichment were merely attempts to plead around the Sloan rule: “At the heart of all of Auto-Owners’ equitable claims is a desire to have Travelers pay for part of the defense costs.” However, even if that were not the case, the unjust enrichment claim would still fail because Auto-Owners had simply done what was required of it under its contract with its insured. If the duty to defend is triggered, it requires defense of the entire suit. Thus, the court reasoned, Auto-Owners did not confer any benefit on Travelers as it was simply complying with South Carolina law and the terms of its contract with its insured. Likewise, the equitable subrogation claim would fail because Auto-Owners was simply complying with the terms of its contract; there was no evidence it paid a debt owed by Travelers or that it was secondarily liable for a debt owed by Travelers. Accordingly, the court found summary judgment was also appropriate as to the contribution, unjust enrichment, and equitable subrogation claims.

As an interesting side note, contrary to South Carolina law, a majority of courts permit an action by one co-insurer seeking contribution for defense costs from a co-insurer. In fact, in a case in which Travelers sought contribution from its co-insurer, just two weeks after the Auto-Owners opinion was released, the Connecticut Supreme Court held that an insurer has standing to bring a declaratory judgment action against a co-insurer even in the absence of a contractual relationship between the parties. See Travelers Cas. & Surety Co. of Am. v. Netherlands Ins. Co., 312 Conn. 714 (2014).

Topics:  Contribution Claims, Declaratory Judgments, Duty to Defend, Popular, Unjust Enrichment

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Collins & Lacy, P.C. | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »