Court: District Court, D. Rhode Island; September 6, 2011; Federal District Court
The opinion addresses a dispute between two insurers, Liberty Mutual Insurance Company and Century Indemnity Company, regarding the allocation of defense costs for Emhart Industries, Inc., which is responsible for the clean-up of the Centerdale Manor Superfund Site in North Providence, Rhode Island. Emhart had sued both insurers to compel them to defend and indemnify it against claims related to hazardous substance releases at the Site. Liberty Mutual settled with Emhart for $250,000, while Century went to trial, ultimately paying Emhart $6,067,290.11 after the court affirmed Century's duty to defend but not indemnify Emhart.
Century subsequently sought equitable contribution from Liberty Mutual for the defense costs incurred. Liberty Mutual counterclaimed, asserting it had no duty to defend or contribute. The court previously ruled that Liberty Mutual did owe a duty to defend Emhart but allowed it time for discovery regarding potential settlement offers from Emhart to Century and the duties of other insurers.
With discovery concluded, the focus of the dispute has shifted to the determination of the equitable contribution amount Liberty Mutual owes to Century. This raises complex issues about risk allocation between the insurers, particularly in the context of large-scale environmental claims, specifically concerning the implications of Liberty Mutual's settlement on its contribution obligations and the methodology for dividing defense costs.
Liberty Mutual contends that its obligation to defend Emhart ceased with their settlement on March 24, 2005, and argues against contributing to Emhart’s defense costs thereafter. Century disputes this, citing a previous court ruling which stated that Liberty Mutual's settlement does not affect its duty to defend, which begins when a covered complaint is filed and lasts until a judgment on coverage is made. Century argues the court did not rule out Liberty Mutual's settlement argument but merely discussed the temporal aspects of the duty to defend. The court granted Liberty Mutual additional time for discovery regarding equitable contribution before making a ruling. Liberty Mutual claims its equitable contribution obligation was only during the shared duty to defend before the settlement, emphasizing that penalizing early settlements contradicts public policy favoring settlements. Century counters that other insurers retain the right to seek equitable contribution from a settling insurer and cites legal precedents to support its position, asserting that settlements do not extinguish such rights unless a release from the injured party is provided.
Liberty Mutual's assertion that a settlement between one insurer and the insured bars other insurers from seeking equitable contribution or indemnity has been rejected by several courts and commentators. Notably, there is no established rule that a settlement has no impact on Century's potential entitlement to contribution from Liberty Mutual. Instead, courts generally focus on equity and the prevention of unjust enrichment when considering the implications of such settlements. The doctrine of equitable contribution aims to ensure that no guarantor pays more than their fair share. Additionally, courts have dismissed Liberty Mutual's argument that a ruling against it would undermine public policy by promoting litigation over settlement. They contend that public policy in favor of settlements does not justify allowing a co-insurer to sidestep its contribution responsibilities by settling separately with the insured. Concerns have also been raised that allowing such settlements could incentivize insurers to engage in questionable practices to limit their payouts. In this case, although Liberty Mutual settled early for $250,000, it was part of a larger confidential settlement, and the terms suggest Emhart likely received better conditions elsewhere. Importantly, the settlement did not require Emhart to relinquish any claims against Century or indemnify Liberty Mutual if Century pursued contribution from them.
Emhart's likelihood of seeking recovery from Century has implications for both parties, with Century facing the risk and costs of litigation. Liberty Mutual's strategy has delayed resolution and hindered settlement prospects between Emhart and Century. Despite a discovery opportunity, Liberty Mutual found no evidence of unreasonable failure to settle by Century. Rewarding Liberty Mutual for its settlement with Emhart would contravene Rhode Island's public policy aimed at promoting settlement over litigation. This settlement has not resolved the litigation but rather perpetuated it.
Equity principles dictate that one guarantor should not pay more than their fair share of a burden, preventing unjust enrichment. Given Liberty Mutual's longer insurance coverage of Emhart, higher policy limits, and greater premium collection, it would be inequitable to release Liberty Mutual from its contribution obligation post-settlement, as it would unfairly increase Century's burden. Consequently, the March 24, 2005 settlement does not affect Liberty Mutual's duty to defend Emhart.
Liberty Mutual contests its liability for pre- and post-judgment interest, but this argument is contingent on its settlement, which the Court has deemed ineffective regarding its defense obligations. Therefore, Liberty Mutual is accountable for such interest under R.I. Gen. Laws § 9-21-10.
The Court faces the challenge of equitably distributing defense costs. Liberty Mutual proposes an equal shares method, suggesting a split of Emhart’s defense costs, totaling $6,317,290.11, resulting in a payment of $3,158,645.06 to Century, adjusted by a $250,000 settlement. Conversely, Century advocates for a time on the risk method, proposing that costs be allocated based on the duration of each insurer's coverage. Under this method, Century would bear 13.13% of the defense costs ($796,635.19), while Liberty Mutual would cover 86.87% ($5,270,654.92), adjusted for the same $250,000 settlement discount.
Rhode Island authorities provide limited guidance on equitable contribution methods for successive coinsurers defending an insured against the same risk. The Rhode Island Supreme Court has established that defense costs can be prorated between concurrent insurers who both refuse to defend an insured, as noted in *Peloso v. Imperatore*, but this does not directly inform the allocation between successive coinsurers. No Rhode Island court has specifically addressed equitable contribution in long-term progressive environmental injury cases, which complicates matters since these injuries are often "indivisible" and arise from ongoing events rather than a single identifiable cause, as highlighted in *Boston Gas Co. v. Century Indem. Co.*.
The complexity of long-term environmental pollution claims makes it challenging to assign liability to specific insurance policies, especially when damage occurs across various coverage periods. As a result, differing judicial approaches to allocation exist, leading to significant uncertainty and encouraging litigation among insurers and insureds. This fractured legal landscape incentivizes insurers to deny indemnification and defense responsibilities in hopes of favorable court rulings, which further complicates settlements and drives up litigation costs. Consequently, underwriters face increased uncertainty in assessing risk for progressive injuries, contributing to higher premiums for consumers.
The document advocates for the time-on-the-risk method of loss allocation as a practical solution when precise loss allocation during each policy period is unfeasible, promoting predictability and reducing litigation incentives, which could ultimately lower premiums.
The Court is evaluating two allocation methods for defense costs. Liberty Mutual advocates for an equal shares allocation based on the parties' other insurance clauses, which state that when multiple insurers cover the same loss, they should contribute equally. However, Liberty Mutual's argument is countered by the fact that these clauses are designed primarily to prevent double recovery by the insured and do not apply to defense cost allocation between successive insurers. Relevant case law supports this position, indicating that other insurance clauses only pertain to concurrent coverage, not overlapping coverage periods, as illustrated by cases such as Pacitti v. Nationwide and Taco Bell Corp. v. Continental Casualty Co.
In considering equal shares versus time on the risk, the Court notes that jurisdictions adopting equal shares often do so based on the principle that an insurer’s duty to defend is broader than its duty to indemnify. This principle is reinforced by legal precedents indicating that the intention of other insurance clauses does not govern the allocation of defense costs in cases of successive coverage. Thus, the Court finds that the other insurance clauses are not relevant to the current allocation issue.
The Minnesota Supreme Court outlined several key principles regarding the duty to defend in insurance cases: (1) the duty encompasses all claims that could potentially fall within coverage; (2) if an insurer has a duty to defend one claim, it must defend all claims; and (3) the duty exists independently of the merits of the claims. The duty to defend is broader than the duty to indemnify, meaning an insurer must defend a lawsuit based on the possibility of liability, even if it may later determine it has no duty to indemnify.
In the context of defense cost apportionment, it is reasoned that co-insurers share equal responsibilities, and thus should equally contribute to defense costs. New York law stipulates that each insurer's duty to defend is separate and equal; since they cannot defend only part of the claims, they should share defense costs equally.
The text also discusses alternative methods of cost allocation, such as the "time on the risk" approach, which is applied largely in cases of progressive injuries or damages spanning multiple insurance policies. This method is favored for its fairness and predictability, allocating costs based on the duration of coverage. Courts have frequently adopted this approach to limit co-insurers' responsibilities for defense costs related to occurrences outside their policy periods, thereby rejecting joint and several liability in favor of pro rata apportionment.
In Commercial Union Ins. Co. v. Sepco Corp., the court declined to hold an insurer accountable for defense costs related to claims outside its coverage period, affirming the trial court's pro rata apportionment of defense costs. Courts have established that aligning insurers' defense cost obligations with their policy periods addresses underwriting uncertainty by correlating the time on the risk with the risk assumed. An insurer is responsible for defending claims arising within its policy period, but not for those occurring outside it. This approach reflects a reasonable expectation for both insurers and insured parties regarding liability for losses.
The time-on-the-risk method reduces litigation and enables insurance companies to better estimate total expected liability, which could result in lower premiums. Consistent application of this method diminishes uncertainty in the insurance market and avoids the inconsistencies linked to case-by-case determinations of coverage. While the method does not eliminate all underwriting uncertainty, it is more predictable, particularly with annual policies, as it ties defense costs to the duration of coverage rather than relying on speculative calculations related to other potential coinsurers.
The disparity in coverage duration among insurers was noted, with courts favoring the time-on-the-risk method over equal shares allocation due to its more equitable distribution of defense costs based on actual coverage periods. This alignment of defense cost obligations with policy periods supports public policy goals of reducing uncertainty and lowering consumer premiums.
Century was responsible for approximately 13% of the total coverage duration provided by both parties. The Court ruled that it would be inequitable to require Century to cover 50% of Emhart's defense costs since Liberty Mutual insured Emhart for significantly higher limits and collected more premiums. The ruling aligns with Rhode Island Supreme Court precedent, particularly in Peloso v. Imperatore, where defense costs among concurrent coinsurers were allocated pro rata based on policy limits to prevent insurers from benefiting from not fulfilling their duty to defend. The Court noted that if proration by policy limits is considered equitable for concurrent coinsurers, it should also apply when coinsurers cover the same risk for different durations. Consequently, Century's motion for summary judgment was granted, while Liberty Mutual's was denied. The Court ordered Liberty Mutual to reimburse Century 86.87% of a judgment Century paid, totaling $5,270,654.92, after deducting a $250,000 settlement. Additionally, the excerpt outlines Emhart's legal challenges related to the EPA's involvement due to its status as a potentially responsible party (PRP) under CERCLA, following a PRP letter and a subsequent administrative order from the EPA requiring cleanup actions. Liberty Mutual acknowledged that Century is entitled to equitable contribution for amounts paid exceeding its share, with Rhode Island law governing the matter.
Equitable principles in this case are governed by Rhode Island law, as established in Thomas v. Jacobs. The Court is bound by the U.S. Supreme Court's directive to adhere to Rhode Island Supreme Court rulings regarding choice of law. Century asserts that costs can be allocated based on the time and limits on the risk method, which considers both the duration of the coverage and the policy limits, suggesting Liberty Mutual would owe Century more under this method. However, Century prefers the time on the risk method, which it deems the most equitable, thus negating the need for the time and limits on the risk approach. The settlement rate is influenced by each party's uncertainty about the outcome, leading to inflated perceptions of their chances of success.
Liberty Mutual references Wooddale Builders, where the Minnesota Supreme Court adopted the equal shares method for apportioning defense costs among insurers to minimize delays. However, this case is not applicable here due to different Minnesota laws regarding insurers' rights to recover costs from one another. Century's calculations on the duration of coverage and proportional shares are based on the assumption of collective insurance for Emhart, with Century covering for thirteen months and Liberty Mutual for eighty-six months. Notably, Liberty Mutual claims it covered Emhart for ninety-six months, a fact that Century does not dispute. The Court finds Century's calculations conservative and in favor of the non-prevailing party but allows Century to amend the judgment if clerical errors are identified in its computations.
