Fourth Circuit Holds That Virginia Would Follow General Rule That Indemnity Agreement Between Insureds May Shift Entire Loss To A Particular Insurer, Notwithstanding 'Other Insurance' Clauses

In St. Paul Fire & Marine Ins. Co. v. American International Specialty Lines Insurance Co. (AISLIC), Nos. 02-2360 and 02-2361, dated April 9, 2004, the Fourth Circuit decided the allocation of loss between four insurers, St. Paul, TIG, CNA and AISLIC, for the cost of a $4 million settlement of a Virginia food poisoning case. The insurers funded $3 million of the settlement through an interim agreement, and also agreed to resolve their coverage and allocation issues after the lawsuit settled. The insureds were corporations that were the owners and management companies of the Leesburg, Virginia resort where the food poisoning occurred.

The Fourth Circuit decided that AISLIC had to reimburse St. Paul for the $1 million that St. Paul already paid toward the settlement and also had to pay toward the settlement the $1 million plus interest for which TIG erroneously was held to be responsible.

The management companies were insured by St. Paul's primary layer of $1 million, and TIG's $10 million of umbrella coverage. The owners were insured by CNA's $1 million of primary coverage, and AISLIC's $50 million of umbrella coverage excess to the CNA policy. Each of the four policies had some form of 'other insurance' clause.

There were reciprocal indemnification clauses in the management contract between the owner and the management company. The owner was required to indemnify the management company and its agents from liability arising from ordinary negligence or the like at the resort; but the management company was required to indemnify the owner as to liability arising from gross negligence, fraud, or willful conduct.

The underlying settlement agreement established the named defendants' collective liability, but explicitly did not resolve the controversy among the insurers as to their ultimate liabilities.

The district court ruled that the primary layers (CNA and St. Paul) would each be exhausted, and that TIG and AISLIC would pay the remaining $2 million equally.

The Fourth Circuit found that the critical issue was the indemnification obligation created by the management contract between the insureds, and that that obligation should be assessed before any conflicts between the policies are resolved. The Court stated, "in the end, we largely disregard the parties' free-standing arguments about the various policies, for this case's resolution is controlled by the [management agreement's] . . . indemnification provisions."

The Fourth Circuit agreed that the district court erred in construing the indemnification provisions as an attempt by the management company's insurers to use extrinsic evidence to modify the terms of the owner's insurance policies. The Court agreed that if the settlement liabilities of the management companies must be indemnified by the owners, and if CNA/AISLIC must cover the owner's contractual indemnification obligations in full, then St. Paul and TIG would have no obligation to pay into the settlement.

The Fourth Circuit held that Virginia courts would apply the indemnification provisions now rather than wait for a subsequent action that would produce the same result; that the indemnification provisions control the allocation of liability between the insurers because it results in the owner having responsibility for the management company and its agent's share of the settlement; and that since that results in the St. Paul/TIG line having no obligation to cover any of the settlement liability, the alleged conflict between the two lines' other insurance provisions is irrelevant.

The Fourth Circut essentially followed the reasoning of an Eighth Circuit case, Walmart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002).

Further it relied on Couch on Insurance for the general rule that "an indemnity agreement between the insureds or a contract with an indemnification clause . . . may shift an entire loss to a particular insurer notwithstanding the existence of an 'other insurance' clause in its policy.' Couch on Insurance, sec. 219:1, at 219-7 (3d ec. 1999).

The Fourth Circuit rejected AISLIC's argument that the applicability of the reciprocal indemnification clauses in the management contract should be left for a subsequent action. Rather, the Court held that it was appropriate to rely on the facts and causes of action pled in the Complaint. The actual claims against the named defendants were based on theories of breach of warranty, negligence, negligence per se and res ipsa loquitur, all of which give rise to an indemnification obligation solely on behalf of the owners.

Thus, the Court held that the CNA/AISLIC line is primarily responsible for the management companies shares of the settlement, and that St. Paul and TIG had no obligation to contribute anything to the settlement.

The Court also criticized AISLIC's brief for "borderline-duplicitous unremarked capitalization of quoted materials in the argument section of its brief -- which has the effect of making 'additional insured' appear to be a defined term in the AISLIC policy -- 'additional insured' is not so defined."

Another Confusing Decision From the D.C. Court of Appeals On Common Law Contribution

Another common law contribution decision has been handed down by the D.C. Court of Appeals, again illustrating the need for a joint tortfeasor statute in the District. It simply takes too much time to review a raft of complex decisions by the D.C. Court of Appeals in order to determine contribution among joint tortfeasors.

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