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Insurance Law Report: March 2017

March 10, 2017

Insurance Law Report focuses on developments in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

Below are the articles for the March issue. To view, click on the appropriate title and you will be brought to the full version of the article below.

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South Carolina Supreme Court Holds General Denial Of Coverage In Reservation Of Rights Letter To Be Insufficient

The South Carolina Supreme Court held that an insurer failed to give adequate notice of potential policy positions and defenses in a reservation of rights letter that included only “general denials of coverage coupled with furnishing the insured with a verbatim recitation of all or most of the policy provision [through a cut-and-paste method].” Harleysville Grp. Ins. v. Heritage Communities, Inc., 2017 WL 105021 (S.C. Jan. 11, 2017).

The insurer defended a contractor subject to a reservation of rights to deny coverage. The jury returned a general verdict. The insurer sought a declaratory judgment allocating covered and non-covered damages. The matter was referred to a special referee, who found that, while certain claims were not covered by the policy, the insurer had failed properly to reserve its right to contest coverage and therefore declined to allocate the general verdict.

On appeal, the South Carolina Supreme Court agreed. It held that the reservation of rights letter was insufficient to put the insured on notice what the insurer intended to assert, including the allocation of damages between covered and non-covered losses. The insurer’s reservation of rights letter included only general denials and recitations of all or most of the policy’s provisions. According to the Supreme Court, a proper reservation of rights would have (1) provided an express reservation that it disputed coverage for a specific type of damages; (2) stated that in the event that the insured was found liable in the underlying lawsuit, the insurer intended to file suit to contest various coverage issues; (3) put the insured on notice of the specific coverage issues the insurer planned on litigating; and (4) informed the insured that a conflict of interest may exist between the insurer and insured and that the insured should protect its interests by requesting an appropriate verdict allocating damages.
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Oklahoma Supreme Court Finds “Indoor Air” Exclusion Enforceable To Bar Coverage For Carbon Monoxide Poisoning

The Oklahoma Supreme Court, in response to a certified question from a federal district court, has ruled that the enforcement of an “indoor air” exclusion in a liability policy is not against the public policy of the State of Oklahoma. Siloam Springs Hotel, LLC v. Century Surety Co., 2017 WL 696815 (Okla. Feb. 22, 2017).

Several guests inside a hotel suffered bodily injury due to carbon monoxide poisoning. The carbon monoxide allegedly escaped from the hotel’s indoor swimming pool heater. The hotel sought coverage under its liability policy, and the insurer denied the claim on the basis of an “indoor air” exclusion, which excluded coverage for bodily injury “arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause.”

The Oklahoma Supreme Court ruled that the exclusion was enforceable and that it did not violate the public policy of the State of Oklahoma. It noted that the parties were free to enter a contract with terms that limit coverage, as long as it did not violate the law or the public policy of the state, and that “[j]ust because one believes the air they breathe might be contaminated, and expects a business should carry insurance to cover that eventuality, does not mean the law requires it.”
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Supreme Court Of Texas Holds Insured-Versus-Insured Exclusion Applies To Subrogated Insurer Which Succeeded To The Interests Of Insured

Construing a D&O policy’s insured-versus-insured exclusion which included in its scope “any person or entity which succeeds to the interest of” the insured, the Texas Supreme Court held that this exclusion applies to a subrogated insurer of an insured. Great American Insurance Company v. Primo, Case No. 15-0317 (Tex. Feb. 24, 2016).

The director of a non-profit condominium association allegedly misappropriated funds. The association made a claim for the loss with its fidelity insurer, which paid the claim in exchange for a written assignment of the association’s rights and claim against the director. It then sued him to recover the funds, and the director tendered the defense of the suit to the association’s D&O policy, which insured the director as a former director. The case was non-suited, but the director pursued the insurer for defense costs he had incurred before the non-suit.

The insurer refused to cover the defense costs, citing the policy’s insured-versus-insured exclusion, which excluded coverage for claims brought against one insured by another insured, or any entity which “succeeds to the interest of” that insured, which the insurer contended includes insurers of the insured. The Court of Appeals disagreed, narrowly construing the phrase “succeeds to the interest” to mean only “successor-in-interest,” a term borrowed from corporate law and which commonly refers to one company that assumes control of another. On appeal, the Texas Supreme Court reversed, holding that the exclusion applies, and that this result comports with the general intent of the exclusion to prevent collusive suits between businesses and their directors.
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Florida Supreme Court Finds Concurrent Cause Doctrine Applicable When Independent Perils Converge

The Florida Supreme Court recently held that an insured may obtain coverage for an entire claim where there are multiple independent concurrent causes of loss when no single cause can be considered the sole or proximate cause and at least one cause is covered under a policy. Sebo v. Am. Home Assurance Co., Inc., 2016 WL 7013859 (Fla. Dec. 1, 2016), rehearing denied, 2017 WL 361132 (Fla. Jan. 25, 2017).

The insured submitted a claim under his homeowner’s policy for damage caused by multiple perils, including defective construction, rain and wind. The policy excluded coverage for defective construction, but covered damage caused by rain and wind. The insurer tendered payment for mold damage, but denied coverage for water intrusion damage. The insured sued the insurer seeking a declaration that the policy provided coverage for all damage. The jury found for the insured and the court entered judgment against the insurer. The appellate court reversed after having evaluated the loss under the efficient proximate cause theory and remanded for new trial.

The Florida Supreme Court reversed, finding that when independent perils converge and no single cause can be considered the sole or proximate cause, it is appropriate to apply the concurrent cause doctrine. The Supreme Court discussed the split of authority among Florida courts of appeal as to which of two theories – efficient proximate cause and concurrent cause – should apply when two or more perils converge to cause a loss and at least one of the perils is excluded by the policy. It noted that under the efficient proximate cause theory, where there is concurrence of different perils, the efficient cause – the one that set the other in motion – is the cause to which the loss is attributable. Under the concurrent cause theory, coverage may exist when an insured peril constitutes a concurrent cause of the loss even when it is not the prime or efficient cause. The Supreme Court held that there was no reasonable way to determine the proximate cause of the insured’s loss, as the rain and construction defects acted in concert to create the damage, and it would not be feasible to apply the efficient proximate cause doctrine.
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Fifth Circuit Holds Statute Of Limitations On Claim Against Insurer Is Not Renewed When Insurer Reopens Claims File

The Fifth Circuit U.S. Court of Appeals, applying Texas law, held that the reopening of a closed claim file does not restart the statute of limitations for an insured’s bad faith claim against an insurer. De Jongh v. State Farm Lloyds, 2016 WL 7009088 (5th Cir. Nov. 30, 2016).

An insurer investigated an insured’s hail damage claim and informed the insured that the claim was not covered. While internal notes indicated the insurer intended to send a coverage denial letter, it did not and closed the claim file without payment. The next month, the insured requested that the insurer reopen the claim file and reinvestigate the loss. The insurer did, and upon reinspection, the insurer found new damage but nonetheless denied the claim again because the amount was under the deductible. The insurer so advised the insured, who subsequently sued.

The insurer argued that the insured’s claims were barred by the two-year-and-one day limitations period in the policy, and that the insured’s cause of action accrued on the date the insurer closed the claim file -- two years and two days before the insurer was first named in the lawsuit. The Fifth Circuit agreed, holding that the insured’s legal injury arose at the time the insurer closed the claim file because “the closing of the claim file was an objectively verifiable event that unambiguously demonstrated [the insurer’s] intent not to pay the claim, even if the fact of the injury was not discovered until later.” The Fifth Circuit held that the insurer’s reopening of the claim file at the insured’s request did not “reset the limitations clock,” meaning the original date of denial remained the trigger for the limitations period.
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Eleventh Circuit Holds Insured’s Employee Was Permissive User Of Automobile Despite Having Violated Insured’s Policy Regarding Driving Company Vehicles

The U.S. Eleventh Circuit Court of Appeals held that an insured’s employee was a permissive user of a company automobile even though the employee violated the insured’s internal policies by driving under the influence of alcohol. Great Am. Alliance Ins. Co. v. Anderson, 2017 WL 521560 (11th Cir. Feb. 8, 2017).

The insured allowed its employee to drive a company automobile for both work and personal purposes, including specific permission to drive to the employee’s family lake house. The employee was driving the automobile under the influence of alcohol after leaving the lake house and was involved in an accident. The employee sought coverage under the insured’s auto policy that covered “anyone else while using with [the insured’s] permission a covered auto.” The insurer filed a declaratory judgment action against the employee and underlying plaintiff seeking a declaration that the employee’s use of the company automobile exceeded the scope of the permissive use granted by the insured because he drove while intoxicated in violation of a policy banning employees from working and driving under the influence of alcohol. The court found that the employee was not insured under the employer’s auto policy at the time of the accident because the employee had violated company policy. The underlying plaintiff appealed.

The Eleventh Circuit reversed, finding the employee was a permissive user of the company automobile even though the employee violated the employer’s policy by driving under the influence of alcohol. The Eleventh Circuit explained that the district court failed to apply the proper standard for determining permissive use, which addresses only whether the automobile was being used for an approved purpose. Finding that the employee was permitted to use the company automobile for personal purposes, the Eleventh Circuit found the employee was a permissive user and insured under the employer’s auto policy.
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Eleventh Circuit Affirms Ruling That Professional Liability Policy Does Not Cover Claims For Sanctions And Non-Pecuniary Relief

The U.S. Eleventh Circuit Court of Appeals recently held that a professional liability insurer had no duty to defend against claims for sanctions and non-pecuniary relief. Jones, Foster, Johnston & Stubbs, P.A. v. Prosight-Syndicate 1110 at Lloyd’s, 2017 WL 586450 (11th Cir. Feb. 14, 2017).

The insured, a law firm, sought coverage under its professional liability policy in response to a motion for contempt and sanctions for using privileged information in violation of a protective order. The insurer refused to defend, asserting that the policy applied only to claims seeking damages, not sanctions. The policy defined the term “damages” as “compensatory judgments, settlements, or awards” but not “sanctions” or other penalties. The insured was sued for breach of contract, breach of the covenant of good faith, and declaratory relief. Among other things, the insured argued that the attorneys’ fees and costs sought along with the sanctions were compensatory in nature, and therefore triggered the duty to defend. The court found that the policy did not extend coverage to claims seeking sanctions and held that the insurer had no duty to defend. The insured appealed.

The Eleventh Circuit affirmed, holding that the insurer had no duty to defend the insured against the claim for sanctions. The Eleventh Circuit noted any assessment of attorneys’ fees and costs pursuant to contempt still served as a form of punishment through the sanctions.
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North Carolina Appellate Court Holds Partially Subrogated Insurer May Intervene

The North Carolina Court of Appeals held that even when an insurer has paid only a portion of an insured’s loss, it has acquired an interest in a lawsuit sufficient to permit intervention. Wichnoski v. Piedmont Fire Prot. Sys., LLC, 2016 WL 7976125 (N.C. Ct. App. Dec. 30, 2016).

A fire sprinkler system in a condominium building burst and flooded several units, including the plaintiff’s. The plaintiff presented a claim to its insurer for various losses. The insurer paid some, but not all, of the claims. Thereafter, the plaintiff sued the installer and inspector of the fire sprinkler system. The insurer moved to intervene. The trial court denied intervention because the insurer had not paid all losses and therefore was not fully subrogated, relying on Hardware Dealers Mutual Fire Ins. Co. v. Sheek, 158 S.E.2d 635 (N.C. 1968), where the North Carolina Supreme Court held that an insurer that was only partially subrogated could not initiate claims against a tortfeasor for losses suffered by its insured. The insurer appealed.

The Court of Appeals reversed. It first found Hardware Dealers to be inapplicable because the issue there was whether an partially subrogated insurer could initiate claims, not whether a partially subrogated insurer could intervene in ongoing legal proceedings. Moreover, the Court of Appeals reasoned that whether a party can intervene turns upon whether the party has acquired an interest in the litigation, and not whether an insurer has been partially or fully subrogated. It held that both partial and full subrogation “vests an equitable right to reimbursement in the insurer,” and that the right to reimbursement constitutes an interest. It concluded that even partial payment of the plaintiff’s damages is sufficient for an insurer to acquire an interest in a lawsuit to satisfy intervention requirements.
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Federal Court In Virginia Holds Claim For Damages Arising Out Of Contractual Obligations Does Not Trigger Policy

A federal court in Virginia held that absent a “coercive directive to compensate,” an insured is not “legally obligated to pay.” Elec. Motor & Contracting Co., Inc. v. Travelers Indem. Co. of Am., 2017 WL 385043 (E.D. Va. Jan. 27, 2017).

An electric generator repair contractor sought a declaratory judgment that its insurer was obligated to reimburse it under a CGL policy for costs of repairing a generator that was allegedly damaged by the poor workmanship of the insured’s subcontractor. The insured discovered the poor workmanship when the generator was returned to the insured for inspection and repair. Knowing the generator was needed immediately onboard a vessel, the insured promptly repaired the generator. It then sought coverage and argued that it was “legally obligated” to pay damages (in the form of repair costs) due to a contractual warranty included in the contract governing the repair of the generators. The insurer filed a motion to dismiss in ensuing coverage litigation, which the court granted.

The court held that the insurer was not legally obligated to pay damages. It held that the requirement that an insured be legally obligated to pay exists when there are (1) facts sufficient to show a claim for monetary compensation or remediation and (2) facts sufficient to show that the insured was legally obligated to pay such a claim. The court reasoned that a contractual duty to incur repair costs is insufficient to meet the requirement absent “some claim, order, or adjudication, which directed [the insured] to pay the [r]epair [c]osts as compensation or remediation for a loss or injury,” and that there was none.
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Florida Appellate Court Finds Pre-Suit Acknowledgment Of Coverage And Claim Payment Did Not Waive Insurer’s Reliance On Exclusion

A Florida appellate court recently held that an insurer’s pre-suit acknowledgment of coverage and partial payment of an insured’s claim did not result in waiver of the insurer’s right to rely on an exclusion in the policy. Gamero v. Foremost Ins. Co., 2017 WL 104935 (Fla. 3d DCA Jan. 11, 2017).

The insured made a claim under his homeowner’s policy for cracked floor tiles. The insurer accepted coverage for the loss and tendered payment to the insured. The insured disagreed with the amount paid and invoked appraisal to resolve the dispute. After the appraisal award was entered, the insurer paid the insured for the covered portion of the appraisal award, but denied coverage for the replacement of the tile flooring throughout the home. The insured sued the insurer for breach of contract. The insurer raised the policy’s marring exclusion as an affirmative defense to coverage for replacement of all of the tiles in the home. The trial court denied the insured’s motion for summary judgment, finding that, as a matter of law, coverage for the insured’s loss beyond the damaged tiles was excluded. The insured appealed.

On appeal, the insured argued that the insurer waived its right to rely upon the marring exclusion by its pre-suit conduct of acknowledging coverage and paying a portion of the claim. The appellate court disagreed, noting that, even if the insurer’s actions amounted to a waiver, the insured did not preserve the issue by failing to reply to, or avoid, the insurer’s affirmative defense, instead raising the issue for the first time in opposition to the insurer’s motion for summary judgment.
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Louisiana Appellate Court Holds Defendant Has No Right Of Action Under Direct Action Statute Against Co-Defendant’s Insurers

A Louisiana Court of Appeal held that the Direct Action Statute does not grant a right of action in favor of a tortfeasor against a co-tortfeasor’s liability insurer. Mabile v. The Dow Chem. Co., 2016-0576 (La. App. 1 Cir. 12/28/16); 2016 WL 7407390, reh'g denied sub nom. 2016-0576 (La. App. 1 Cir. 2/7/17); 2017 WL 519383.

Suit was filed against several defendants for an asbestos-related injury, during which one defendant filed a cross-claim against the plaintiff’s former employer and a third-party petition against the former employer’s insurers, alleging that the insurers issued policies that provided coverage. The insurers excepted to the third-party petition, arguing that there was no right of action to sue them directly because the claim was based on an agreement with the employer, and not on the defendant’s status as an injured tort victim. The trial court granted the insurers’ exception of no right of action.

The appellate court noted that Louisiana’s Direct Action Statute states that an injured person shall have a right of direct action against the tortfeasor's insurer. The appellate court held that a tortfeasor responsible for a tort victim’s injuries is not among the parties to whom the Direct Action Statute provides a remedy, and it therefore does not have a right of direct action against another’s insurer.
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Federal Court In Texas Holds Attorneys’ Fees Incurred By Seller Seeking Indemnity From Manufacturer For Product Liability Not “Damages” Under CGL Policy

A federal court in Texas found that attorneys’ fees awarded to a manufacturer for defense of a suit for indemnity by a retailer are not “damages” covered by a CGL policy. Mid–Continent Cas. Co. v. Petroleum Sols., Inc., 2016 WL 7491858 (S.D. Tex. Dec. 30, 2016).

The insured was sued by a customer for whom the insured installed an underground fuel tank from which fuel had leaked. The installer’s insurer denied coverage because the fuel leak was caused by a faulty flex connector made by the manufacturer of the component parts. The customer sued the insured for breach of express and implied warranties, and the insured sued the manufacturer for statutory indemnity. The manufacturer counterclaimed against the insured for fees incurred in defense of the insured’s action and in prosecution of its claim against the insured. The manufacturer offered to dismiss its counterclaim, but only if the insured would dismiss its claim with prejudice. The insured instead dismissed its claim against the manufacturer, without prejudice, and the manufacturer pursued its counterclaim.

The jury found against the insured for the customer’s claim and also awarded attorneys’ fees, costs and expenses to the manufacturer. The insured’s insurer denied coverage for the manufacturer’s counterclaim, taking the position that the award for attorneys’ fees are not “damages” covered by its CGL policy. The insurer previously had argued that the damages were not covered on the theory that the insured’s rejection of the offer mutually to dismiss the claims was a breach of the cooperation clause. The court refused to extend the cooperation clause to that extent in a liability case. See, September 2016 issue of the Insurance Law Report. The court held that attorneys’ fees are not “damages” because they were incurred in prosecution of its counterclaim against the insured, as contrasted with fees awarded to the manufacturer in the defense of a product liability suit, which would be considered an element of “damages.”
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Arkansas Court Holds Mitigation Expenses Incurred To Prevent Non-Covered Business Income Loss Not Covered

An Arkansas appellate court held that a commercial property policy which covers expenses incurred to avoid the loss of business income covers those expenses only if the loss of income, had it occurred, would have been covered under the policy. Welspun Pipes, Inc. v. Liberty Mut. Fire Ins. Co., 2017 WL 449635 (E.D. Ark. Feb. 2, 2017).

A pipe manufacturer’s plant sustained fire damage which affected its ability to produce pipe required under a contract. To avoid losing the order, it shifted production to another facility and incurred costs to do so. The production schedule was also delayed. The insured’s policy insured the manufacturer for, among other things, loss of business income and necessary expenses incurred to reduce its loss of business income. The manufacturer made a claim under the policy for the costs incurred.

The policy covered loss of business income through the end of an extended restoration period set forth in the policy. However, the income which the manufacturer protected by shifting its production would not be realized until after that date and therefore any reduction in income would not be covered under that policy. The court therefore rejected the claim for the costs incurred to shift production costs, holding that because the insurer would not be obligated to pay for loss of income for which those expenses were incurred to avoid (because any income would be realized after the restoration period), it was not obligated to cover the insured’s expenses incurred to reduce the losses. The court held that because the insurer would pay nothing for a business loss that was not covered, it should pay nothing to mitigate the loss.
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North Carolina Court Holds Effectively Identical “Other Insurance” Clauses Mutually Repugnant Under Virginia Law

A North Carolina appellate court recently construed Virginia law to hold that “other insurance” clauses identical in effect are mutually repugnant and cancel each other out. Spruill v. Westfield Ins. Co., 794 S.E.2d 556 (N.C. Ct. App. 2016).

The court was faced with competing “other insurance” clauses in two underinsured motorist policies, both of which provided coverage. One of the insurers argued that the clauses were not identical and therefore could not be mutually repugnant. The court disagreed, holding that mutual repugnancy comes not just from identical policy form but also when policies are identical in effect. It held that because the two “other insurance” clauses led to the result of both carriers being excess, the clauses were deemed to be mutually repugnant. Thus, the default position applied and each insurer paid a pro rata portion of the loss.
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Federal Court In Georgia Holds Insurer Entitled To Rescind Based On Material Misrepresentation In Application

A federal court in Georgia recently held that an insurer had the right to rescind a policy based on a material misrepresentation in the insurance application regarding the size of the insured property. Great Lakes Ins. SE v. Queen, 2017 WL 343637 (M.D. Ga. Jan. 23, 2017).

Following a fire, the insured made a claim with his homeowner’s insurer for a damaged shed and its contents. During its investigation, the insurer became aware that the insured property was more than five acres in size. The insured signed an application that indicated the insured property was less than five acres. In light of the discovery of the actual size of the insured property, the insurer rescinded the policy and returned the premium. The insured continued to seek payment under the policy, and the insurer filed suit seeking a declaration of its right to rescind the policy. The insured argued that he did not make a misrepresentation in his application because he only intended to cover his house and shed, which were situated on land totaling less than five acres.

The district court granted summary judgment to the insurer, finding that the insured had made a material misrepresentation in the application. The district court explained that the application’s questions regarding the size of the property were not ambiguous given that the “insured address” indicated by the insured would include all of the acres of land at that address, and not just the house and shed. The district court determined that the misrepresentation was material based on the insurer’s affidavits showing the insurer would have charged a higher premium and offered different coverage based on the property size.
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Federal Court In South Carolina Holds Coverage Excluded For Hazing Injury

A federal court in South Carolina applied a hazing exclusion in a CGL policy to bar coverage for a fraternity ritual. State Farm Fire & Cas. Co. v. Admiral Ins. Co., 2017 WL 384305 (D. S.C. Jan. 25, 2017).

The claim arose after a pledge in a fraternity suffered injury during a hazing event that took place at the home of the vice-president of a chapter of the fraternity. The fraternity’s CGL insurer accepted coverage for the chapter but refused to defend or indemnify the vice-president.

The vice-president’s homeowner’s insurer settled with the claimant and sought indemnity from the fraternity’s CGL insurer, arguing that the vice-president was an insured under the fraternity’s CGL policy as a volunteer worker for the fraternity. The court disagreed, holding that even if the vice-president qualified as an insured, coverage was barred by an exclusion for hazing as to “insureds who participate in or direct others to participate in the hazing.” Irrespective of testimony showing that the vice-president did not himself carry out the hazing, the evidence at trial clearly showed that the vice-president controlled and participated in the hazing.
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Federal Court In Mississippi Holds Voluntary Payment Doctrine Precludes Recovery By One Insurer From Another

A federal court in Mississippi applied the “voluntary payment” doctrine based on recent guidance from the Fifth Circuit. Colony Insurance Co. v. First Specialty Insurance Co., Case No. 16-191, 2017 WL 470902 (S.D. Miss. Feb. 3, 2017), appeal filed (17-60094 5th Cir. Feb. 14, 2017).

An explosion at a plant resulted in the death of a contractor’s employee. The decedent’s estate brought a wrongful death claim against the plant owner. The plant owner was insured under a primary liability policy and an excess policy, but the plant owner made a demand against the contractor’s insurer as an additional insured under the contractor’s policy. That insurer defended the plant owner under a reservation of rights. Early in the litigation, the wrongful death plaintiff made a policy limits settlement demand on the contractor’s insurer, which agreed to pay. Prior to settlement, however, it made a demand on the plant owner’s excess insurer, contending that the plant owner’s excess liability insurer was obligated to defend and indemnify the plant for those amounts in excess of the primary policy limits provided by the plant’s primary insurer. The excess insurer declined to do so and refused to contribute to the settlement. The contractor’s insurer sued. The excess insurer moved for summary judgment, arguing that the voluntary payment doctrine precludes equitable subrogation and implied indemnity.

The district court relied on S. Ins. Co. v. Affiliated FM Ins. Co., 830 F.3d 337, 347 (5th Cir. 2016), which explained that a contractually-obligated payment is not voluntary, and on the Mississippi Supreme Court’s decision in Indemnity Insurance Co. of North America v. Guidant Mutual Insurance Co., 99 So.3d 142 (Miss. 2012), and held that an insurer that settles a claim and/or pays legal expenses of an insured may seek contribution from another insurer that also owed those expenses, as long as the insurer seeking contribution was under a legal duty to pay. The court noted that the contractor’s insurer had argued that the plant owner was not an insured under its policy, and concluded that, if that argument were accepted, there would have been no obligation for the contractor’s insurer to pay the claim. It therefore held that payment was a voluntary, not contractual, obligation.
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