One of the great myths in the insurance industry is that punitive damages are not insurable. This is false, particularly considering that the majority of US jurisdictions allow coverage for punitive damages at least in some circumstances. The argument against coverage in premised on the notion that it would undermine the deterrent effect of imposing punitive damages were the defendant able to in turn seek insurance recovery. A century ago the same debate in the same terms was had over whether liability insurance policies were themselves contracts violative of public policy, since it would undermine the deterrent effect of imposing tort liabiltiy were the defendant able to in turn seek insurance recovery. See Mary McNeely, Illegality as a Factor in Liability Insurance, 41 Col. L. Rev. 26 (1941) (an excellent early analysis of some of these questions). As McNeely wrote three score years ago, "Throughout its history the insurance device has been alternatively hailed as a promoter of communal welfare and damned as a generator of evil."

So too is framed the interesting recapitulation of these familiar polarities from the majority and (main) concurring opinions in Texas. Fairfield Ins. Co. v. Stephens Martin Paving LP (Texas Feb. 15, 2008).

What I would add is that the data and more rigorous theoretical analyses do not suggest there is a major "moral hazard" problem in liability insurance, see C. Heimer, Reactive Risk and Rational Action: Managing Moral Hazard in Insurance Contracts (1985). And courts should not assume a set of governing facts without evidence (for given the data here the easy assumption that allowing indemnification "encourages" misconduct is surely problematic and not a proper subject for judicial notice). This is not to suggest that there isn't lazy underwriting -- insurers should vet their potential insureds to see if they might be the kind of of folks or companies to engage in misdeeds. But as the Texas majority holds, the principle of freedom of contract should allow whatever coverage is provided by the contract terms -- and if insurers do not want to cover punitive damages in their policies, they can say that.

Two years ago, the Court granted rehearing. Yesterday, the Court changed course, with a majority ruling that an insurer does not have a unilateral right or an equitable claim to recover a settlement payment. Excess Underwriters v. Frank's Casing (Tex. Feb. 1, 2008). The court reaffirmed its prior decision in Matagorda County, which barred a primary insurer from seeking recoupment of defense cost. Recent case law in other jurisdictions have split on the issue, but the more robust recent opinions (Illinois, Massachusetts, Wyoming) line up with Texas.

The Frank's Casing case was challenging in that an undeserving insured stood before the court – the insurer owed no obligation to pay. Had the insurer refused to pay, it would not have breached its contract and would not (on this basis) be liable for any bad faith or extra-contractual obligation. And the policyholder did not settle the case in reliance on the insurers forfeiting whatever claim they may have possessed at the time to obtain reimbursement.

The majority, per Justice O’Neil, found there was no fundamental unfairness in allowing the insured to reap the benefit of the settlement even when the claim is shown not to be covered. Settlement paid by the insurer is a welcome relief for the policyholder – unless the “other shoe” drops and the carrier seeks to prove in a separate suit both (i) the tort plaintiff was right and the insured-defendant truly was liable, (ii) the insured’s liability was such that it was entirely excluded from coverage and (iii) the insurer alleges the insured must reimburse it for all the money it paid. This result is essentially worse for the insured than is “rolling the dice” at trial, because if the case is triable then a reasonable jury could rule in favor of the insured. By the insurer’s settling, the insured loses the opportunity to have an outcome whereby it walks scot free.

Faced with a reasonable settlement offer from the tort plaintiff, what is the carrier to do? An insurer surely has a privilege to reject an unreasonable settlement offer, but a reasonable settlement offer cast against doubtful coverage places the insurer in a difficult situation. If the insurer doubts the existence of coverage but later is proven wrong, and the settlement offer was reasonable but spurned, the insurer is at risk of being held liable for the entirety of the verdict against the insured even if the verdict exceeds policy limits. This is a consequence of the law of “third party” bad faith or what is called in Texas “Stowers.” An insurer that unreasonably fails to settle a third-party claim that results in a verdict adverse to the insured is potentially liable for all the damages stemming from its unreasonable conduct, i.e., the value of the verdict that could have been averted had the settlement been accepted.

The insurers and their backers in the Texas Supreme Court found it unfair that the insurer could be set up or pressured to make payment on behalf of an insured yet be unable to prove that coverage was not properly owed. The split between the majority and dissent might be thought of as a difference in opinion whether the insurers are required to put into the policy some sort of provision addressing the situation of a reasonable settlement that might or might not be covered. The majority holds the insurer that fails to clarify its contract on this point bears the consequences, that is, if it makes the payment to extinguish the insured’s liability it does so without recourse against the insured (unless the insured expressly agrees to a right of reimbursement). The articulate dissent by Justice Hecht reasons that because the policy is silent the insurer should be able to pay under protest (i.e., with a reservation) such that it can mount an equitable claim to recover the benefit conferred on the insured that was never owing to begin with (assuming that coverage does not apply).

Justice Hecht’s dissent argues cogently that principles of equity generally permit a party that doubts performance is owed to tendered performance subject to a reservation; the dissent then argues that there is no distinction between insurance companies and other contracting parties. Assuming Justice Hecht is right in his premise on what equity generally provides, policyholders need to fashion a persuasive response as to why insurance is different.

I think the difference lies in the fact that other kinds of contracting parties do something else in the world other than make contracts. If I make widgets and you are a supplier, and you then think that you don’t owe me some delivery, equity (apparently) will permit you to provide performance to me, subject to straightening it all out later. No doubt the parties’ contract does not address this situation, that is, of uncertain obligations to perform, and the law or equity seeks to ensure a fundamentally fair outcome and does not blame the parties for not accounting for this situation ex ante.

That widget makers and their suppliers do not lay out in their contracts what happens in these circumstances is understandable. They are in the business of widgets, and their making a contract is ancillary to what they do. But insurance companies are different.

Insurers are professional contract-writing companies; what they sell are not widgets but contracts. Insurers have the knowledge that there are many circumstances where coverage may be uncertain but a reasonable settlement will be presented. What the insurer may do or may be required to do might be deemed to be something in the insurer’s superior knowledge vis a vis a prospective insured, such that an omission in the contract can be considered to be deliberate by the insurer. Under this approach, an insurer’s failure to clarify what might happen in a situation that is not altogether unlikely to arise can be considered a species of sharp practice such that Justice Hecht’s equitable remedy will not lie. It is well established that he who seeks equity must do equity, and that doctrines such as unclean hands will preclude the exercise of equity power. Accordingly, while the dissent makes a powerful argument that in an ordinary circumstance payment under protest is allowable and equity will reallocate, an insurer that finds itself in this situation and has not clarified its intentions in its contract has only itself to blame, such that equity should not intervene.

Instead, insurers should write out how such claims will be handled, and allow insurance regulators and market forces to scrutinize and differentiate among insurance products. This is the essence of the holding of the new majority opinion in Frank’s Casing:

We resolved this quandary in Matagorda County, determining that the risk of coverage uncertainties was best placed with the insurer. Id. We reasoned that “[r]equiring the insurer, rather than the insured, to choose a course of action is appropriate because the insurer is in the business of analyzing and allocating risk and is in the best position to assess the viability of its coverage dispute.” Id. at 135. An insurer in this situation has a number of options. If the insurer assesses its coverage position as strong, it may refuse to participate in settlement and rely on its coverage action, leaving the insured to negotiate a settlement with its own resources. Or, an insurer may seek prompt resolution of its coverage dispute, a course we have encouraged insurers in this position to take. Id. at 135 (citing State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996); Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997)). Or, if an insurer’s coverage position is difficult to assess, as is sometimes the case, the insurer can leverage the coverage dispute during settlement negotiations to lower the claimant’s demand; by paying the negotiated claim, the insurer eliminates its own potential bad-faith liability, saves defense costs, and avoids protracted coverage litigation with its insured. Or, at the outset, the insurer may include a reimbursement right in the policy, which may yield a lower premium than a policy that does not contain such a right.

Slip op. at 7. Texas joins the high courts of Massachusetts and Illinois, among others, in placing the initial onus on insurers to state their intentions ex ante and not to permit case by case adjudication after the tort claim is settled. An insurer that has a contract that is silent on the point can choose to settle the claim against the insured and fund the settlement, can arrange with the insured to provide it with a loan to fund a settlement while the coverage issues are worked out, or can refuse to pay for a settlement and hope to prove there is no coverage or that its refusal to perform at least was reasonable. There is no reason for courts to create one further remedy for insurers when they are well-positioned to protect themselves at the point of contract. The Texas Supreme Court in its majority opinion contributes to stability in contract relationships and cleans up what had been a real mess conceptually in the initial opinion in Frank’s Casing.

Certainly, an unexcused breach of the obligation to provide timely notice is not sympathetic, and insurers have legitimate interests in knowing of the existence of claims against their insureds, in investigating claims while the evidence is fresh, and taking steps to safeguard their insureds’ interests and their own. The question in PAJ and other notice cases is whether it is best to set up a system that results in automatic forfeiture in all cases where notice is late or other “conditions” are violated. The Texas Supreme Court ruled that a “no harm, no foul” or “little harm, minor penalty” approach was fair to both sides. Accordingly, a policyholder that violates an obligation under the policy in general will be considered to have violated a covenant, not a condition. This was the holding also in the recent California appellate case of Belz v. Clarendon Am. Ins. Co. (Cal. App. Dec. 28, 2007), which while ostensibly focused on the question whether the particular clause at issue was a "no voluntary payments" or (merely) a "cooperation" clause adopts the equivalent framework considering material (prejudicial) versus immaterial breaches of policyholder duties.

Classifying a policy provision as a covenant does not mean that the insurer’s legitimate interests cannot be recognized. An immaterial breach of contract allows the non-breaching party a right to damages or set off; however, the non-breaching party is not allowed to suspend its promised performance completely. Put differently, to the extent the insurer can show that a policyholder’s breach of covenant in fact worked a harm to it in some way, the insurer is free to seek to prove the extent of that harm. If that harm is “immaterial” – that is, does not vitiate the entirety of the contract – then the insurer is able to set off its obligations (subject to the usual rules of proving damages). If the harm is material, then the insurer’s obligation to perform may be excused entirely. See generally Belz , slip op. at 15 ("'To establish actual prejudice, the insurer must show a substantial likelihood that, with timely notice, and notwithstanding [any] denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.'") (citation omitted).

But it does not make sense to allow an insurer to keep the policyholder’s premium and refuse to perform when the policyholder’s late notice works no harm. Most policyholders do not have multiple claims under a single policy, and a strict forfeiture rule would create the situation that in the sole instance where the policyholder might achieve value from its insurance investment the insurer is excused from performing even though it has not in fact been harmed from late notice (all the while keeping the policyholder’s premium).

The confusion in the law has stemmed in part from the nomenclature adopted by courts in this area, where they have sought to protect insureds that or who gave “late” notice by requiring the insurer to show “prejudice” (or the policyholder to prove the absence of prejudice). But it makes no sense from a contract-law vantage point to characterize a provision as a condition but only to enforce it if the other party has been prejudiced from its nonperformance. The casual reference by courts to notice provisions as “conditions” and the adoption of the “notice/prejudice” rule itself has created confusion in the law.

The right approach is to presume that all contractual provisions setting forth policyholder duties are covenants, whose breach if immaterial entitles the innocent party to set off or if material entitles the innocent party to refuse performance. As the dissent in PAJ recognizes, “’[m]agic words are not controlling; labeling something a ‘condition precedent’ does not make it so.”

The right question is whether the specific language and the particular obligation is one whose performance should be completed before the other party’s obligation matures or is required at all. If an insurance company wishes to make notice a true condition precedent, it should make the contract provision absolutely clear that noncompliance will work a forfeiture. We see the equivalent of this in claims-made-and-reported policies which require that reporting of the claim (i.e., providing notice) occur during the policy period in order for the insuring agreement to be satisfied. As a leading English judge wrote in a key notice ruling there, “If insurers consider that they want or need such protection, they can and should try to express it in their insurance contracts and see if insureds and the broking market will accept it.” Friends Provident Life & Pensions Ltd. v. Sirius Int’l Ins., [2005] EWCA Civ. 601 (per Lord Mance).

PAJ was a split decision, 5 to 4, with strong majority and dissenting opinions. From the perspective of insurance law, it is a very positive development that the Texas justices all accepted the framework of determining whether notice was a condition or a covenant and if so the consequences of breach. Adopting the right framework not only produces correct results, as in PAJ, but also clarifies for insurers and insurance regulators how to approach revising the policy language to make clear – if intended – that punctilious compliance is requisite on pain of forfeiture. Were this made pellucid, then insurance regulators could step in to protect consumers or the marketplace could respond by pricing such policies commensurate with the traps they lay. Most important, insurers should say what is expected and what they require and make clear to purchasers the consequences of noncompliance (in plain, unambiguous language, and labeling something a "condition precedent" certainly fails on that score).

Regardless whether a particular jurisdiction is a “notice/prejudice” state, see Prince Georges Cty. v. Local Gov't Ins. Trust (Md. 2004) at n.9 (classifying 38 states as "notice/prejudice" and discussing most others), policyholders in all circumstances should seek to involve their insurers as soon as practicable, and they timeously should consider whether claims against them potentially implicate coverage. As always, rather than arguing about conditions versus covenants and material versus immaterial breach, policyholders are advised to abide by the rule that notice is like voting in Chicago – do it early and often.

In any circumstance where one insurer is suing another entity for performance, the insured will have an interest in the policy proceeds to the extent that it has not been “made whole.” Under the “made whole” or “make whole” doctrine, an insurer pursuing a subrogation claim retain the recovery unless and until the policyholder’s loss has been fully indemnified. Thus, in the event the policyholder’s loss exceeds the combined limits of all its coverage, that an overlying insurer has performed and sued a recalcitrant underlying insurer does not mean that that insurer is able to pocket the money from the nonperforming insurer. Instead, as should be reasonably obvious, the policyholder would be entitled to receive the money from the non-performing carrier, even if the overlying performing carrier is the one that brought suit. If the performing carrier succeeds in this suit, then the only consequence to the policyholder should be that the underlying carrier’s payment is to be debited against its policy limits, and the limits of the performing carrier should be refreshed (to the extent that the policyholder has been fully indemnified and there is money left over from the proceeds from the underlying carrier). Cf. Alta California Regional Center v. Fremont Indemnity Co., 25 Cal. App. 4th 455, 466 (1994), overruled on other grounds, 11 Cal. 4th 1, 34 (1995). Once “made whole,” however, most courts are uncomfortable with allowing the prospect that an insured might obtain more than complete recovery, Burns v. Cal. Fair Plan, __ Cal. App. 4th __ (Ct. App. June 25, 2007), but this issue more properly is policed through the collateral-source rule.

When a performing carrier instead brings an action against other insurers that issued policies in successive or prior policy years, its claim can be brought as a subrogation claim (asserting the rights of the insured) or as a contribution or indemnity claim (depending on whether the insurer is seeking partial recovery or full recovery from the nonperforming carriers). Most courts will look to the insurer’s other-insurance clauses as guidance in determine the relative obligations of the different insurers.

The other-insurance clause does not limit the policyholder’s right in the first instance, see Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 72 (1997) (“Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers.”); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 909 (2000) (“The other-insurance clause . . . does not excuse the insurer from discharging its independent obligation to indemnify the insured up to policy limits.”). Indeed, there is authority holding that it is bad-faith for an insurer to deny performance to the insured by pointing to another insurer. Silberg v. California Life Ins. Co., 11 Cal. 3d 452, 460 (1974). An other-insurance clause is not a “sue other insurance” obligation on the insured. Rhone-Poulenc Inc. v. International Ins. Co., 71 F.3d 1299 (7th Cir. 1996).

When an insurer pays the insured’s claim, it may want to look around to other insurers to see whether the policies they issued also have an obligation to perform. Insureds may have an interest, however, in the dispute between one insurer and another. That it has an interest does not mean that the insured necessarily can preclude contribution actions.

Some states allow an insured to target its insurance coverage and in effect preclude one insurer from suing another horizontally. For example, in Casualty Indem. Exchange Ins. Co. v. Liberty National Fire Ins. Co., 902 F. Supp. 1235 (D. Mont. 1995), the insured failed to provide notice of a suit to one of its insurers yet obtained recovery from another. The performing insurer sought contribution but the court ruled that principles of equity did not allow it to force contribution from an insurer with a valid notice defense. Id. at 1239. Rather than simply failing to provide notice, sometimes insureds make the deliberate choice not to select an insurer to provide performance; in such circumstances, the question is whether that election precludes a contribution claim. In Illinois, for example, the answer clearly is yes. Under Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App. 3d 70 (1992), the court upheld a “targeted tender” of the defense and insulated the non-targeted insurer from equitable contribution/indemnity claims.

Most courts, however, have found that one insurer should be permitted to seek recovery against another. E.g., Insurance Co. of North America v. Travelers Ins. Co., 118 Ohio App. 3d 302, 314 (1997) (“applying the principles of equity and natural justice, the secondary insurer possesses an equitable right to recover from the primary insurer, as well as a right to recover by way of subrogation under the policy.”). But does an insurer have any obligation relative to its own insured not to seek contribution? In Mitchell, Silberberg & Knupp v. Yosemite, 58 Cal. App. 4th 389 (1997), the insured had been sued and several of its insurers agreed to settle the claim, subject to a reservation of rights among the insurers. In the later contribution action, one of the insurers contended that its policy never provided coverage to begin with, and thus it was entitled to contribution/indemnification. The insurer against which contribution was sought at the same time also was providing coverage for other claims against the insured. If it paid the contribution claim, the insurer would not have any limits available to pay for these other claims. The insured in response brought suit against Yosemite (the carrier that sought contribution), contending that it had breached its duty of good faith and fair dealing by paying to settle and then contending it had no obligation whatsoever, with the result being that its other coverage was unduly impaired. The court rejected the contention that the excess insurer’s failure to reserve its rights against its own insured when paying the original settlement effected a waiver of its right to deny its coverage obligation ab initio in the subsequent litigation with the other carriers.

Consequently, an insurer in general breaches no duty to its insured when it seeks to pursue contribution against another insurance company issuing similar coverage at the same layer/risk. E.g., Illinois Emcasco Co. v. Continental Cas. Co., 487 N.E.2d 1110 (Ill. App. 1985); cf. Guaranty Nat’l Ins. Co. v. American Motorists Ins. Co., 981 F.2d 1108, 1109 (9th Cir. 1992) (discussing primary, true excess and “excess by coincidence” coverages). This is true when the effect on the policyholder from the contribution action is indirect, that is, a successful contribution action affects the policyholder’s ability to obtain performance with respect to other claims.

An insurer, however, may not obtain contribution from “other insurance” when if successful the contribution action would result in a money award that comes from the policyholder’s own pocket, at least in part. While it may not be bad faith for an insurer to pursue contribution, the insurer can obtain contribution only from “other insurance.” Many commercial policyholders have various forms of “fronting” arrangements with insurers, so the question arises whether an initially targeted insurer may obtain contribution from an insurer that in turn will demand reimbursement from the policyholder pursuant to a side indemnity agreement, captive reinsurance arrangement, or matching deductible program. See Gabe’s Constr. Co. v. United Capitol Ins. Co., 539 N.W.2d 144, 148 (Iowa 1995).

For example, a Florida appellate court held that an employer’s $1 million deductible was not “other insurance” subject to contribution from a performing insurer. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981); see also Wake County Hospital System v. National Cas. Co., 804 F. Supp. 768 (E.D.N.C. 1992). This has been the result in a number of other jurisdictions, e.g., American Fam. Mut. Ins. Co. v. Missouri Power and Light Co., 517 S.W. 2d 110 (Mo. 1974); USX Corp. v. Liberty Mut. Ins. Co., 645 N.E.2d 396 (Ill. App. 1994); Physicians Ins. Co. v. Grandview Hosp. and Medical Center, 542 N.E.2d 706 (Ohio App. 1988); Hertz Corp. v. Robineau, 6 S.W.3d 332 (Tex. App. 1999). Courts have looked to the economic substance of transactions to determine whether these are insurance – and thus even within the purview of “other insurance” clauses. E.g., Lawyers Title Ins. Co. v. Norwest Corp., 493 S.E.2d 114 (Va. 1997); State v. Continental Cas. Co., 879 P.2d 111, 1116 (Idaho 1994). As the Idaho court explained, “[t]he nature of ‘self-insurance,’ and the fact that it is not a form of insurance, is well-established. . . . Because ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance. [A] payment of . . . losses [that] was a matter of ‘self-insurance’, rather than insurance, . . . did not trigger the ‘other insurance’ clause in Continental’s policy.” Id. at 1116. Cf. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (captive-issued policies are not insurance).

Thus, various forms of fronting arrangements are not considered “other and valid collectible insurance” within the meaning of an other-insurance clause. Citgo Petroleum Corp. v. Yeargin, Inc., 690 So.2d 154 (La. App. 1997). This is true even where the self-insurance or fronted component is administered by an entity other than the insured in the first instance. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981). Accordingly, an insurer that is targeted for performance from the insured cannot pursue contribution from other insurance companies where the result of a successful contribution action would be for the policyholder to pay in part for the claim. Any other result would defeat the substance of the policyholder’s transaction with the originally targeted insurer, whereby it sought to transfer the risk of loss away from itself to its insurers.

In any circumstance where one insurer is suing another entity for performance, the insured will have an interest in the policy proceeds to the extent that it has not been “made whole.” Under the “made whole” or “make whole” doctrine, an insurer pursuing a subrogation claim retain the recovery unless and until the policyholder’s loss has been fully indemnified. Thus, in the event the policyholder’s loss exceeds the combined limits of all its coverage, that an overlying insurer has performed and sued a recalcitrant underlying insurer does not mean that that insurer is able to pocket the money from the nonperforming insurer. Instead, as should be reasonably obvious, the policyholder would be entitled to receive the money from the non-performing carrier, even if the overlying performing carrier is the one that brought suit. If the performing carrier succeeds in this suit, then the only consequence to the policyholder should be that the underlying carrier’s payment is to be debited against its policy limits, and the limits of the performing carrier should be refreshed (to the extent that the policyholder has been fully indemnified and there is money left over from the proceeds from the underlying carrier). Cf. Alta California Regional Center v. Fremont Indemnity Co., 25 Cal. App. 4th 455, 466 (1994), overruled on other grounds, 11 Cal. 4th 1, 34 (1995). Once “made whole,” however, most courts are uncomfortable with allowing the prospect that an insured might obtain more than complete recovery, Burns v. Cal. Fair Plan, __ Cal. App. 4th __ (Ct. App. June 25, 2007), but this issue more properly is policed through the collateral-source rule.

When a performing carrier instead brings an action against other insurers that issued policies in successive or prior policy years, its claim can be brought as a subrogation claim (asserting the rights of the insured) or as a contribution or indemnity claim (depending on whether the insurer is seeking partial recovery or full recovery from the nonperforming carriers). Most courts will look to the insurer’s other-insurance clauses as guidance in determine the relative obligations of the different insurers.

The other-insurance clause does not limit the policyholder’s right in the first instance, see Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 72 (1997) (“Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers.”); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 909 (2000) (“The other-insurance clause . . . does not excuse the insurer from discharging its independent obligation to indemnify the insured up to policy limits.”). Indeed, there is authority holding that it is bad-faith for an insurer to deny performance to the insured by pointing to another insurer. Silberg v. California Life Ins. Co., 11 Cal. 3d 452, 460 (1974). An other-insurance clause is not a “sue other insurance” obligation on the insured. Rhone-Poulenc Inc. v. International Ins. Co., 71 F.3d 1299 (7th Cir. 1996).

When an insurer pays the insured’s claim, it may want to look around to other insurers to see whether the policies they issued also have an obligation to perform. Insureds may have an interest, however, in the dispute between one insurer and another. That it has an interest does not mean that the insured necessarily can preclude contribution actions.

Some states allow an insured to target its insurance coverage and in effect preclude one insurer from suing another horizontally. For example, in Casualty Indem. Exchange Ins. Co. v. Liberty National Fire Ins. Co., 902 F. Supp. 1235 (D. Mont. 1995), the insured failed to provide notice of a suit to one of its insurers yet obtained recovery from another. The performing insurer sought contribution but the court ruled that principles of equity did not allow it to force contribution from an insurer with a valid notice defense. Id. at 1239. Rather than simply failing to provide notice, sometimes insureds make the deliberate choice not to select an insurer to provide performance; in such circumstances, the question is whether that election precludes a contribution claim. In Illinois, for example, the answer clearly is yes. Under Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App. 3d 70 (1992), the court upheld a “targeted tender” of the defense and insulated the non-targeted insurer from equitable contribution/indemnity claims.

Most courts, however, have found that one insurer should be permitted to seek recovery against another. E.g., Insurance Co. of North America v. Travelers Ins. Co., 118 Ohio App. 3d 302, 314 (1997) (“applying the principles of equity and natural justice, the secondary insurer possesses an equitable right to recover from the primary insurer, as well as a right to recover by way of subrogation under the policy.”). But does an insurer have any obligation relative to its own insured not to seek contribution? In Mitchell, Silberberg & Knupp v. Yosemite, 58 Cal. App. 4th 389 (1997), the insured had been sued and several of its insurers agreed to settle the claim, subject to a reservation of rights among the insurers. In the later contribution action, one of the insurers contended that its policy never provided coverage to begin with, and thus it was entitled to contribution/indemnification. The insurer against which contribution was sought at the same time also was providing coverage for other claims against the insured. If it paid the contribution claim, the insurer would not have any limits available to pay for these other claims. The insured in response brought suit against Yosemite (the carrier that sought contribution), contending that it had breached its duty of good faith and fair dealing by paying to settle and then contending it had no obligation whatsoever, with the result being that its other coverage was unduly impaired. The court rejected the contention that the excess insurer’s failure to reserve its rights against its own insured when paying the original settlement effected a waiver of its right to deny its coverage obligation ab initio in the subsequent litigation with the other carriers.

Consequently, an insurer in general breaches no duty to its insured when it seeks to pursue contribution against another insurance company issuing similar coverage at the same layer/risk. E.g., Illinois Emcasco Co. v. Continental Cas. Co., 487 N.E.2d 1110 (Ill. App. 1985); cf. Guaranty Nat’l Ins. Co. v. American Motorists Ins. Co., 981 F.2d 1108, 1109 (9th Cir. 1992) (discussing primary, true excess and “excess by coincidence” coverages). This is true when the effect on the policyholder from the contribution action is indirect, that is, a successful contribution action affects the policyholder’s ability to obtain performance with respect to other claims.

An insurer, however, may not obtain contribution from “other insurance” when if successful the contribution action would result in a money award that comes from the policyholder’s own pocket, at least in part. While it may not be bad faith for an insurer to pursue contribution, the insurer can obtain contribution only from “other insurance.” Many commercial policyholders have various forms of “fronting” arrangements with insurers, so the question arises whether an initially targeted insurer may obtain contribution from an insurer that in turn will demand reimbursement from the policyholder pursuant to a side indemnity agreement, captive reinsurance arrangement, or matching deductible program. See Gabe’s Constr. Co. v. United Capitol Ins. Co., 539 N.W.2d 144, 148 (Iowa 1995).

For example, a Florida appellate court held that an employer’s $1 million deductible was not “other insurance” subject to contribution from a performing insurer. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981); see also Wake County Hospital System v. National Cas. Co., 804 F. Supp. 768 (E.D.N.C. 1992). This has been the result in a number of other jurisdictions, e.g., American Fam. Mut. Ins. Co. v. Missouri Power and Light Co., 517 S.W. 2d 110 (Mo. 1974); USX Corp. v. Liberty Mut. Ins. Co., 645 N.E.2d 396 (Ill. App. 1994); Physicians Ins. Co. v. Grandview Hosp. and Medical Center, 542 N.E.2d 706 (Ohio App. 1988); Hertz Corp. v. Robineau, 6 S.W.3d 332 (Tex. App. 1999). Courts have looked to the economic substance of transactions to determine whether these are insurance – and thus even within the purview of “other insurance” clauses. E.g., Lawyers Title Ins. Co. v. Norwest Corp., 493 S.E.2d 114 (Va. 1997); State v. Continental Cas. Co., 879 P.2d 111, 1116 (Idaho 1994). As the Idaho court explained, “[t]he nature of ‘self-insurance,’ and the fact that it is not a form of insurance, is well-established. . . . Because ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance. [A] payment of . . . losses [that] was a matter of ‘self-insurance’, rather than insurance, . . . did not trigger the ‘other insurance’ clause in Continental’s policy.” Id. at 1116. Cf. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (captive-issued policies are not insurance).

Thus, various forms of fronting arrangements are not considered “other and valid collectible insurance” within the meaning of an other-insurance clause. Citgo Petroleum Corp. v. Yeargin, Inc., 690 So.2d 154 (La. App. 1997). This is true even where the self-insurance or fronted component is administered by an entity other than the insured in the first instance. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981). Accordingly, an insurer that is targeted for performance from the insured cannot pursue contribution from other insurance companies where the result of a successful contribution action would be for the policyholder to pay in part for the claim. Any other result would defeat the substance of the policyholder’s transaction with the originally targeted insurer, whereby it sought to transfer the risk of loss away from itself to its insurers.

I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners' loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with "good hands," and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers' historic mission of helping their insureds, being "there" in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners' loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with "good hands," and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers' historic mission of helping their insureds, being "there" in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

Arguing that the term "flood" was ambiguous when considered in the context of third-party negligence that released water, the policyholders contended that the various flood exclusions should not apply, i.e., a man-made flood does not a "flood" make. The issue has considerable importance given that a decision in the policyholders' favor would have rendered nugatory the flood exclusion in the bulk of New Orleans' losses. (Put differently, should the costs of the loss be transferred to insurers via private market mechanisms or should they be transferred to the government through public mechanisms (the flood insurance program or the tax system), or should they not be transferred at all and thus the victims should bear the losses?)

The court followed a Colorado case in finding that a "large-scale inundation of water [is] a 'flood.'" See Kane v. Royal Ins. Co., 768 P.2d 678, 681 (Colo. 1989). See slip op. at 33-35. The Fifth Circuit distinguished cases involving inundations from a water-main break as being something different in kind from the failure of a levee.

Finally, the court did not enter into the "efficient" or "concurrent" cause debate that has been central in the Mississippi litigation where questions have been presented whether a particular loss there was from wind, water, wind-driven rain, or some combination thereof, with one or more of those causes being covered and others, not. In this instance, the only cause of loss was water from the failure of the levees, which the court held was excluded by the flood exclusion.

Arguing that the term "flood" was ambiguous when considered in the context of third-party negligence that released water, the policyholders contended that the various flood exclusions should not apply, i.e., a man-made flood does not a "flood" make. The issue has considerable importance given that a decision in the policyholders' favor would have rendered nugatory the flood exclusion in the bulk of New Orleans' losses. (Put differently, should the costs of the loss be transferred to insurers via private market mechanisms or should they be transferred to the government through public mechanisms (the flood insurance program or the tax system), or should they not be transferred at all and thus the victims should bear the losses?)

The court followed a Colorado case in finding that a "large-scale inundation of water [is] a 'flood.'" See Kane v. Royal Ins. Co., 768 P.2d 678, 681 (Colo. 1989). See slip op. at 33-35. The Fifth Circuit distinguished cases involving inundations from a water-main break as being something different in kind from the failure of a levee.

Finally, the court did not enter into the "efficient" or "concurrent" cause debate that has been central in the Mississippi litigation where questions have been presented whether a particular loss there was from wind, water, wind-driven rain, or some combination thereof, with one or more of those causes being covered and others, not. In this instance, the only cause of loss was water from the failure of the levees, which the court held was excluded by the flood exclusion.

No doubt that any collection such as BlawgWorld will omit many fine commentators, but I take as the project's point more to show off the range and diversity of this newer forum for discussion writ large and to encourage lawyers -- who strike all of us legal bloggers as ideal readers and competitors -- to take advantage of the considerable benefits these vectors of communication present. I certainly spend at least 30 minutes a day cruising through various blog entries in the US, UK, and Canada, as well as news sources that utilize an RSS feed, to keep up on the most current developments and to stimulate my own thinking. I find this work is more effective at keeping up to date on legal developments than just about any other mode of communication, and the manner in which people write in BlawgWorld makes ingesting that information easy.

You are cordially invited to find materials in which you have an interest -- and if the right stuff does not already exist out there then, by gum, you've got the tools via blogging to start your own printing press too and get into and shape the conversation, the practice of law, public policy, and court decisions, too.

No doubt that any collection such as BlawgWorld will omit many fine commentators, but I take as the project's point more to show off the range and diversity of this newer forum for discussion writ large and to encourage lawyers -- who strike all of us legal bloggers as ideal readers and competitors -- to take advantage of the considerable benefits these vectors of communication present. I certainly spend at least 30 minutes a day cruising through various blog entries in the US, UK, and Canada, as well as news sources that utilize an RSS feed, to keep up on the most current developments and to stimulate my own thinking. I find this work is more effective at keeping up to date on legal developments than just about any other mode of communication, and the manner in which people write in BlawgWorld makes ingesting that information easy.

You are cordially invited to find materials in which you have an interest -- and if the right stuff does not already exist out there then, by gum, you've got the tools via blogging to start your own printing press too and get into and shape the conversation, the practice of law, public policy, and court decisions, too.