Can an Insurance Company Recover Defense Costs from its Insured?

January 26, 2021

In 2018, the New York Court of Appeals issued a landmark insurance law decision in Keyspan Gas East Corp v. Munich Reins. Am., Inc., et al, 31 NY3d 51 (2018), holding that an insured can be held responsible for indemnification of claims occurring during periods when it was uninsured, even when relevant insurance was not available on the market during those time periods.  In rejecting the “unavailability rule” used in several other jurisdictions, the Court of Appeals made clear that, where insurance policies provide for “pro rata” risk allocation, an insured will bear the risk for policy periods in which it did not have coverage, regardless of the reason for the lack of coverage.

The Court of Appeals emphasized in Keyspan that New York has not adopted either a strict “pro rata” or “all sums” allocation rule for apportioning costs among insurers in long-tail product liability or environmental suits.  These cases present unique challenges because the alleged harm is gradual and continuous, and can span multiple insurance policy periods, including periods when insurance was either not available or not purchased by the policyholder.  Accordingly, courts in multiple jurisdictions have been charged with determining the proper distribution of liability between multiple insurers, and between insurers and the insured.

In New York, whether a particular insurance policy should be subject to a “pro rata” or “all sums” allocation turns on the specific language of the policy, and particularly on whether the policy includes so-called “non-cumulation provisions” that contemplate coverage spanning multiple policy periods.  The Court of Appeals has provided substantial guidance in distinguishing between terms which dictate pro rata vs. all sums allocation, including discussions of non-cumulation provisions in cases such as Consolidated Edison Co. of NY v. Allstate, 98 NY2d 208 (2002)Matter of Viking Pump, 27 NY3d 244 (2016) and in Keyspan.

Keyspan only addressed the allocation of indemnification costs and did not tackle the question of whether or how defense costs should be divided among insurers and insured.  The Southern District of New York has now addressed this issue in Danaher Corp. v. Travelers Indemnity Co., 2019 414 F.Supp.3d 436 (SDNY 2019), a complex insurance coverage dispute that has been in litigation since 2012.  Danaher, the plaintiff, is the former owner of Chicago Pneumatic, a manufacturer of various products that continue to give rise to both asbestos and silica-related bodily injury claims.  In 1987, Danaher sold Chicago Pneumatic to Atlas Copco, now a third-party defendant in the suit.  Danaher brought the action to resolve disputes over insurance coverage among Chicago Pneumatic’s insurers, including Travelers, who issued various primary insurance policies to Chicago Pneumatic prior to 1987, excess insurers, and the companies themselves, who did not have insurance policies for the entire period which gave rise to these claims.  (Danaher no longer has an ownership stake in Chicago Pneumatic, but indemnified Atlas Copco against certain liabilities in connection with the sale of the company.)  As of 2019, Danaher and Atlas Copco had incurred more than $8.7 million to defend the asbestos and silica-related injury claims, and more than $2 million in settling claims.  This is in addition to the over $7.1 million in costs and fees incurred by Travelers in defending the claims.  These costs continue to accrue- the parties have represented to the court that on average 70 new asbestos claims are filed each year against Chicago Pneumatic.

In 2012, the SDNY, after determining that several of Travelers’ policies covered the time periods at issue, granted Danaher and Atlas Copco’s summary judgment motion, determining that Travelers had the “duty to defend” the asbestos and silica claims against Chicago Pneumatic, and additionally had to reimburse the insured companies for defense costs incurred to that point.  The Court left open the question of whether Travelers could recover contributions to defense costs from other insurers “for another day.”

In 2019, after seven years of litigation on the underlying claims, and after the Keyspan decision, Travelers brought a summary judgment motion seeking a declaration both that the liabilities at issue should be subject to “pro rata” allocation among the parties, commensurate to their “time on the risk,” and that it could seek contribution for both indemnity and defense costs from the other parties, relative to their “pro rata” obligations.

The SDNY agreed with Travelers that many of the relevant policies contain provisions which necessitate a pro rata method of allocation of indemnity costs.  Following Keyspan’s dictate that the unavailability exception did not apply, it found both that other insurers were responsible for certain policy periods, and that the insureds themselves would be liable for periods there was no coverage.  It further found that Travelers’ right to contribution “may be applied in the context of an insurer’s overpayment of both indemnification and defense costs.”  As the court had determined that the insureds were “among the parties responsible for indemnifying” the claims, it concluded that there was “no compelling basis for excusing [the insureds] from contributing to defense costs for those periods as well.”

In November 2020, the SDNY rejected the insureds’ motion for leave to appeal. 2020 WL 6712193 (SDNY 2020) Danaher and Atlas Copco sought to bring an interlocutory appeal challenging the trial court’s finding that an insured, in some circumstances, has the obligation to contribute to defense costs for long-tail claims.  The Court rejected the argument that such a finding was “contrary to New York law.” The Court reasoned that just as Danaher and Atlas Copco have an obligation to contribute to Travelers’ indemnification costs for the years in which Chicago Pneumatic was not insured, the same apportionment will apply to defense costs for those claims.

It’s important to note that Danaher, while confirming the ability of Travelers to seek contribution for defense costs post-litigation, also reaffirmed the court’s 2012 judgment that Travelers, “as the primary insurer of the risks of loss posed by the [claims] for a number of years. . . has a continuing duty to defend [those claims] in the first instance.”  Danaher also presumes that such a division of costs will only apply “so long as defense costs can be readily apportioned.”

How this will work in practice is less clear.  New York courts have long held that “the duty to defend. . . is a much broader duty than the duty to indemnify.” Continental Cas. Co. v. Employers Ins. Co. of Wausau, 60 AD3d 128, 142 (1st Dept. 2008).  But the SDNY, relying on Keyspan, does not define how a “broader” duty translates into any differentiation in apportionment between and among insurers and the insured for indemnity liability and defense costs.  And if an insured will eventually have to contribute to their own defense costs, is it in that company’s interest to wait until post-litigation for a contribution action, or should the issue be addressed up front?

Also note that this is the SDNY’s application of Keyspan.  Whether the Court of Appeals will address this precise question is still to be seen.  Finally, it is worth pointing out that whenever a company is on notice that it may be subject to long-tail claims for product liability or environmental damages, it is vital to conduct a thorough analysis of any applicable policies.  The entire question of an insured’s contribution to defense costs only arises in the context of a pro rata allocation; if the insurance policies dictate an all sums approach, logically the insurers will be on the hook for providing the defense.  In the meantime, insureds should be on notice that, particularly in complex long-tail claims, their insurers may seek contribution for defense costs.

Erin F. Casey is an attorney with Adams Leclair, LLP. Erin represents businesses and individuals in complex disputes in federal and state courts, in arbitration, and before governmental agencies.

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