Insurer Can Recover Indemnity And Defense Costs From Excess Insurer In “Indivisible Injury” Settlement.

A Minnesota federal court recently granted equitable contribution to an excess insurer against a primary insurer for amounts paid on behalf of their mutual insured.  In Lexington Ins. Co. v. AXIS Surplus Ins. Co., Civ. No. 13-3348 (RHK/FLN) (D. Minn. June 4, 2014), Lexington Insurance Company contributed $2 million towards settlement of an underlying lawsuit against Fagen, Inc.  The suit alleged defective design and construction of grain silos for an ethanol plant.  Lexington, which provided primary level liability insurance for Fagen’s design services, sought contribution from AXIS Surplus Insurance, the excess liability insurer for Fagen’s construction services.  AXIS moved to dismiss, arguing the right of equitable contribution applied to defense cost, but did not extend to indemnity payments.  Further, AXIS argued, the claim failed for lack of common liability, as the two carriers insured different risks (one design, one construction).

District Judge Richard Kyle, citing Lametti v. Peter Lametti Constr. Co., 232 N.W.2d 435, 438 (Minn. 1975) held Lexington’s right to equitable contribution extended to its indemnity payment, not just defense costs as Axis claimed.  Further, insurers can share a common liability regardless of whether they insure the same risk (design vs. construction) or apply at the same level (primary vs. excess).  The court held it was enough that the two insurers shared a common liability to Fagen.  To determine whether Lexington alleged a common liability, the Court focused on whether both parties had a duty to indemnify Fagen for the settlement.  Lexington argued that because settlement encompassed damages resulting from Fagen’s negligent construction (which AXIS insured), and since Fagen’s primary limits for construction services was exhausted, AXIS had a duty to indemnify.  Because Lexington alleged facts to support a finding of common liability—namely, the parties’ shared a duty to indemnify Fagen for the settlement, whether for silo design or silo construction—the claim for equitable contribution towards the settlement amount could proceed.

This decision is significant for recognizing a settling insurer’s right to equitable contribution for defense costs and indemnity payments.  It requires insurers to be proactive in protecting their rights where coverage is uncertain.  If not, the insurer might end up contributing towards settling defense costs and indemnity payments.

We will continue to monitor this and other decisions involving equitable.  If you have any questions about this or any other matter please contact us.