Last week, the Minnesota Supreme Court overruled, finally, the archaic “Iowa National” rule. Iowa National prohibited a defending liability insurer from seeking contribution or reimbursement of attorney’s fees and costs from other liability insurers who refused to defend. In Iowa National Mutual Insurance Co. v. Universal Underwriters Insurance Co., 276 Minn. 362, 150 N.W.2d 233 (1967), the court held that where “either of two insurers has primary coverage for a claim, both insurers have a duty to defend that claim. If either insurer undertakes the defense, it is responsible for its own defense costs and cannot later seek reimbursement from the other.” Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 167 (Minn. 1986). The court in Iowa National, further noted: “‘[t]he duty to defend is personal to each insurer . . . and the carrier is not entitled to divide the duty nor require contribution from another absent a specific contractual right.’” 150 N.W.2d at 237.
Later, in Home Insurance Co. v. National Union Fire Insurance of Pittsburgh, 658 N.W.2d 522, 527 (Minn. 2003), the Minnesota Supreme Court court created an exception to the Iowa National rule. Under National Union, one liability insurer could seek contribution from other liability insurers toward defense costs if the defending insurer and the insured entered into a loan receipt agreement. The concept of a “loan receipt” elevated form over substance.
In Wooddale Builders v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006), the leading insurance- construction defect case in Minnesota, my client West Bend urged the court to adopt case law from other jurisdictions which had applied the “equitable contribution” theory to allocate defense fees. The Minnesota Court of Appeals agreed with West Bend’s position, noting that “[a]n insurer’s duty to the insured is separate and distinct from its obligations for contribution to other insurers for the costs of defense.” Wooddale Builders, Inc. v. Maryland Cas. Co., 695 N.W.2d 399, 406-407 (Minn. Ct. App. 2005). However, the Minnesota Supreme Court disagreed and applied the holdings in Iowa National/National Union to the case.
In Cargill, Inc. v. Ace American Insurance Company, A08-1082, ____ N.W.2d ___ (Minn. 2010), the court overruled Iowa National and held that a defending liability insurer has a claim for “equitable contribution” against other insurers insuring a mutual insured who are also obligated to defend. Although no party in Cargill actually requested that Iowa National be overruled, the court did so, concluding as follows:
Accordingly, we overrule Iowa National and hold that a primary insurer that has a duty to defend, and whose policy is triggered for defense purposes, has an equitable right to seek contribution for defense costs from any other insurer who also has a duty to defend the insured, and whose policy has been triggered for defense purposes. An equal share for costs of defense among co-primary insurers is consistent with our approach in previous cases. Wooddale, 722 N.W.2d at 303-04 (“If insurers know from the beginning that defense costs will be apportioned equally among insurers whose policies are triggered, the possibilities for delay will be minimized because no insurer will benefit from delaying or refusing to undertake a defense. Therefore, we conclude that when the pro-rata-by-time-on-the-risk method applies to allocation of liability, and insurers participate in providing a defense to a common insured . . . defense costs are apportioned equally among insurers whose policies are triggered.”); Jostens, 387 N.W.2d at 167 (“If it is established that both insurers arguably had coverage at the time of the rejected defense tender, the insurers, as between them, shall be equally liable for the insured’s defense costs . . . .”).
Thus, Minnesota joined the vast majority of courts which have held that an insurer has an equitable right, whether by contribution or subrogation, to recover defense costs, at least partially, when primary insurers also have a duty to defend a common insured. This has been described as “the better-reasoned view.” Allan D. Windt, Insurance Claims and Disputes: Representation of Insurance Companies and Insureds, § 10:3, at 199-201 (4th ed. 2001); see also 1 Rowland H. Long, The Law of Liability Insurance, § 5.07, at 5-97 (2009) (“[A]n increasing number of courts recognize that it is unfair to require one insurer to bear the entire burden of defense costs.”); Douglas R. Richmond, Issues and Problems in “Other Insurance,” Multiple Insurance, and Self-Insurance, 22 Pepp. L.Rev. 1373, 1426 (1995) (“The majority position sounds in equity, and indeed is supported by fairness and logic”). Courts that have recognized an insurer’s right to contribution or right to have defense costs shared in some way include the following: (1) Alaska: Marwell Constr., Inc. v. Underwriters at Lloyd’s, London, 465 P.2d 298, 313 (Alaska 1970); (2) Arizona: Nat’l Indem. Co. v. St. Paul Ins. Cos., 150 Ariz. 458, 724 P.2d 544, 545 (1986); (3) California: Cont’l Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 17 Cal. Rptr. 12, 366 P.2d 455, 460-62 (1961); (4) Colorado: Nat’l Cas. Co. v. Great Sw. Fire Ins. Co., 833 P.2d 741, 747-48 (Colo.1992); (5) Connecticut: Sec. Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 264 Conn. 688, 826 A.2d 107, 123-24 (2003); (6) New Hampshire: Liberty Mut. Ins. Co. v. Home Ins. Indem. Co., 116 N.H. 12, 351 A.2d 891, 894 (1976); (7) New Jersey: Marshall v. Raritan Valley Disposal, 398 N.J.Super. 168, 940 A.2d 315, 320 (2008); (8) Pennsylvania: J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa. 29, 626 A.2d 502, 509 (1993); (9) Tennessee: United Servs. Auto. Ass’n v. Hartford Acc. & Indem. Co., 220 Tenn. 120, 414 S.W.2d 836, 841 (1967); (10) Utah: Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127, 137-38 (Utah 1997); and (11) Washington: Mut. of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash.2d 411, 191 P.3d 866, 872-74 (2008).
Note the Minnesota Supreme Court’s comment that “[a]n equal share for costs of defense among co-primary insurers is consistent with our approach in previous cases.” In the Wooddale case, West Bend pointed out the unfairness of having two insurers contribute “equal shares” to the defense fees when, for example, the insurers are not on the risk for the same period of time. The majority of jurisdictions which allow “equitable contribution” claims in the context of claims involving successive policy periods, hold that the defense fees should be allocated in the exact same fashion as indemnity payments, i.e., based on each insurer’s respective time on the risk, due to the unfairness which would otherwise result. As noted by the Court of Appeals in Wooddale:
[A]llocating defense costs equally based on the number of insurers leads to inequitable results: For example, assume an insured’s actions progressively contaminated a property for a period of 20 years and that the insured obtained coverage for 19 of those years from one insurer, but switched insurers for the last remaining year. Under the district court’s reasoning, an insurer who was on the risk for 5% of the period during which damage occurred would be liable for 50% of the costs of investigation and defense. Although the disparity in percentages is not as pronounced in the instant action, the potential for inequity is clear. Because we conclude that the majority jurisdictions have the better-reasoned approach to this issue, we hold today that defense costs among consecutively liable insurers should be allocated according to the same method used to apportion indemnity costs. Accordingly, the district court erred in allocating defense costs equally according to the number of insurers.
Perhaps this issue will resurface in the future now that Minnesota has embraced “equity” in the context of defense cost allocation.
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It’s always nice when the Court finally gets around to making the right decision. Congratulations.