Coverage For Defense Costs Under Excess Policies – Missouri Court Surveys the Landscape
An excess insurer’s most immediate concern is usually whether the indemnity costs will exceed the underlying insurance and impact its layer of coverage. Trigger, allocation and proof of underlying exhaustion are therefore generally significant threshold issues. When an excess insurer finds that its policy may be reached, an equally important issue arises: how does the excess policy treat defense costs? Is there an affirmative duty to defend or an obligation to reimburse (i.e., indemnify) defense costs? Is there any obligation to pay defense costs at all? The recent -Missouri Court of Appeals decision, Nooter Corporation v. Allianz Underwriters Ins. Company, No. ED103835, 2017 Mo. App. LEXIS 977 (Mo. Ct. App. Oct. 3, 2017), is instructive because the court considered various types of excess policy language relating to the defense obligation. The Nooter decision addresses a number of the key issues relating to payment of defense costs under excess policies.
Nooter, a classic asbestos coverage action, involved an industrial supply company seeking defense and indemnity costs from numerous insurers for thousands of underlying asbestos claims. The main issue presented in the case is allocation – i.e., whether the underlying losses should be allocated on a pro-rata or “all sums” basis. The court chose “all sums.” (See “Other Top Developments” on the Nooter allocation ruling in the prior edition of the Complex Insurance Litigation Reporter.) The Nooter court also addressed a host of noteworthy issues pertaining to an insurer’s duty to defend or pay (indemnify) defense costs.
First, the court addressed language in excess policies which contain a “broad as primary provision.” See Nooter, at **37-39. The trial court in Nooter held that the “broad as primary” provision in an Allianz policy at issue required Allianz to assume a duty to defend upon the exhaustion of underlying coverage because the primary policy contained an affirmative duty to defend. The Allianz excess policy contained the following “broad as primary” provision:
IT IS UNDERSTOOD AND AGREED THAT, NONWITHSTANDING[SIC] ANYTHING CONTAINED HEREIN TO THE CONTRARY, WHERE UNDERLYING INSURANCE IS WRITTEN UNDER TERMS AND CONDITIONS PROVIDING GREATER PROTECTION OR INDEMNITY TO THE INSURED THAN THE TERMS AND CONDITIONS OF THIS POLICY, THEN THIS POLICY WILL INDEMNIFY THE INSURED UPON THE SAME TERMS, CONDITIONS AND LIMITATIONS AS THE APPLICABLE UNDERLYING INSURANCE. (Emphasis added.)
The Missouri Court of Appeals, enforcing the policy as written, reversed the trial court’s ruling and held that Allianz’s obligation is limited to indemnifying (i.e., reimbursing) Nooter for defense costs. In other words, Allianz did not have an affirmative duty to defend, notwithstanding the fact that it contained a “broad as primary” provision. The court focused on the precise language of the provision which stated that “THIS POLICY WILL INDEMNIFY THE INSURED UPON THE SAME TERMS, CONDITIONS AND LIMITATIONS AS THE APPLICABLE UNDERLYING INSURANCE.” The court held that the plain meaning of “indemnify” limited Allianz’s obligations to reimbursing or indemnifying Nooter for defense costs and did not mean that Allianz assumed the same duty to defend as the primary policy. (Similarly, the court ruled that a “broad as primary” endorsement which provides that the policy “shall pay on behalf of the insured upon the same terms, conditions and limitations of the applicable underlying insurance” does not create an affirmative obligation to defend.) See Nooter, at **39-41.
This ruling is particularly significant considering the difference between an affirmative “duty to defend” and an obligation to reimburse or indemnify defense costs. In the case of an affirmative duty to defend, the insurer is required to defend all claims, usually based purely on the allegations in the complaint, and it manages the litigation and pays for all defense costs and expenses under the policy. In the case of a duty to reimburse or indemnify, however, the excess insurer only reimburses defense costs and, under the language of many excess policies, its obligation may only extend to claims actually covered under the policy. In the reimbursement scenario, the insured also has more flexibility to control the defense (e.g., selection of defense counsel) and must front the defense costs.
Second, the Nooter court addressed whether an affirmative duty to defend was created by a standard “Defense, Settlement, Supplementary Payments” provision contained in an excess insurer’s policy. See Nooter, at **41-42. Excess policies issued by Appalachian and OneBeacon provided:
With respect to any occurrence not covered by the underlying policies . . . but covered by the terms and conditions of this Policy except for the amount of Retained Limited[SIC] specified in the declarations, the company shall:
(a) defend any suit against the insured . . .
Addressing the “any occurrence not covered by underlying” language, the Nooter court concluded that this referred to occurrences covered per the terms of the underlying policy, regardless of whether coverage was actually available or collectible for the claims in question. In other words, an excess policy which provides a duty to defend if the underlying policy does not cover the same “occurrence” only obligates the excess insurer “to defend . . . if the terms of the excess policies cover an occurrence and the terms of the underlying insurance does not.” Otherwise, the excess insurer only has the duty to indemnify or reimburse defense costs.
This particular ruling is noteworthy for the same reasons discussed above (i.e., the distinction between the duty to defend and the duty to reimburse or indemnify defense costs). It is also significant because other decisions have recently gone the other way on this issue. See, e.g., In re Viking Pump, Inc., 148 A.3d 633 (Del. 2016) (under New York law, the court rejected an excess insurer’s arguments and found that the reasonable expectation of the average insured would be that “covered under” concerns whether the underlying insurance is collectible.)
Third, the court addressed “consent to defense” language contained in certain policies. See Nooter, at **42-46. Certain policies issued by North Star contained “ultimate net loss” language that clearly excluded all “Costs,” which was defined to include “investigation, adjustment and legal expenses.” The policies, however, also provided that:
…if [North Star] approves [a] settlement or consents to the proceedings continuing, [then North Star] shall contribute to the Costs incurred by [Nooter].
Nooter successfully argued before the trial court that North Star had an obligation to pay defense costs because the policy language provided that North Star shall contribute to the costs incurred by the insured. On appeal, North Star argued that the trial court: (a) improperly imposed an obligation to defend on it even though it did not “consent” to such defense costs; and (b) erred in declaring that North Star may not unreasonably withhold its consent to incur defense costs. The Nooter court agreed with North Star, finding that the language in the policy clearly and unambiguously creates an option, not an obligation, for North Star to pay defense costs. Furthermore, the court held, the option to pay or not pay defense costs is not subject to a “reasonableness” requirement, and, therefore, North Star had no obligation to reimburse defense costs unless North Star expressly consented to do so.
Insurers have been raising this issue for some time and, more recently have been successful in advancing this argument. See, e.g., In re Viking Pump, Inc., 148 A.3d 633 (Del. 2016) (under New York law, excess policies required the insurer’s consent to defense costs); Mine Safety Appliances Co. v. AIU Insurance Co., 2014 Del. Super. LEXIS 49, at *12-15 (Del. Super. Ct. Jan. 21, 2014), aff’d in part, 2015 Del. Super. LEXIS 515 (Del. Super. Ct. Aug. 10, 2015) (“the alleged requirement of reasonable consent [does not rise] to the level of established ‘custom and usage’ in the insurance industry” under PA law); AstenJohnson, Inc. v. Columbia Cas. Co., 562 F.3d 213, 230 (3d Cir. 2009) (under PA law, there is no “prohibition against unreasonable refusals” in providing consent for defense costs).
Fourth, the Nooter court addressed other policy language to determine whether the payment of defense costs would erode the limits or be in addition to (i.e., outside) limits. See Nooter, at **46-50. The court looked closely at the different language in the policies at issue and concluded that payment of defense costs is outside (or in addition to) policy limits only where the excess policy specifically states that the amounts paid for defense are “in addition to the applicable limit of liability of the Policy.”
The lesson of Nooter is a familiar one: pay close attention to specific policy language, particularly with respect to defense obligations. In today’s litigation environment, defense costs will inevitably go up instead of down. Defense firms may be charging high rates and the insured may be controlling the defense depending upon the policy language. The treatment of defense costs under excess policies varies more widely than under primary policies. A careful analysis of whether, how and when a particular excess policy pays defense costs is imperative.
By: Gregory S. Capps
(Note: On November 28, 2017, certain of the insurer-defendants in Nooter filed a Notice of Appeal to the Supreme Court of Missouri on the allocation (i.e., “all sums”) ruling. We will continue to monitor the case and report on any significant developments.)