Fifth Circuit allows excess underwriters to recover their defense costs from primary when primary improperly denied defense

In Continental v. North American et al, defendant Encompass had three different primary insurers: Continental, a GL carrier; Columbia, a professional liability carrier, and North American, where Encompass was an additional insured by virtue of an indemnity agreement with its subcontractor.  Encompass was also insured by National Union under an umbrella policy.

All three primary insurers denied Encompass indemnity and two denied a defense upon an occurrence.  National Union dropped down and provided the insured a defense.  It then sought to recoup its defense costs from the primary insurers.  The district court denied National Union its entitlement to recoup defense costs, finding it voluntarily undertook payment and could therefore not recover under an arguably-applicable earlier Fifth Circuit case.  That prior case, Mid-Continent, involved two insurers who valued a case differently.  One paid $150,000 and the other paid $1.35 million in settlement.  The higher-paying insurer sought contribution from the other, but the Fifth Circuit held it could not recover because it had the choice not to settle.

In this case, the Fifth Circuit reversed, finding Mid-Continent inapplicable.  It ruled (a) the primary insurers owed Encompass defense and (b) National Union could recover when it had paid and primary underwriters had not.  It concluded:

The three primary carriers here refused to defend their insured, Encompass, in the midst of the arbitration, with two of the carriers denying any obligation to indemnify.  With the insured left  unprotected,  National  Union  stepped  in  to  take  over  the  defense  and incurred  significant  defense  costs ($3,000,000).  National Union thus  bore the  costs  of  a defense to which Encompass was entitled from third parties. National Union’s policy with Encompass contains a subrogation clause that states: “If any Insured has rights to recover all or part of any payment we have made under this policy, those rights are transferred to us.  The Insured must do nothing after loss to impair these rights and must help us enforce them.”  Under the terms of the subrogation  clause,  National  Union  is  entitled  to  reimbursement  from  the insurers who should have borne the costs that it paid.

The real shock from the case may be that Continental incurred $2.7 million in defense costs and National Union incurred $3,000,000.