New Twists In California Contribution Claims Involving SIRs

An intermediate appellate court in California has issued a decision addressing inter-insurer contribution claims for indemnity payments in the context of self-insured retentions (SIRs) that has a couple of new twists worth noting. In Axis Surplus Ins. Co. v. Glencoe Ins. Ltd. (April 11, 2012), the Court of Appeal for the Fourth District affirmed the trial court’s ruling that Axis was entitled to contribution from Glencoe in the amount of 60% of what Axis paid to settle a construction defect claim against their mutual insured, despite the facts that the insured only made its settlement payment that satisfied the Glencoe SIR after Axis made its settlement payment, that Axis did not prove actual covered damages exceeding the total settlement amount, and that both insurers’ policies contained equal-shares allocation “other insurance” wording.

As to the issue of timing of satisfying the SIR, the Court of Appeal recognized as a general rule that a paying insurer usually is not entitled to contribution unless the nonpaying insurer had a duty to pay at the time of the payment. In this case, the Glencoe SIR was not satisfied until the insured paid $250,000 as part of the $1,000,000 settlement, which was after Axis cut its $750,000 check for the settlement. However, the Court of Appeal created a new exception to that general rule where three factors are present: (1) the insured has tendered to the nonpaying SIR insurer; (2) the nonpaying insurer’s defense duty is subject to the satisfaction of the SIR; (3) the SIR is then satisfied by the insured’s contribution to settlement after notice to the nonpaying insurer. In such a situation, the court found that the equitable purposes of contribution would be undermined if the timing of the SIR insurer’s obligation arising was a defense to contribution.

As to proof of covered damages exceeding the settlement amount, the Court of Appeal found that Glencoe (which neither defended nor paid anything in settlement) was a “nonparticipating insurer,” and so upon proof a potential for coverage, Axis was entitled to a presumption that the settled amounts were for covered amounts. Because Axis did not rebut this presumption, it could not challenge the settlement as exceeding covered liability.

Finally, as to the allocation awarded, the Court of Appeal decided that the equal-shares allocation method spelled out in both insurers’ policies was not controlling and that the trial court had discretion to fashion an equitable allocation. Notably, the trial court expressly had considered that wording and had balanced it against Glencoe’s greater time on the risk and other factors in making the 60/40 allocation decision. Whether these new twists in California contribution law are followed by other appellate courts will be worth watching.