(Article from Insurance Law Alert, April 2018)
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The Fifth Circuit has certified two questions to the Mississippi Supreme Court relating to whether the voluntary payment doctrine precludes an insurer from recovering settlement payments made on behalf of an additional insured where the insurer disputed coverage as to the additional insured. Colony Ins. Co. v. First Specialty Ins. Co., 2018 WL 1804670 (5th Cir. Apr. 16, 2018).
An employee of Accu-Fab was killed in an explosion at Omega Protein Corporation’s facility. Accu-Fab was insured under a liability policy issued by Colony Insurance. Omega sought coverage as an additional insured under the Colony policy for the claims arising out of the accident. Colony defended under a reservation of rights and filed a declaratory judgment action seeking a ruling as to coverage under its policy. The underlying suit ultimately settled, with Colony agreeing to pay its $1 million policy limit. Thereafter, Colony demanded reimbursement of its $1 million from one of Omega’s liability insurers, First Specialty, on the basis that the Colony policy did not cover the underlying claims. When First Specialty refused to pay, Colony filed suit, asserting claims for equitable subrogation and implied indemnity.
A Mississippi district court granted First Specialty’s summary judgment motion, relying on Mississippi’s voluntary payment doctrine. The court reasoned that Colony acted as a “voluntary payor” by making payments it believed it was not obligated to make, and thus could not recover the settlement payments. On appeal, the Fifth Circuit noted that the Mississippi Supreme Court has not addressed whether the voluntary payment doctrine precludes recovery by an insurer that contests coverage but nonetheless contributes to a settlement on behalf of a purported insured. The Fifth Circuit certified to the Mississippi Supreme Court the following questions of law:
1. Does an insurer act under “compulsion” if it takes the legal position that an entity purporting to be its insured is not covered by its policy, but nonetheless pays a settlement demand in good faith to avoid potentially greater liability that could arise from a future coverage determination?
2. Does an insurer satisfy the “legal duty” standard if it makes a settlement payment on behalf of a purported insured whose defense it has assumed in good faith, but whose coverage under the policy has not been definitely resolved, even if the insurer maintains that the purported insured is not actually insured under the policy?
We will keep you posted on any developments in this matter.