(Article from Insurance Law Alert, March 2024)
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Holding
Reversing an Ohio district court decision, the Sixth Circuit ruled that an insurer’s equitable contribution claim for reimbursement of pre-tender defense costs from non-defending insurers should not have been dismissed based on untimely notice alone. ACE American Ins. Co. v. Zurich Am. Ins. Co., 2024 U.S. App. LEXIS 5535 (6th Cir. Mar. 5, 2024).
Background
Safelite, a windshield repair company, was named as a defendant in a suit alleging Lanham Act violations. Safelite notified ACE, one of its general liability insurers, but did not notify Zurich or Discover, two other insurers that had issued general liability policies during the relevant time period. After paying for Safelite’s defense costs for more than a year, ACE inquired about other liability policies, and approximately two years after ACE began funding the defense, notified Zurich and Discover of the underlying suit and its intent to seek equitable contribution from them. Zurich and Discover agreed to equally share future defense costs with ACE, but refused to reimburse ACE for pre-tender defense costs (i.e., defense costs incurred prior to the date they received notice).
An Ohio trial court ruled in favor of Discover and Zurich, concluding that they had no duty to contribute to past defense costs based on untimely notice, regardless of prejudice. The Sixth Circuit vacated and remanded the matter for further proceedings.
Decision
Under Ohio law, a party seeking equitable contribution must show the existence of a shared obligation, payment by the plaintiff and a failure of the defendant to pay its proportional share. Since there was no dispute that ACE had paid prior defense costs, the central issue was whether Zurich and Discover had a shared obligation for those costs. Resolution of that issue turned on whether ACE’s untimely notice of the underlying suit, standing alone, relieved Zurich and Discover of their defense obligations. The Sixth Circuit held that it did not.
The Sixth Circuit explained that under Ohio law, occurrence-based liability policies require a showing of prejudice in order for untimely notice to preclude coverage, and that the district court erred in failing to conduct a prejudice analysis. The Sixth Circuit rejected Discover’s assertion that its policy did not require a showing of prejudice because its notice provision, which required notice within thirty days rather than a “reasonable” time, was more akin to a claims-made policy (for which prejudice is not required). The Sixth Circuit explained that regardless of the thirty-day provision, the policy was still an occurrence-based policy based on language limiting coverage to an “offense . . . committed . . . during the policy period.”
The Sixth Circuit remanded the matter to the district court for a fact-intensive prejudice inquiry in order to determine whether the insurers had a shared defense obligation. The Sixth Circuit also instructed the district court to consider whether a voluntary payments provision in Zurich and Discover’s policies eliminated any potential shared obligation.
Comments
While the Sixth Circuit ruled that ACE’s equitable contribution claim should not have been dismissed, it disagreed with ACE’s assertion that “special notice rules” applied here in light of Ohio’s endorsement of “all sums” allocation. ACE argued that under the “all sums” approach, ACE was the “targeted insurer” and acted appropriately by defending Safelite on its own and then later seeking contribution from other insurers. The court ruled that all sums allocation applies only in progressive injury cases, and was thus irrelevant to the present case, which involved “distinct and identifiable events that occurred at a known or knowable time.”