I.A. Construction Co. began operating as a subcontractor for James J. Anderson Construction Co. sometime before 1995. I.A. Construction was responsible for providing insurance and defending Anderson for any claims from work I.A. conducted.
I.A. obtained primary coverage from Liberty Mutual Fire Insurance Co. – the third-party defendant at issue in this case – with a limit of $2 million per occurrence. I.A. also purchased an excess policy with American National Fire Insurance Co. with a limit of $20 million per occurrence.
Under the American policy, I.A. was obligated to notify the excess insurer when a claim was likely to involve the American policy.
On June 6, 1995, I.A. employee Keith Voiro was injured on the job at the Anderson construction site. His case eventually settled for $4.8 million in November 1998. Anderson’s share of the settlement amounted to $4 million.
Liberty paid $2 million, but American refused to contribute to the settlement, asserting it had not been notified of the lawsuit nor permitted to participate in the defense of the case. American argued that Liberty knew that the settlement amount could exceed the $2 million policy on March 6, 1998, but didn’t notify American until Sept. 4, 1998.
Anderson’s primary and excess insurers paid the remaining $2 million of the settlement. U.S. Fire Insurance Co. subsequently filed suit against American to recover money under the theories of breach of contract and equitable subrogation.
American filed a joinder complaint, joining Liberty to the action. The court’s opinion is an answer to Liberty’s motion for summary judgment.
Primary, Excess Relationship
Sheppard first set forth some principles of Pennsylvania law dealing with the relationship between a primary and excess insurer, noting that very little case law addresses such a relationship.
The court said Pennsylvania courts allow an excess insurer to be treated as the insured’s subrogee through the doctrine of equitable subrogation. The doctrine is “a means of placing the ultimate burden of a debt upon the one who in good conscience ought to pay it, and is generally applicable when one pays out of his own funds a debt or obligation that is primarily payable from the funds of another.”
To establish a claim based on equitable subrogation, the purported subrogee, American in this case, must establish:
* “The claimant paid the creditor to protect its own interests.
* “The claimant did not act as a volunteer.
* “The claimant was not primarily liable for the debt.
* “The entire debt has been satisfied.
* “And allowing subrogation will not cause injustice to the rights of others.”
The court said when those conditions are met, the excess insurer basically steps in the place of the insured and the primary insurer owes the same duty to the excess insurer that it would owe to its insured.
The court then determined that even though American was Anderson’s equitable subrogee, Liberty did not necessarily have an obligation to advise Anderson to notify American of the claim.
To answer that question, Sheppard looked to a New Jersey case – American Centennial Insurance Co. v. Warner-Lambert Co., 681 A.2d 1241 ( .J. Super. Ct. Law Div. 1995) – for guidance. That court ruled that a “direct duty of good faith imposes on a primary insurer an obligation to notify an excess carrier, when known, if it reasonably appears that exposure may exceed the primary limit.”
Sheppard found American Centennial persuasive.
“While Pennsylvania courts have not endorsed the concept of direct primary/excess insurer duties expressly, they have shown concern regarding the skewed relationship between the primary and excess insurance carrier,” Sheppard wrote. “This imbalance is not rectified if the excess carrier is limited to claims based on equitable subrogation.”
The court, therefore, concluded that state law supports the theory that a primary insurer has the responsibility to notify an excess carrier when the excess policy might be implicated.
Noting that the 3rd Circuit Court of Appeals has rejected the theory that a primary insurer has a duty to notify an excess carrier, Sheppard said the federal court’s decision is “unconvincing” and not binding on the state court.
The court determined, therefore, that if Liberty knew the settlement might implicate the American policy, the primary insurer had a duty to inform the excess carrier.
Under an alternative theory, Sheppard also said that as Anderson’s subrogee, Liberty may have had a duty to notify American of the potential implication of the Voiro action.
“Because nearly all insurance policies have a notification provision, the primary insurer subrogation approach almost always will lead to the same result as imposing a direct duty,” Sheppard wrote.
Sheppard noted, however, that such a theory was not widely adopted. Regardless, under both the direct duty and primary subrogation theories, Liberty had a potential duty to notify American, he said.
The court said summary judgment was inappropriate, given that there are outstanding issues of material fact. Sheppard said no cases exist addressing what circumstances might trigger the duty of a primary insurer to inform an excess insurer of its potential involvement in a lawsuit.
Sheppard also determined that American’s joinder complaint was proper and ultimately denied Liberty’s motion for summary judgment.
