The United States Court of Appeals for the Fifth Circuit recently affirmed a ruling barring an excess carrier from recovering under a contribution theory from a primary carrier. The Court of Appeals agreed with the district court that Mississippi’s voluntary payment doctrine barred recovery, in the absence of a mutual agreement between the carriers to litigate the contribution issue after resolution of the underlying claim. Liberty Mut. Fire Ins. Co. v. Fireman’s Fund Ins. Co., No. 06-60446 (5th Cir. May 30, 2007).

Factual and Procedural Background In the underlying liability case, the plaintifftenant was sexually assaulted and raped by an employee of the apartment complex owned by the insured. The primary carrier agreed to defend the state court lawsuit filed against the apartment complex owner, but also filed a declaratory judgment action in federal court seeking a declaration of no coverage under the apartment complex owner’s general liability policy. Thereafter, the plaintiff-tenant amended her action to include the apartment complex’s management company. The management company was an additional insured under the primary carrier’s general liability policy issued to the apartment complex owner, and had excess coverage under a policy issued by the excess carrier. The primary carrier agreed to defend the management company, but did not deny coverage and did not amend its declaratory judgment action to include the management company as a defendant-insured.

After an unsuccessful mediation in the underlying liability action — at which the primary carrier offered $ 200,000 of its $1 million limit due to the pending declaratory judgment action, and the plaintiff sought damages in excess of several million dollars — the excess carrier was notified and encouraged to engage in the settlement discussions. The excess carrier, in turn, encouraged the primary carrier to pay its policy limit and when it would not, the excess carrier took control of the ongoing negotiations. During the negotiations, and before finally settling the underlying claim, the excess carrier advised the primary carrier in several conversations and writings that any payment would be subject to a reservation of rights to resolve coverage and contribution issues with the primary carrier after the underlying case settled.

The primary carrier maintained its position and refused to offer its policy limit based on the asserted coverage defenses. In addition, the primary carrier never agreed to litigate the contribution issues with the excess carrier after the underlying claim settled. The underlying case then settled for $3 million, and the underlying defendants (and carriers) agreed to allocate 50 percent of the settlement to the management company. The primary carrier paid $200,000 of the $1.5 million, leaving the excess carrier to pay the remainder.

Next, having already intervened in the primary carrier’s declaratory judgment action, the excess carrier filed a motion for summary judgment, contending that the primary carrier’s policy afforded coverage and that it was entitled to contribution from the primary carrier. The primary carrier filed a cross-motion for summary judgment, contending that the excess carrier was barred from any such recovery under Mississippi’s voluntary payment doctrine. The district court agreed with the primary carrier that the voluntary payment doctrine barred the excess carrier from recovering against the primary carrier. The excess carrier appealed the district court’s decision to the Fifth Circuit Court of Appeals.

Holding

“The voluntary payment doctrine is a common law construct that has been consistently followed in Mississippi,” noted the Fifth Circuit, and provides that: “a voluntary payment cannot be recovered back and . . . is a payment made without compulsion, fraud, mistake of fact, or agreement to repay a demand which the payor does not owe, and which is not enforceable against him.”

The Fifth Circuit then noted an exception to the voluntary payment doctrine, when there is “a mutual agreement between two insurance companies to litigate their respective liabilities between themselves after settling an underlying lawsuit.”

On appeal, the excess carrier argued two points. First, that its payment was not a voluntary payment because it had a legal obligation to settle the underlying lawsuit on behalf of its mutual insured.

Second, that there was at least a genuine issue of material fact because it contended the primary carrier agreed to litigate the contribution issues after resolution of the underlying liability claims and, therefore, summary judgment was improper.

In support of its contention that it had an obligation to settle the underlying claim, the excess carrier argued that because the primary carrier refused to settle the underlying lawsuit, that it became, in effect, a co-primary insurer and, as such, had an obligation to defend or settle the lawsuit in the best interest of the insured.

The Fifth Circuit rejected this contention, noting that the excess carrier had “inappropriately attempted to agglomerate to itself as an excess/umbrella insurer the primary insurer’s duty to defend.”

The court also noted that, “[the primary carrier] never denied coverage as to [the management company] and had agreed at the outset to provide . . . a defense, thereby nullifying any interest that [the excess carrier] might have had in controlling the litigation.” In addition, the Fifth Circuit distinguished its previous ruling, reasoning that because there was not an endorsement to the applicable policies that effectively made either the primary or the excess carrier “the insured’s surety as to any judgments rendered against the insured,” there was not an obligation on the part of the excess carrier to make any payment to settle the underlying suit. Therefore, the Fifth Circuit held that the excess carrier was under no obligation to make any payment to settle the underlying case because it was an excess carrier and its only obligation was “to pay any amount, up to the limit of its policy, that exceeded the limits of any primary insurance policy.”

Second, the excess carrier argued that the exception to the voluntary payment doctrine applied because there was an agreement with the primary carrier that the two carriers would litigate the contribution issues after resolving the underlying claim. The excess carrier offered deposition testimony of its claim personnel concerning conversations with the primary carrier’s claim personnel, as well as various correspondence with the primary carrier, which it contended evidenced that the primary carrier agreed to litigate the contribution issue with the excess carrier after resolving the underlying claim.

The Fifth Circuit found no such mutual agreement. After reviewing the record, the Fifth Circuit found nothing more than a unilateral assertion or reservation on the part of the excess carrier to litigate the contribution issues after resolution of the underlying liability claims. The Fifth Circuit stated that the record before it demonstrated that “both parties acknowledged that [the primary carrier] would not raise its settlement contribution over $200,000 and [the excess carrier] could do whatever it wanted in response,” and that these facts were not enough to create a genuine issue that the primary carrier agreed to litigate the coverage and contribution issues later. Therefore, the Fifth Circuit ruled that the primary carrier did not agree to litigate these issues after resolving the underlying claim and the excess carrier was barred from any contribution from the primary carrier under the voluntary payment doctrine.

Implication

Excess carriers conducting business in Mississippi must be aware of the voluntary payment doctrine. Unless there is an obligation to defend or to make a payment to settle a claim, absent a specific agreement with the primary carrier to litigate the contribution issues after the underlying claim is resolved, any payment made by the excess carrier may not be recoverable from the primary carrier. A unilateral reservation of rights to later seek contribution from the primary carrier is not enough in Mississippi. On the other hand, primary carriers disagreeing with an excess carrier’s position concerning payment of a liability claim, should be aware that the voluntary payment doctrine may enable it to avoid contributing to the excess carrier, unless the primary carrier agrees to litigate a contribution issue with the excess carrier after resolution of the underlying claim.