Why it matters

When a primary insurer improperly refused to provide coverage, an excess insurer should have stepped in, the Sixth U.S. Circuit Court recently ruled. In the unpublished opinion, the panel noted the excess insurer was contractually obligated to undertake the defense when the primary refused. Had it done so at that time, the excess insurer unquestionably would have been entitled to subrogation rights against the primary. However, after the underlying case was settled, the insured reached an agreement with the primary insurer including a release from further liability. The court noted that allowing the excess insurer to obtain any sort of set-off from the primary now would run counter to the well-established public policy favoring settlement of insurance disputes. The court recognized that the excess insurer likely did not anticipate the risk of funding the insured’s defense without the possibility of reimbursement – but neither did the insured.

Detailed Discussion

IMG Worldwide was a consultant to a failed real estate development project in Orlando, Florida. A group of investors filed a $300 million lawsuit against IMG and the other companies involved in the project, alleging the defendants engaged in fraud when they sold properties with the promise that the properties would be developed into high-end condominiums.

IMG sought coverage from both Great Divide, its primary commercial general liability insurer, and Westchester Fire Insurance Co., its excess insurer. Both carriers denied coverage, contending, among other defenses, that IMG’s conduct was intentional rather than accidental.

IMG eventually settled the underlying suit for $5 million, having incurred more than $8 million in defense costs. IMG continued to seek coverage from both insurers and reached a settlement with its primary, Great Divide, for $1.25 million. This represented the primary policy limits of $1 million plus an additional $250,000 for defense costs. As part of the settlement, IMG released the primary insurer from further liability. Westchester refused to settle and IMG filed suit.

After a trial, a jury found the claims in the underlying action were covered under the excess policy and that Westchester therefore was obligated to reimburse IMG for $3.9 million – the settlement amount in excess of the funds it received from Great Divide. The court retained the question of whether Westchester also was obligated to defend IMG and thus liable for defense costs. The trial court concluded there was no duty to defend under the circumstances and found in favor of Westchester.

Both parties appealed.

The Sixth Circuit first affirmed the jury’s verdict, finding “ample evidence” to support the jury’s finding that the underlying claims were covered under the terms of Westchester’s excess policy.

The panel then turned to the issue of whether Westchester breached its duty to defend IMG.

The policy provided that the insurer has a “duty to defend the insured against any ‘suit’ seeking damages for . . . ‘property damage’ when the ‘underlying insurance’ [Great Divide] does not provide coverage.” Finding two possible interpretations of the provision, the panel deemed it ambiguous and construed it against Westchester.

“Because the [underlying] suit was a ‘suit’ seeking damages for ‘property damage,’ and Great Divide did not undertake to deliver coverage, we find that Westchester had a duty to defend IMG after Great Divide wrongfully denied coverage,” the court ruled.

The panel also found a second, separate provision of the policy independently supported its conclusion that Westchester wrongfully denied coverage. The provision read: “If no other insurer defends, [Westchester] will undertake to do so, but [Westchester] will be entitled to the insured’s rights against all those other insurers.”

At the time the underlying suit was brought and IMG requested coverage from Westchester, “no other insurer” had defended IMG. “Westchester breached the policy when it refused to provide a defense despite IMG’s specific demand after the underlying insurance, Great Divide, refused to provide a defense.”

As for damages, IMG’s remaining defense costs – just under $8 million after the $250,000 from Great Divide was deducted, plus prejudgment interest – the court held Westchester was contractually obligated to pay and was not excused by IMG’s settlement with Great Divide.

“We recognize that Westchester did not anticipate the risk of funding IMG’s defense costs without the possibility of reimbursement from Great Divide.” However, the court reasoned that “neither did IMG. IMG negotiated and paid for CGL policies from Great Divide and Westchester to cover itself from liability in precisely this type of situation. Certainly, as the non-breaching party, IMG must not be left holding the bag.”

To read the decision in IMG Worldwide, Inc. v. Westchester Fire Insurance Co., click here.