On a question certified by the Fifth Circuit Court of Appeals, the Texas Supreme Court recently ruled that "[t]here is no direct duty of reimbursement between co-primary insurers." Mid-Continent Insurance Company v. Liberty Mutual Insurance Company, No 05-0261 (Oct. 12, 2007).
The underlying case arose from a 1996 auto accident that occurred in a construction zone of a state highway project. Defendant Kinsel Industries served as the general contractor on the project. Defendant Crabtree Barricades was Kinsel's subcontractor. Crabtree was insured under a policy issued by Mid-Continent. Kinsel was insured by Liberty Mutual and was also named as an additional insured under the Mid-Continent policy. The Mid-Continent and the Liberty Mutual policies contained identical "other insurance" clauses providing for pro rata responsibility for payment of a claim if a loss was covered by other primary insurance.
Liberty Mutual agreed to settle on behalf of Kinsel for $1.5 million. It demanded that Mid-Continent contribute half of the settlement amount. Mid-Continent agreed to provide only $150,000. Liberty Mutual then sued Mid-Continent to recover the remaining equal share of the settlement amount. The U.S. District Court for the Northern District of Texas ruled that Liberty Mutual was entitled to half of the settlement amount as Mid-Continent had been "objectively unreasonable" in assessing Kinsel's share of liability. The Fifth Circuit Court of Appeals certified the issue to the Texas Supreme Court.
The Texas Supreme Court ruled that Mid-Continent owed no duty to pay the remaining settlement share. The court reasoned that where the insurance policies contain pro rata "other insurance" clauses, a co-insurer that pays the full amount of a settlement does not have a right to seek contribution from its co-primary insurers. The overpaying insurer was liable only for its pro rata share, and a co-insurer that pays more than its pro rata share does so "voluntarily." The court further reasoned that there is no duty among co-insurers to act reasonably under their respective insurance policies.