In OneBeacon America Insurance Company v. American Motorists Insurance Company, No. 10-4530 (6th Cir. 5/17/2012), the U.S. Court of Appeals for the Sixth Circuit put an end to OneBeacon’s attempts to shirk responsibility for a jury verdict of $42 million in compensatory damages, prejudgment interest of $19.6 million, $12 million in attorney fees, and $3.2 million in past interest on the attorney fees.  Although essentially an insurer-versus-insurer dispute, the case reflects a lengthy, tortuous path for parties who enter into early settlement.  Ultimately, the Court’s holding is a victory for policyholders and insurers who act reasonably in settling disputes.

In 1999, Goodrich filed a complaint against several insurers, including OneBeacon, in the Summit County, Ohio, Court of Common Pleas, contending that the insurers were contractually obligated to indemnify Goodrich against claims by the federal government for soil and groundwater contamination at Goodrich’s Calvert City, Kentucky, plant.  Prior to the litigation, in 1995, Goodrich settled with American Motorists Insurance Company (“AMICO”), a primary insurer with which it had a $55 million policy. OneBeacon, an excess carrier that did not settle with Goodrich, had a policy that attached once AMICO’s liability exceeded $20 million.

A jury verdict was returned against OneBeacon and its co-defendant, Certain London Market Insurance Companies (“Lloyd’s”).  OneBeacon received a “set-off” of $20 million to reflect its position as an excess insurer. Following the jury verdict, OneBeacon sought settlement credits to reflect the coverage amounts that Goodrich had already received from the settling insurers.  The trial court decided, however, that the universe of claims that AMICO and other insurers settled via their agreements with Goodrich was not coextensive with the claims for which OneBeacon was found liable. The trial court noted that if OneBeacon “thinks it is entitled to contribution from other insurers, let it proceed against them.”

OneBeacon did just that. OneBeacon sought declaratory relief for equitable contribution from AMICO in the Summit County Court of Common Pleas. AMICO then removed the case to federal court on diversity grounds.  Ultimately, the district court held that the instant action was “a second bite at the apple” for OneBeacon and adopted the state trial court’s logic that the jury award and AMICO’s coverage were not “one in the same.”  The district court determined that Ohio law was not clear as to whether a non-settling insurer could seek contribution from a settling insurer, but that OneBeacon failed to uphold its burden of persuasion.  The district court granted AMICO’s motion for summary judgment.

On appeal, the Court of Appeals held that settlement can exhaust a settling insurer’s policy, and that such exhaustion precludes a non-settling insurer from seeking equitable contribution from the settling insurers.  Such a position best comports with the Ohio Supreme Court’s proposition that:

[t]he law favors prevention of litigation by compromise and settlement. Given the explosion of litigation so characteristic of the modern era, it is essential that the settlement of litigation be facilitated, not impeded.  So long as there is no evidence of collusion, in bad faith, to the detriment of other, non-settling parties, the settlement of litigation will be encouraged and upheld.

The Court found that “a decision allowing OneBeacon to pursue equitable contribution from AMICO would not only fail to encourage settlements, it would actively discourage such settlements.  An insurer would have no incentive to settle with a policyholder if it knew that it would be liable to another insurer down the road. And an insurer considering going to trial would be economically rational in doing so if the expected value of prevailing at all exceeds the expected cost of defending the lawsuit.”