In its recent decision in Century Indemnity Co. v. Liberty Mutual Ins. Co., 2011 U.S. Dist. LEXIS 100088 (D.R.I. Sept. 6, 2011), the United States District Court for the District of Rhode Island had occasion to consider whether an insurer’s settlement with its insured had the effect of barring an equitable contribution claim by a co-insurer.

Liberty Mutual and Century both insured Emhart, which was alleged to have contaminated a site in Rhode Island.  Emhart filed a coverage action against Liberty and Century, seeking a declaration of coverage with respect to any claims, administrative proceedings and lawsuits arising from the release of hazardous materials at the site.  Liberty Mutual opted to settle with Emhart, paying $250,000 for a full release of any coverage obligations under several policies it had issued to Emhart.  Century, on the other hand, took the matter to trial and ultimately prevailed on the issue of whether it had a duty to indemnify.  The jury, however, held that Century had a duty to defend Emhart with respect to the various underlying matters.  As a result, Century became obligated to reimburse Emhart for over $6 million in defense costs.

Century subsequently brought suit against Liberty on a theory of equitable contribution.  Liberty Mutual argued that it had no duty to defend Emhart and that even if it did, its settlement with Emhart satisfied its defense obligation such that Century did not have a valid claim for equitable contribution.  After an initial finding that Liberty Mutual did have a duty to defend, the court considered what it described as “two difficult and important issues regarding risk allocation among insurers, particularly in large-scale environmental claims like this one,” namely, the effect of Liberty Mutual’s settlement with Emhart and how defense costs should be allocated between the two insurers.

With respect to the first issue, Liberty Mutual argued that allowing an equitable contribution claim despite the settlement would frustrate the important public policy of favoring early settlements.  The court noted that courts and commentators to have considered the issue “roundly rejected Liberty Mutual’s proposed bright line rule that ‘one insurer’s settlement with the insured is [always] a bar to a separate action against that insurer by the other insurer or insurers for equitable contribution or indemnity.’” The court acknowledged, however, that there was no bright line rule to the contrary.  Rather, the prevailing sentiment, explained the court, was to uphold equity and prevent unjust enrichment.   Toward this end, the court found that Liberty Mutual’s settlement with Emhart did not advance any public policy goals pertaining to settlements since the terms of the settlement reflected a mutual understanding that no settlement would occur between Emhart and Century since Liberty Mutual’s settlement payment was so disproportionately small in comparison to the entirety of Emhart’s defense costs.  Thus, concluded the court, “[f]ar from being a litigation killer, Liberty Mutual’s settlement essentially ensured that this litigation would not die.”  Given this, and given the fact that Liberty Mutual had substantially larger policy limits at interest than Century, the court concluded that the equities favored allowing Century’s contribution claim.

The court next considered how Emhart’s defense costs should be allocated.  Liberty Mutual argued that defense costs should be divided equally between it and Century as a result of their policies’ respective other insurance clauses.  Century, on the other hand, argued in favor of a time on the risk allocation, which would result in Liberty Mutual being required to pay the majority of defense costs since Liberty Mutual insured Emhart for a period of eighty-six months whereas Century insured Emhart for only thirteen months. The court held that Liberty Mutual’s argument concerning other insurance clauses only applied to insurers covering the same risk, not to insurers that issued successive policies.  Relying on case law from other jurisdictions, the court concluded that the most equitable means of allocations would be a time on the risk allocation that it explained “serves to align insurers’ defense costs expectations with the proportion of risk that they assume based on the duration of their policy.”  As a result, the court held that in light of the number of years that Liberty Mutual insured Emhart, as comparison to the number of years that Century insured Emhart, Liberty was required to pay 86% of Emhart’s defense costs, or approximately $5.2 million of the defense costs, less the $250,000 it initially paid pursuant to its settlement agreement.