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January 2010

Trinity Universal Ins. Co. v. Employers Mut. Cas. Co. - Pro-Rata Co-Insurers have Right of Contribution for Cost of Defense

Texas Rule that Co-Insurers have No Rights of Contribution or Subrogation Against Non-Paying Insurers for Indemnity Payments Does Not apply to the Duty to Defend.

_ F.3d_, 2010 WL 6903 (5th Cir.[Tex.] January 4, 2010)

In a de novo review of the district court's granting of summary judgment, the Fifth Circuit upheld the district court's ruling that, under Texas law, Employer's Mutual Casualty Co. had a duty to defend Lacy Masonry, Inc. in a suit against it for its work on the design, construction and renovation of McKenna Memorial Hospital despite an exclusion, because the petition potentially alleged damage from work outside of the exclusion.  However, the Court of Appeals reversed the district court's ruling that the insurers who actually paid for the defense of the insured, Lacy Masonry, Inc., could not recover from Employers Mutual its share of the defense costs, and held that the appellants could recover Employers Mutual's one-fifth share of the defense costs under the theory of contribution.

Lacy Masonry, as well as other contractors, was sued for property damage resulting from construction work on McKenna Memorial Hospital, and Lacy Masonry tendered its defense to its insurers.  Lacy Masonry had five primary insurers, but one did not participate in the appeal.  All four insurance companies participating in the appeal provided CGL policies to Lacy Masonry, and all four insurance policies contained pro rata clauses.  Trinity Universal Ins. Co., Utica National Ins., and National American Ins. Co. all shared in the cost of Lacy Masonry's defense, but the fourth, Employer's Mutual, did not contribute to the defense. 

Employers Mutual argued that its policy exclusion ("designated work exclusion"), which excluded coverage for "any work or operations with respect to any exterior component, fixture or feature if an exterior insulation and finish system is used on any part of the structure" resulted in no potential coverage for a lawsuit alleging water infiltration, and thus it had no duty to defend.  It further contended that even if it did have a duty to defend, co-insurers could not recover amounts paid in the defense of the insured from other co-insurers under the Texas Supreme Court's ruling in Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W.3d 765 (Tex.2007). 

The Fifth Circuit first analyzed the designated work exclusion under the "eight corners" 1 rule to determine if Employer's Mutual had any duty to defend Lacy Masonry under the allegations in the plaintiff's petition.  It upheld the district court's determination that Employers Mutual did have a duty to defend Lacy Masonry.  It agreed with the district court that since the petition alleged "water infiltration caused by improperly installed masonry," the water infiltration could have been caused by defects in interior masonry, or from a source inside the building.  Liberally construing the petition and resolving all ambiguities in favor of coverage, the Fifth Circuit agreed that the designated work exclusion did not preclude coverage for Lacy Masonry's work, because the petition potentially alleged property damages stemming from Lacy Masonry's work on the non-exterior components of the building, which the Employers Mutual policy would cover.  Thus, it affirmed the district court's ruling that Employers Mutual had a duty to defend.

On an issue of first impression, the Fifth Circuit then looked at the district court's determination that, under the rule announced by the Texas Supreme Court in Mid-Continent Ins. Co., the insurers who did provide a defense to Lacy Masonry could not recover one-fifth of the defense costs from Employers Mutual.  In Mid-Continent, the Texas Supreme Court held that because the pro rata clauses in co-insurers' policies limited the insurer's liability to its share of the total indemnity paid on behalf of the insured, there was no common obligation upon which a right of contribution against another insurer could be based.  Further, because the insured no longer had any claim against the insurers once it was fully indemnified, and the insurer stood in the shoes of its insured, there could be no right of subrogation, either. 

The Fifth Circuit reversed the district court on the issue of contribution, holding that it had mischaracterized the holding in Mid-Continent.  The Fifth Circuit held that the Mid-Continent rule only applies to the question of whether there is a right of contribution or subrogation against a non-paying co-insurer for indemnity payments.  It looked at the language of the pro rata and "other insurance" clauses in the policies, which only address the insured's "loss," not its defense.  Thus, pro rata clauses only apply to the duty to indemnify.  This interpretation of the clause means that the policies are not "several and independent" regarding the duty to defend, they are only "several and independent" with respect to the duty to indemnify.  The Court of Appeals held that each co-insurer contractually agreed with the insured to pay only its pro rata share of a covered loss, not the whole loss, but each co-insurer contractually agreed to provide a complete defense to the insured.  The duty of each insurer to provide a complete defense creates a debt which is equally and concurrently due by all of its insurers.   When an insurer pays for the entire defense and there are other primary insurers who have a duty to defend, there is a common law right of contribution.  Thus, the insurers who paid for Lacy Masonry's defense could recover from Employer's Mutual its 1/5 share of the defense costs.  The Court of Appeals remanded the case to the district court to determine those costs.  Because this ruling disposed of the issue of sharing the cost of defense, the Fifth Circuit did not rule on recovery under the alleged subrogation theory.

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This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or certiorari may be granted by the United States Supreme Court.  These events would render the opinion unavailable for use as legal authority.


1The allegations within the "four-corners" of the petition filed against the insured are compared against the language within the "four corners" of the insurance policy to determine whether there is a duty to defend; facts outside of the petition are not relevant to the determination. See EMCASCO Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., 438 F.3d 519, 524 (5th Cir.2006)