Court of Appeals of New York.
GENERAL MOTORS ACCEPTANCE CORPORATION, et al., Respondents,
v.
NATIONWIDE INSURANCE COMPANY, Appellant.
March 31, 2005.
CIPARICK, J.
We are called upon to determine whether an allocation of defense costs between a primary and excess insurer is warranted. We conclude that where, as here, two coincidental primary policies exist–one excess to the other by reason of competing “other insurance” provisions–and where the excess carrier has voluntarily assumed and marshaled the insured’s defense, an allocation of defense costs based on primary policy limits is appropriate. Here the primary policy limits are identical, warranting a 50-50 split.
In 1994, John C. Sabin, not a party to this action, leased an SUV from plaintiff General Motors Acceptance Corporation (GMAC). The lease agreement required Sabin to obtain an automobile insurance policy and include GMAC as an additional insured under the policy. Sabin procured a suitable primary insurance policy through defendant Nationwide Insurance Company. This policy limited liability to $100,000 per person and $300,000 per occurrence. Nationwide’s policy made explicit that it would “defend at [its] expense, with attorneys of [its] choice, any suit against the insured.”
In order to cover its potential liability in the event the lessee failed to fulfill its obligation to obtain insurance, and to obtain excess coverage in the event of catastrophic injury, GMAC purchased two distinct policies from plaintiff Fireman’s Fund Insurance Company. Fireman’s issued both a primary “Business Auto Policy,” with liability limits comparable to Nationwide’s policy, and an “Excess Liability Policy,” or an “umbrella” policy, with a substantially greater limit of $9,000,000 per occurrence. The primary business auto policy stated that Fireman’s had “the right and duty to defend any suit asking for [ ] damages.” As to other insurance, the policy stated that the primary policy’s insurance coverage was “excess over any other collectible insurance, whether primary, excess, or contingent.” There was no similar limitation on Fireman’s duty to defend. Fireman’s true excess or umbrella policy, by contrast, specifically limited the duty to defend to instances where no primary policy or other insurance applied, stating that it would “assume charge of the settlement or defense of any claim or suit against the Insured seeking damages to which this policy applies and to which no Primary Insurance or Other Insurance applies …” (emphasis in original).
On April 5, 1995, Sabin drove his leased vehicle through an intersection, colliding with a dump truck and another passenger vehicle. Two individuals were seriously injured and a third died in the accident. The injured parties, and decedent’s estate, commenced three separate lawsuits against, among others, GMAC as owner of the offending vehicle. Jeanette Mammano, whose injuries left her in a permanent vegetative state, commenced the action that exposed GMAC to the greatest potential liability. Nationwide’s primary policy and both Fireman’s policies were in effect on the date of the accident. Prior to commencement of this action, Nationwide–reasonably expecting any award to exceed policy limits–tendered its entire policy to Mammano’s attorney in exchange for a general release. Counsel refused the tender and the case proceeded.
Nationwide originally undertook GMAC’s defense of the Mammano action. In a letter dated October 24, 1997, however, Nationwide wrote that it was tendering the defense to Fireman’s. “As our available liability limit is only $100,000 it represents only 1% of the total indemnification potential considering [Fireman’s] limits of nine million.” Nationwide further wrote that “[i]t only makes sense therefore that [Fireman’s] designate counsel that should continue with the defense of the matter, under your direction.” In a letter dated November 25, 1997, Fireman’s voluntarily agreed that it would “assume the defense of … GMAC, but it [would] do so while reserving its rights to pursue collection of all defense costs from Nationwide expended in Fireman’s Fund’s defense of these actions.” Thereafter Fireman’s retained counsel vigorously defended the action in an effort to reduce the enormous exposure of GMAC and Fireman’s.
In January 1999, the parties settled the Mammano action. The settlement agreement provided for a one-time payment of $4.5 million, of which Fireman’s paid $3.3 million and provided an annuity of $10,000 a month for life with guaranteed payments for ten years. The settlement nearly exhausted the $9.1 million limit provided under both Fireman’s policies. Nationwide contributed its entire $100,000 policy to the settlement. Prior to settling, Fireman’s amassed over $200,000 in legal fees defending the action.
Following settlement, Fireman’s sought to recover all its legal expenses from Nationwide. When Nationwide refused to contribute, Fireman’s and GMAC commenced the underlying action to recover the defense costs. Supreme Court granted plaintiffs Fireman’s and GMAC summary judgment and awarded them full reimbursement of defense costs, and the Appellate Division affirmed.. We granted defendant Nationwide leave to appeal and now reverse.
FN Supreme Court approved a total award to Fireman’s of $289,052.18, representing reasonable attorneys’ fees and costs, with statutory interest from January 1999.
A primary insurer “has the primary duty to defend on behalf of [its] insureds” (General Accident Fire & Life Assurance Corp., Ltd. v. Piazza, 4 N.Y.2d 659, 669 [1958]; see also Ostrager and Newman, Handbook on Insurance Coverage Disputes § 6.03[a] [12th Ed.] ). Moreover, a primary insurer has a duty to defend “without any entitlement to contribution from an excess insurer” (Fireman’s Ins. Co. of Washington v. Federal Ins. Co., 233 A.D.2d 193, 193 [1st Dept 1996] ). An excess carrier may, in its discretion, “protect its interest … by participating in the defense” (General Accident Fire & Life, 4 N.Y.2d at 669). Unlike a primary insurer, however, there is no obligation to do so.
We have liberally construed an insurer’s general duty to defend in order to ensure the adequate and timely investigation of a claim and defense of an insured, regardless of the insured’s ultimate likelihood of success on the merits. Consequently, an insurer’s duty to defend is broader than its duty to indemnify (see Fitzpatrick v. American Honda Motor Co., Inc., 78 N.Y.2d 61, 65-66 [1991] ).
Here, Fireman’s issued two distinct policies–a primary policy deemed excess by the competing “other insurance” provisions and a true excess, or “umbrella,” policy where the duty to defend and the duty to indemnify came into effect only after the limits of the underlying primary coverage were exhausted. Furthermore, Fireman’s accepted the defense of the action and conducted it in a most thorough manner suitable to protect its own interests and that of its insured. The circumstances of this case thus allowed both Nationwide and Fireman’s to defend the action on behalf of GMAC. Moreover, insofar as both Nationwide and Fireman’s shared this obligation, and each participated in the defense, they are both liable for the defense costs, here in equal shares as the policy limits of the coincidental primary auto liability policies are identical.
Both primary insurance policies contain specific language reaffirming their duties, as primary insurers, to defend the insured. While Fireman’s primary policy coverage is deemed “excess” by virtue of other collectible insurance, the limiting language is directed to its obligation to contribute to a settlement or judgment, not to its duty to defend. Moreover, when Nationwide tendered the defense, Fireman’s accepted and proceeded to defend the action in a manner that it deemed most appropriate–albeit reserving its rights to collect defense costs from Nationwide. In essence, Fireman’s, in accepting the defense here, embraced the specific language of its primary policy requiring it to “defend any suit asking for [ ] damages.” In assuming the defense, Fireman’s triggered its own duty to defend the action, a duty that overlapped with Nationwide’s same obligation.
Fireman’s reservation of rights put Nationwide on notice that Fireman’s acceptance did not relieve Nationwide of its policy obligations. At a minimum, Nationwide knew that it would be liable for a share of the defense costs. Consequently, insofar as the primary insurers’ respective policy limits were identical, an allocation in this case requires that the total defense costs be shared equally.
We are mindful of the fact that these policies were both coincidental primary policies. Primary insurance premiums are based, at least in part, on the insurers’ consideration that it may be liable to defend an action. In this sense, “primary” policy premiums are higher, relatively speaking, than “excess” premiums, because the primary insurer contemplates defending a potential lawsuit when it contracts with the insured. A primary insurer’s duty to defend is not diminished, however, nor is it entitled to defend an action less vigorously, simply because its policy limits are more easily exceeded in any given case. Relieving primary insurers of this duty to defend would provide a windfall to the carrier insofar as the costs of defense–litigation insurance– are contemplated by, and reflected in, the premiums charged for primary coverage. This is in contrast to a true excess, or “umbrella,” policy, where the duty to defend is not as readily triggered.
Both Fireman’s and Nationwide issued primary policies commensurate with their respective expectations and bargained-for rights and obligations. Therefore, requiring both Fireman’s and Nationwide, as coincidental primary insurers having the same policy limits, to contribute equally to defense costs is consistent with the requirement that insurance contracts be interpreted “according to the reasonable expectation and purpose of the ordinary businessman when making an ordinary business contract” (Atl. Cement Co., Inc. v Fidelity & Cas. Co. of New York, 91 A.D.2d 412, 418 [1st Dept 1983], affd 63 N.Y.2d 798 [1984] ). It is also consistent with our general reluctance to relieve a primary insurer of its duty to defend (see generally Fitzpatrick, 78 N.Y.2d 61). In this instance, it is apparent that both Fireman’s and Nationwide, by virtue of their status as primary insurers, and additionally through their course of conduct, could reasonably have expected to share the expense of the defense.
Thus, we reject Nationwide’s position, followed in only a minority of jurisdictions, that an equitable allocation between a primary and excess insurer must be realized and hold only that, under the circumstances of this case, both insurers should be required to share defense costs. Here, the policy limits of the coincidental policies lead to a 50-50 split (cf. Fed. Ins. Co. v. Atl. Natl. Ins. Co., 25 N.Y.2d 71 [1969] ).
Accordingly, the order of the Appellate Division should be reversed, with costs, and the case remitted to Supreme Court for further proceedings in accordance with this Opinion.
R.S. SMITH, J. (Concurring):
I agree with the result reached by the majority, and I agree in part with its reasoning. I think the majority is correct in rejecting a general doctrine of “equitable allocation” between primary and excess insurers. I also agree that, since Fireman’s chose to take over the defense in this case, it is liable under its policy for a fair portion of defense costs. Indeed, I think the facts here would support allocating to Fireman’s more than 50 percent of the burden, but allocations like this are not an exact science, and the majority’s 50-50 division is not unreasonable.
I differ with the majority, however, in its reliance on the existence of two “coincidental” defense policies. As the majority notes, the terms of Nationwide’s policy and Fireman’s “Business Auto Policy” render the latter “excess” with respect to the former. The relevant language in the Fireman’s Business Auto Policy–“The insurance provided by this policy is excess over any other collectible insurance, whether primary, excess, or contingent”–is on its face equally applicable to defense costs and damages. The majority seems to suggest that, as to defense costs, the Nationwide policy and the Fireman’s Business Auto Policy were both primary, but I see no valid reason for reaching that conclusion.
I believe the Fireman’s “true excess” policy, the “Excess Liability Policy”, provides a sounder basis for compelling Fireman’s to share defense costs. That policy provided nine million dollars in coverage–many times the amount provided by the other two policies. This large exposure obviously furnished the motivation for Fireman’s to assume, as it did, control of the defense of the case.
The Excess Liability Policy also gave Fireman’s the right to defend the case– at its own expense. The policy provided that Fireman’s “will have the right and opportunity, although not the obligation, to associate with the Primary Insurer in the defense and control of any claim or Suit….” The policy also provided that “[w]ith respect to any claim or Suit of which We [Fireman’s] assume charge of the settlement or defense, We will pay … All expenses We incur.”
Fireman’s did assume charge of the defense of the Mammano case, and thus it became obligated to pay the expenses it incurred. That did not release Nationwide from its own obligation under the primary policy. Nationwide’s policy excused it from defending claims only “[a]fter the limits of this coverage have been paid,” and I agree with the majority that that never occurred.
Thus, the terms of the Fireman’s Excess Liability Policy and the terms of the Nationwide policy both rendered the insurers liable for defense costs on the facts of this case. It is only these policy clauses that, in my view, make an allocation between the two insurers appropriate.
Order reversed, with costs, and case remitted to Supreme Court, New York County, for further proceedings in accordance with the opinion herein.
Chief Judge KAYE and Judges G.B. SMITH, GRAFFEO and READ concur. Judge R.S. SMITH concurs in result in a separate opinion in which Judge ROSENBLATT concurs.
