FIFTH CIRCUIT ALLOCATES DEFENSE COSTS AMONG THREE PRIMARY INSURERS, ALLOWS EXCESS INSURER TO RECOVER ON CONTRACTUAL SUBROGATION CLAIM

Last Wednesday, The Fifth Circuit reversed a lower court’s ruling and found that an excess insurer could recover  from  three  primary  insurers  who  refused  to  defend.   In  Continental  Casualty  Co.  v.  North American Capacity Insurance Co.¸ 2012 WL 19641842 (5th Cir. (Tex.), May 30, 2012), Valero Refining Company contracted with Encompass Power Services to design and construct a co-generation facility at a refinery.  Power outages and a fire resulted in significant damages to the refinery and Valero sought recovery against Encompass who was covered by three primary policies and an excess policy.  Two of the primary insurers denied coverage; one ended its defense after paying its policy limits and then the excess insurer took over the defense until the case settled.  The excess insurer then sought recovery for defense costs from the underlying insurers.  The trial court held that because of a bankruptcy, assignment of claims, and the settlement, the excess insurer “stood in empty shoes” in trying to assert subrogation rights.

On appeal, the Fifth Circuit affirmed the lower court’s ruling that the two primary insurers, who denied coverage, had a duty to defend.  And, that the third insurer who refused to defend after paying its policy limit in a separate deal with Valero that did not end the litigation, still had a duty to defend.  The Fifth Circuit then examined the contractual subrogation clause in the excess insurer’s policy and determined that the excess insurer was entitled to pursue contractual subrogation against the primary insurers “who should have borne the costs that it paid.”  Lastly, the court found that even though the three primary insurers had vastly different policy limits, they should each bare the defense costs equally.  Accordingly, the Fifth Circuit affirmed the allocation of defense costs, and reversed the lower court’s decision concerning the excess insurer’s subrogation claim and remanded the case for further proceedings.