DONALD C. NUGENT, District Judge.
This matter is before the Court on Defendant and Third-Party Plaintiff, Westchester Fire Insurance Company's Motion for Partial Summary Judgment (ECF #200), and the Motion of Great Divide Insurance Company For Summary Judgment (ECF # 202). Both motions have been fully briefed and are ready for disposition.
This case was originally brought to determine whether the Defendant, Westchester Fire Insurance Company ("Westchester"), an excess insurance carrier, was obligated to reimburse the Plaintiffs, IMG Worldwide, Inc. and IMG Academies, LLP (collectively "IMG") for a nearly $5,000,000.00 settlement payment they made, and $8,246,655.57 in defense costs they incurred, in connection with the lawsuit Gastaldi, et al v. Sunvest Communities USA, LLC, et al., Case No. 08-62076-CIV (S.D. Fla., Miami 2009)("the Gastaldi suit"). IMG's primary insurer, Great Divide Insurance Company ("Great Divide"), originally denied coverage. However, after the Gastaldi settlement was reached and all defense costs had been incurred, Great Divide entered into a settlement agreement with IMG. Through that settlement, Great Divide agreed to pay $1,250,000.00, exhausting the one million dollar "Each Occurrence" sub-limit set forth in the 2005/2006 policy for "property damage" caused by an "occurrence," and settling all liability for defense costs associated with the Gastaldi action. (ECF #146-2). In exchange, IMG released Great Divide from any further liability under any and all Great Divide policies for any matters relating to the Gastaldi matter, including indemnity and defense costs. (ECF #146-2). Westchester was not a party to this settlement agreement, and continued to deny coverage. This lawsuit followed, culminating in a jury trial on the question of coverage.
Following trial, the jury returned a verdict in favor of IMG, finding that Westchester was responsible for indemnification of the Gastaldi settlement in the amount of $3,900,000.00.
The 2007/2008 policy provides that Westchester
(ECF #33-3 at 9). Based on this language, this Court found that Westchester was not liable for defense costs.
Both sides appealed the judgment. In a mandate issued on September 5, 2014, the Court of Appeals affirmed the judgment as to the jury's finding of liability, reversed this Court's determination that Westchester did not owe a duty to pay the defense costs, and remanded the case for consideration of Westchester's third-party claim against Great Divide. In doing so, the Court of Appeals found the phrase "does not provide coverage" in the 2007/2008 policy could be read as either "provide for" coverage, or "undertakes to deliver" coverage, and was, therefore, ambiguous. (ECF #169). Based on this perceived ambiguity, the Court of Appeals read the contract in favor of the insured and against Westchester, who was the drafter of the language. The Court of Appeals determined that "does not provide coverage" should be read as "does not undertake to deliver" coverage. (ECF # 169). This definition of the phrase "does not provide coverage," however, ignored and/or discounted clarifying language contained in the "Other Insurance" section of the policy.
Under the more specific provisions of the "Other Insurance" section,
(ECF #33-3 at 19)(emphasis added). Despite this language, the Court of Appeals held that Westchester had a duty to provide defense coverage and held that the phrase "we will be entitled to the insured's rights against all those other insurers" did not create a limiting condition to Westchester's promise to cover defense costs.
The Court of Appeals held that the statement "we will be entitled to the insured's rights against all other insurers" did not create a condition precedent to Westchester's promise to provide defense costs, "if no other insurer defends." (ECF #169, pg. 14). However, the Court of Appeals did not even address the other limitation set forth in this section: "When this insurance is excess, we will have
Great Divide's duty to defend is evidenced by both the language of the settlement agreement between Great Divide and IMG,
While disavowing any obligation to pay for IMG's defense, Westchester did make a promise to provide coverage if no other insurer stepped in to defend
Further, the Court of Appeals recognized that "Westchester did not anticipate the risk of funding IMG's defense costs without the possibility of reimbursement from Great Divide." (ECF #169, pg. 15). Nonetheless, it found that Westchester had a contractual obligation to provide coverage and that this was enforceable even after IMG destroyed any subrogation rights Westchester may have had against Great Divide. This ruling effectively and significantly altered the level of risk both parties bargained for in their contract, and created an obligation enforceable against Westchester that even the Court of Appeals conceded was not contemplated or bargained for when the parties entered into the contract.
Finally, although the Court of Appeals indicated that we must look at Westchester's liability as of the date they denied coverage, and not following IMG's settlement with Great Divide, there can be no question that had Great Divide paid the full defense costs before there had been any coverage determination against Westchester, IMG could not have recovered defense costs against Westchester, regardless of whether they should have stepped up at the start. There is possibly an argument to be made that Westchester could be liable to IMG for any out of pocket costs it incurred due to Westchester's prior failure to step up and pay for the defense (i.e. the cost of lost interest on the money fronted by IMG for its own defense). However, once Great Divide paid its obligations, and/or IMG released it from its obligations, IMG no longer had any defense costs to recover. Therefore, even if Westchester was assessed a breach for failing to step up and front the costs, once those costs were recovered or released, there were no longer any damages attributable to that breach.
The Court of Appeals reasoned that although neither Westchester nor IMG bargained for this level of risk, IMG as the "non-breaching" party "must not be left holding the bag." (ECF #169, pg. 15). This Court respectfully disagrees with this characterization of IMG as a "nonbreaching" party and consequently a victim in this case. IMG, throughout these events, had every right and ability to protect its own interests and force both Great Divide and Westchester to trial. However, IMG, recognizing that it faced some risk at trial because this was not a clear coverage case, decided to hedge its bets and settle with its primary insurer so that it was guaranteed at least some recovery. Further, it accepted the $1,250,000.00 payment as full payment of any liabilities owed by Great Divide. As the entire amount of the defense cost was attributable to Great Divide under the terms of both insurance contracts, this should have extinguished IMG's right to recover defense costs under either policy, especially where Westchester's policy included a subrogation provision. See, e.g., Snider v. Nationwide, 2009-Ohio-1026; 2009 Ohio App. LEXIS 897 (Ohio Ct. App. 2009)(because insured settled claim with liable party, their insurance claim was extinguished, and, any insurance payment would have been set-off under subrogation and trust provisions); Triplett v. Rosen, Nos. 92AP-816, 92AP-817, 1992 Ohio App. LEXIS 6787, 1992 WL 394867 (Ohio Ct. App. Dec. 29, 1992)(when an insurer settles with a policyholder, even if it is for less than policy coverage, the policy is considered exhausted). Because Great Divide's policy included full coverage of all defense costs incurred in the Gastaldi action, IMG's settlement with Great Divide should have extinguished IMG's right to recover for those costs.
At the time IMG settled with Great Divide, it knew full well the potential value of its case and risks involved in taking it to trial. It made a reasoned business decision to take the policy coverage limits of $1,000,000.00 and to accept $250,000.00 in defense costs knowing it may never recover anything more. At that time, both IMG and Great Divide knew that if coverage was determined, Great Divide could be on the hook for the full $8,246,655.57 in defense costs, and IMG accepted the risk that it may not recover the remaining defense costs. IMG bargained for the $7,996,655.57 loss of defense costs in exchange for a guaranteed $1,250,000.00 in its pocket. In doing so, it released Great Divide from any further obligation regardless of the outcome of the trial against Westchester. IMG was not acting as a victim, it was acting as any other rational business acts when entering into a settlement agreement; it hedged its bets guaranteeing some recovery when faced with a risk of no recovery. Both IMG and Great Divide understood the risk they took in making the settlement, understood their potential obligations, potential risks, and potential for recovery.
The Court of Appeals argues that holding IMG to its settlement terms with Great Divide would somehow constitute a risk to the well-accepted policy favoring settlement of insurance disputes. However, the policy of favoring settlements cannot be denigrated by simply asking the parties to accept the consequences of their agreements. As set forth above, IMG knew the risk it would take if it pursued Great Divide to trial and lost, and, as with any other settlement between businesses, weighed that against what it was guaranteed to gain through the settlement. It is not as if IMG did not know or should not have known at the time the settlement was reached that Great Divide would have been liable for the full $8,246,655.57 in defense costs if coverage had been established.
In the end, while it is true that IMG and Great Divide should not be penalized for settling, it is also true that Westchester should not be penalized for pursuing its right to challenge coverage in good faith. A policy promoting settlement cannot be confused with supporting the practice of forcing settlement on unwilling parties, which could be the result if excess carriers will forever be at risk of bearing defense costs otherwise attributable to a settling primary insurer. See, Fulli v. Fan, 79 Ohio St.3d 374, 376, 683 N.E.2d 337, 338 (Ohio 1997)("Where possible, it is generally within the discretion of the trial judge to promote and encourage settlements to prevent litigation. A trial judge cannot, however, force parties into settlement.").
Further, even if it were true that Westchester owed a duty to defend that was not conditioned on maintenance of its subrogation rights to recover from the primary insurer, IMG still had a contractual obligation under its contract with Westchester to preserve those subrogation rights. "In Ohio, the right of subrogation is recognized by statute and by the courts. It does not depend upon whether the insurer will be successful in exercising the right." (Ferrando, 98 Ohio St. 3d at 212, Justice Stratton dissenting (citing Bogan v. Progressive Cas. Ins Co., 36 Ohio St.3d 22, 521 N.E.2d 447 (Ohio 1988)(overruled, in part, on other grounds by Ferrando). An insurer's right of subrogation is "a full and present right in and of itself wholly independent of whether a later judgment obtained by use of such right will be reduced to collection." Bogan, 36 Ohio St.3d at 31(overruled, in part, on other grounds by Ferrando). By the time Westchester's liability for a breach of contract was legally established, IMG had also breached its obligations under the policy language and a set-off should have been allowed as a possible cure to IMG's breach. Westchester filed a Motion for Declaratory Judgment with Respect to Reimbursement from Great Divide or in the Alternative a Set-off Based on the Settlement Agreement Between Great Divide and IMG (ECF #136), which this Court denied as moot because it had found no contractual obligation to pay the defense costs. Despite this Court's failure to rule on the issue, and despite the remand order encouraging this Court to review possible equitable claims Westchester might have against Great Divide, the Court of Appeals summarily ruled on the set-off issue in favor of IMG. Noting Westchester's argument, without disputing it, that the defense costs should have been set-off entirely "since Great Divide was contractually obligated to pay for the full amount of IMG's defense costs, and IMG released them from that obligation," the Court of Appeals simply stated "there is no legal basis to obtain a set-off under these circumstances, and we find that applying a credit or set-off would not be appropriate under the circumstances of this case." (ECF #169).
This is a conclusion that this Court disputes. Federal courts in Ohio, and other state courts have found that an insured may not shift the risk of settling for a reduced amount with the primary carrier to either the settling party or to the excess carrier. See, One Beacon America Ins. Co. v. American Motorist Ins. Co., 679 F.3d 456 (6
To be clear, had the Court of Appeals refrained from ruling on the issue of setoff/settlement credits, an issue this Court had not previously determined, this Court would have found under the specific facts of this case, and for the reasons otherwise discussed in this opinion, that Westchester was entitled to a settlement credit or a set-off of its obligation to front defense costs in the full amount of those costs. These reasons include but are not limited to: (1) the fact that there is no dispute Great Divide was primarily responsible for the full amount of defense costs; (2) IMG and Great Divide were the only parties to the settlement agreement and therefore bore the full risk of any potential loss associated with the settlement agreement; (3) the settlement with Great Divide extinguished all claims covered by the primary insurance contract, which, in this case, included the full amount of defense costs; (4) Ohio law states that an insurer is not liable to provide coverage if its subrogation rights in connection with that coverage have been destroyed by the insured through settlement with a third-party or otherwise; (5) even if Westchester breached its duty to front the defense costs, by the time this case went to trial there were no damages left to be recovered for that breach because the defense costs had been satisfied by the settlement agreement with Great Divide; (6) Westchester never bargained for potential liability of bearing all of the defense costs; (7) IMG breached its obligation under its contract with Westchester to preserve Westchester's subrogation rights to recover any defense costs it had to pay; and, (7) IMG misrepresented to Great Divide in its settlement agreement that it had not assigned or "purported to assign" to any other entity the right to collect on the liabilities released in that agreement, despite having agreed that Westchester had a subrogation right to collect from Great Divide in the event it had to pay any defense costs covered by the Great Divide policy, and despite repeatedly arguing to this Court that Westchester maintained its right of subrogation even following the settlement.
Nonetheless, the Sixth Circuit remanded the case back to this Court for a revised judgment assessing all defense costs against Westchester, which this Court dutifully if somewhat reluctantly issued. In doing so it precluded any consideration of set-off or settlement credits and noted that Westchester should be allowed to pursue reimbursement from Great Divide under various equitable claims including equitable contribution and subrogation.
In Westchester's Third-Party action against Great Divide, Westchester seeks reimbursement from Great Divide for the $7,996,655.57, as well as the pre-judgment and postjudgment interest it has been ordered to pay IMG for defense costs associated with the Gastaldi action. Westchester seeks such reimbursement under the alternate theories of contribution, indemnity, equitable subrogation, and unjust enrichment, or as otherwise allowed under the principles of equity.
Great Divide's leading argument against Westchester's request for equitable relief is that "Ohio law favors the resolution of litigation by compromise and settlement." This may, in fact, be true. However, the settlement between IMG and Great Divide can be upheld, as between IMG and Great Divide only, and only absent evidence of collusion or bad faith to the detriment of the non-settling party. Krischbaum v. Dillon, 58 Ohio St.3d 58, 69-70, 567 N.E.2d 1291, 1302 (1991). That settlement agreement between IMG and Great Divide should not be allowed to eviscerate Westchester's contractual right of subrogation, absent their participation and agreement.
Further, there is some evidence that the settlement agreement may have been entered into in bad faith, at least on the part of IMG, to the detriment of Westchester, the non-settling party. Both Great Divide and IMG knew or should have known that Westchester was the excess carrier in this case, and at least IMG knew that it had contracted with Westchester to preserve Westchester's right of subrogation against Great Divide in the event Westchester was required to pay any defense costs. Nonetheless, IMG represented to Great Divide in the settlement agreement that IMG "owns the rights released herein and [IMG] has not assigned or transferred or purported to assign or transfer any of such rights to any other person or entity."
Equitable contribution is inapplicable under the facts of this case. Westchester was not primarily or even jointly liable for the defense costs under the provisions of its contract with IMG. The contract between Westchester and IMG provided that Westchester had "no duty" to provide a defense when a primary carrier bore that duty. There is no dispute that Great Divide, did in fact, bear that duty in this case. The contract did state that Westchester would cover the costs of defense if the primary refused to do so, but it maintained that the ultimate responsibility for all defense costs which the primary insurer had a duty to provide remained with the primary carrier. Consequently, if Westchester fronted those costs, under the terms of its contract with IMG, it was entitled to subrogation of IMG's rights to collect those costs from the primary carrier.
In this case, Great Divide, the primary insurer, was responsible for all defense costs incurred before its policy limits were exhausted; and, all defense costs were incurred prior to the exhaustion of the primary policy. Therefore, Great Divide was fully responsible for all defense costs incurred in the Gastaldi action. Under the facts of this case Westchester had no duty to absorb the cost of any of IMG's defense, even if it did promise to front those costs until it could recover them through its subrogation rights. Westchester was not jointly liable, but rather, at most, bore a secondary liability for the costs. Therefore, theirs is not a claim for contribution, but for indemnity, subrogation, or some other form of equitable relief. Further, the cases cited by the parties in connection with this issue, OneBeacon, Bondex and GenCorp, did rule against contribution claims by excess insurers against primary insurers who settled with the insured, and in the case of OneBeacon, the court did so even when no set-off or settlement credit had been allowed against the insured.
Unjust enrichment is also not an applicable theory for recover in this instance. Westchester did not confer any benefit upon Great Divide that would support an unjust enrichment claim. Rather, IMG received the benefit both of the reduced risk and payoff obtained through the settlement agreement, and of the payment of defense costs by Westchester. Therefore, equitable contribution and unjust enrichment do not seem to be appropriate paths of relief under the circumstances of this case.
The doctrine of equitable subrogation is largely concerned with "the prevention of frauds and relief against mistakes." State v. Jones, 61 Ohio St.2d 99, 102, 399 N.E.2d 1215 (Ohio 1980). It creates a subrogation right without any formal assignment of such rights in order to prevent a double recovery by the insured. Williams v. Erie Ins. Group, 86 Ohio App.3d 660, 772 (Ohio Ct. App. 1993). It does not appear to be the proper mechanism for enforcing a contractual subrogation right that has been eliminated or compromised by the actions of the party who held the original right to recover. Ohio courts have generally held that neither contractual subrogation rights, nor equitable subrogation rights survive when an insured has released the subrogated rights through a settlement agreement. See, e.g., Warmack v. State Auto Insurance Co. v. Arnold, 195 Ohio App.3d 760, 765 (Ohio Ct. App. 2011).
The concept of indemnity is understood as the right of a person who has been compelled to pay what another should pay, to obtain complete reimbursement. Elkins v. Access-Able, Inc., 2004-Ohio-4101, 2004 Ohio App. LEXIS 3745, *22 (Ohio Ct. App. 2004)(citing Travelers Indemn. Co. v. Trowbridge, 41 Ohio St.2d 11, 321 N.E.2d 787 (Ohio 1975). It is essentially grounded in the equitable concept of restitution. Anderson v. Olmsted Utility Equip. Co., Inc., 60 Ohio St.3d 124, 131, 573 N.E.2d 626 (Ohio 1991). The right of an excess insurer to obtain complete reimbursement from a primary insurer may arise under a theory of equitable indemnity when an excess insurer has been compelled to pay what a primary insurer should have paid. Indemnity has been held to be appropriate when a plaintiff who has been held liable "by inference of law" seeks recovery from a defendant who was directly or primarily liable in fact. See, The Globe Indemnity Co., v. Schmitt, 142 Ohio St. 595, 602, 53 N.E.2d 790, 793 (Ohio 1944).
Great Divide cites OneBeacon, Bondex, and GenCorp as proof that no Ohio or Federal court applying Ohio law has allowed equitable recovery against a settling primary insurer by an excess carrier. This overstates the holdings in these cases and ignores the factual distinctions between those cases and the instant action. OneBeacon, Bondex and GenCorp, did rule against excess insurers seeking contribution from primary insurers who settled with the insured. Contribution cases involving two insurers with joint or overlapping coverage are, however, treated differently than cases where an insurer with secondary/indirect liability is being held fully liable for the losses attributable to an insurer or other actor with primary/direct liability. None of the cases cited by Great Divide addressed the possibility of equitable indemnification under these circumstances, nor did they contemplate the equities involved when an excess insurer had been order to pay for defense costs fully attributable to the primary carrier.
In addition, all of these cases actually held that an excess carrier should be placed in the same position it would have been absent any settlement between the insured and the primary carrier. In this case that can only be achieved if Westchester is reimbursed by someone for the defense costs it was assessed. Although the cited cases balanced the equities by assigning the risk of settlement to the insured, via settlement credits or set-offs benefitting the excess carrier, while allowing the primary insurer to maintain the benefits of their settlement agreement, this option has been inexplicably eliminated by the Court of Appeals in this case. Therefore, the only way that Westchester can be placed in the same position it would have been in absent the settlement is if Great Divide is required to reimburse Westchester for the defense costs. Therefore, this Court finds that under the specific circumstances of this case, Westchester is entitled to recover from Great Divide under a theory of equitable indemnity. When considering all of the equities, this is now the most equitable outcome achievable in this case. This Court acknowledges that this result assesses liability against Great Divide for costs it had been absolved from paying in its settlement agreement with IMG, which, in and of itself, may be inequitable. However, it would be even less equitable to allow this burden to be shifted to Westchester by means of an agreement to which Westchester was not a party.
Within its settlement with Great Divide, IMG released rights previously assigned to Westchester without Westchester's knowledge or permission, while representing to Great Divide that no other party had an interest in the released right of action. In addition, IMG has repeatedly argued to this Court and the Court of Appeals, that Westchester maintains the ability to bring an action against Great Divide, despite the fact that IMG absolved Great Divide of any responsibility for this payment.
Pursuant to the Court of Appeals decision, however, IMG cannot be held directly accountable for its acceptance of the settlement agreement, or its breach of the subrogation clause in its contract with Westchester. As between Great Divide and Westchester, which are the only two entities this Court is now allowed to consider, Great Divide had the ultimate duty to pay the defense costs, and Westchester did not. Further, Great Divide accepted IMG's representations regarding the absence of other interests in the released rights. Great Divide could easily have determined that Westchester was an excess carrier, and that it held subrogation rights in the event it was held liable for defense costs. It also could have asked IMG to indemnify it in case of any future contribution or indemnification action by another insurer. Further, to the extent that Great Divide relied on IMG's representations on this issue, and those representations are shown to be false,
For all of the reasons set forth above, this Court finds that Great Divide is liable under the principles of equity to reimburse Westchester for the defense costs it was ordered to pay to IMG in connection with the Gastaldi action. Therefore, Great Divide's Motion for Summary Judgment (ECF #202) is DENIED, and Westchester's Motion for Partial Summary Judgment (ECF #200) is GRANTED. Status remains set for September 1, 2015 at 9:00 a.m.
IT IS SO ORDERED.