Opinion ID: 174629
Heading Depth: 2
Heading Rank: 3

Heading: Subrogation/Priority as to National Union

Text: Although our resolution of this issue turns on policy language and Missouri's recognition that a subrogee's rights are limited to those rights held by the subrogor, we are compelled to discuss the basic industry practices as set forth, in part, in the ample authority presented by Travelers. The industry practice, in short, is that excess carriers are the last insurers obligated to pay claims and the first insurers entitled to recover in subrogation. See, e.g., Century Indemn. Co., 12 Cal. App.4th at 1709-10, 16 Cal.Rptr.2d 393; Vesta Ins. Co., 986 F.2d at 988 (`Where the insurers' coverage is in the nature of layers, the excess carrier should recover under subrogation before primary insurers can be reimbursed.') (quoting 16 Lee R. Russ, Couch on Insurance § 61.48 at 133 (2d ed.1983)); Fluor Austl. Pty. Ltd., 234 Fed.Appx. at 580; Westchester Fire Ins. v. Heddington Ins. Ltd., 883 F.Supp. 158, 167 (S.D.Tex.1995), aff'd, 84 F.3d 432 (5th Cir. 1996) (Money recouped by insurers after paying a claim is first applied to the highest layer of coverage ....); id. at 162, 164 n. 11 (Where there is apparent conflict between ... policies, courts should resolve disputes among the carriers by looking to the overall pattern of insurance coverage and by considering the contracted-for risks.). Insurers know and understand this apportionment of risk among fellow insurers, and they price their insurance accordingly, as was done in this case. In cases where insurers who have contracted to provide primary coverage seek to avoid primary liability either by refusing to pay or asserting priority over excess carrier's subrogation interests, courts have rejected such attempts and have cited the need to ensure that insurers are held to bear the actual risks they contracted to accept. See Horace Mann Ins. Co. v. Gen. Star Nat'l Ins. Co., 514 F.3d 327, 337 (4th Cir.2008) (holding that, as between a true excess policy and primary policy, the critical inquiry was premised on the nature of the policies at issue, not on the language of the other-insurance clauses); Fluor Austl., 234 Fed.Appx. at 580 (subrogation proceeds should be allocated to insurers in the order opposite to that in which they contributed... in accordance with the levels of risk exposure for which the various insurers bargained ) (emphasis added); Smith v. Wausau Underwriters Ins. Co., 977 S.W.2d 291, 294 (Mo.Ct.App.1998) (A primary insurer cannot use an `other insurance clause' to require an umbrella carrier to share in its liability.). As in most matters, of course, clear contract language could override any concepts such as industry standards, but no such language exists in this case. As such, we cannot read these commercial insurance contracts in a vacuum; where terms have meanings generally understood within an industry, we will not give these terms different meanings unless the parties have unambiguously and expressly done so in their contract language. Sonoma Mgmt. Co. v. Boessen, 70 S.W.3d 475, 481 (Mo.Ct.App.2002) (Where a contract term is susceptible to multiple definitions, it should be interpreted in the context of the subject matter of the contract ... and given its plain meaning.) (internal quotation and citation omitted). Against this backdrop, we conclude that the Travelers policy unambiguously grants sole priority in insured proceeds to Travelers and that National Union is bound to the Travelers policy as a subrogee of KCPL who holds only the rights of, and is subject to the contractual restrictions upon, KCPL. We also conclude that the National Union policy itself is consistent with this conclusion because, at best, it is ambiguous regarding the priority of recovery between primary and excess insurers. To explain these conclusions, we turn first to the language of the two policies.
National Union asserts what it describes as a plain-language interpretation of the insurance policies at issue in this case, concluding that it, rather than Travelers, possesses a priority subrogation interest. Travelers, similarly, asserts a plain language argument but reaches the opposite conclusion. In addition to their respective interpretations of the policies, the parties disagree as to the applicability and substance of underlying state law regarding subrogation as well as whether National Union is bound by any terms of the Travelers policy. In interpreting policy language, we read the relevant provisions, each in the context of its corresponding insurance policy as a whole, giving meaning to each provision and eliminating surplusage and internal contradictions where possible. See Rice v. Shelter Mut. Ins. Co., 301 S.W.3d 43, 47 (Mo.2009) (en banc); J.E. Hathman, Inc. v. Sigma Alpha Epsilon Club, 491 S.W.2d 261, 264 (Mo.1973). Also, we apply the meaning which would be attached by an ordinary person of average understanding if purchasing insurance. Seeck v. Geico Gen. Ins. Co., 212 S.W.3d 129, 132 (Mo.2007) (en banc) (internal quotation and citation omitted). [7]
We address this policy first because its subrogation provision is unambiguous. As quoted supra note 5, the relevant sentence of the subrogation provision states, The Travelers shall be entitled to priority of recovery against any such third party (including interest) to the extent payment has been made to the Insured, plus attorney's fees, expenses or costs incurred by The Travelers. The quoted passage is unambiguous in that it accords priority to Travelers and Travelers alone. It does not describe a possible class to which Travelers may belong or a group of insurers or interested parties. The policy, as a true excess policy that references the primary insurance, acknowledges the presence of other insurers, but in the face of this recognition, states simply that Travelers is entitled to priority. National Union argues that a separate sentence within the same paragraph imposes on KCPL a duty to cooperate in recovery proceedings that Travelers initiates, and, therefore, the entire subrogation provision is triggered only if Travelers itself initiates recovery proceedings. We reject this argument for two reasons. First, the policy uses the terms it initiates not Travelers initiates. This use of the pronoun it is imprecise, and the sentence containing these terms can just as easily be read to mean insureds initiates. More importantly, however, we reject National Union's argument as an unnatural reading of the subrogation provision. The subrogation provision sets out rights for Travelers and imposes duties upon KCPL. The separate sentences of the subrogation provision largely stand alone. The only explicit internal reference among the sentences of the subrogation provision is the term such third parties found within the actual sentence granting Travelers a right of subrogation. There is no referencing language in any other sentences suggesting a limitation to proceedings initiated by any particular party. National Union's proffered interpretation, then, takes a qualifying term from one sentence dealing with the imposition of a duty upon KCPL and applies that qualifying term in a separate sentence dealing with the grant of a right to Travelers. There is no sensible explanation nor textual basis for doing so. We also note that National Union's suggested, unnatural reading lacks any reasonable basis in insurance practice. National Union cites no authority suggesting lay persons in general or insurers specifically might read a qualifying term from a cooperation clause into a separate sentence granting a subrogation right. In short, National Union's efforts do not dissuade us from our conclusion that the Travelers policy is unambiguous regarding subrogation and grants sole priority to Travelers.
The provisions of the National Union Policy most pertinent to our discussion are the subrogation provision and two separate provisions authorizing KCPL to obtain excess insurance or additional contributing primary-layer insurance. The contributing primary-layer insurance provision states that if KCPL obtains such insurance, National Union is obligated to join contributing primary-layer insurers in paying claims in proportion to the amount of primary insurance provided by each contributing insurer. The excess-insurance clause, in contrast, does not discuss insurers joining together to make proportionate payments of shared obligations. Rather, the excess insurance provision states that if KCPL obtains excess insurance, National Union agrees the existence of such insurance will not reduce any of National Union's liability under the policy. Read in combination, these separately styled provisions authorizing KCPL to obtain excess and contributing insurance show that National Union recognizes a distinction between true excess policies, on the one hand, and contributory or additional primary-layer coverage, on the other. National Union may effectively have its own liability reduced by sharing primary-layer coverage with other primary insurance that KCPL may elect to purchase, but National Union may not use the existence of any excess insurance as a tool to reduce National Union's own liability. Further, because National Union expressly authorized KCPL to obtain both types of additional insurance and did not in any manner limit that right to obtaining such insurance from National Union or entities related to National Union, the policy anticipates the possibility of insurance from other companies. We read the excess-insurance clause as mirroring the standard industry practices described above in that, by disavowing an ability to reduce National Union's own liability due to the possible existence of excess insurance, the National Union policy implicitly recognizes that excess insurers are the last insurers obligated to pay claims and also the first insurers entitled to recover proceeds that are obtained from third parties and represent insured losses. In other words, any reading of the actual subrogation provision that would place excess insurers' subrogation rights on par with, or subordinate to, National Union's own subrogation rights would impermissibly make the liability limitation provision of the excess-insurance provision surplusage. Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505, 510 (Mo.1997) (en banc) ([E]very clause must be given some meaning if it is reasonably possible to do so.) (citation omitted). Through the excess-insurance provision, National Union promises not merely to pay claims without reference to the existence of excess insurance, National Union agrees that excess insurance will not reduce any liability under the policy. (Emphasis added). In effect, this expansive language addresses the concept of net liability  total outlays after subrogation recoveries  and not merely National Union's initial payments of claims. Reading the National Union policy's subrogation provision against this backdrop, i.e., in the context of the policy as a whole, we find nothing inconsistent with awarding a priority subrogation interest to an excess insurer. The National Union policy's subrogation provision is, at best, silent as to the relative rights of National Union and excess insurers. The provision grants a subrogation interest to the extent of the payment of a claim under the National Union policy. A subsequent sentence states, If any amount is recovered... the net amount recovered after deducting the costs of recovery will accrue first to the Company(ies) involved in proportion to their respective interests. Any excess of this amount will be remitted to the Insured. Unlike the Travelers policy, which refers solely to Travelers, the National Union subrogation provision does not refer solely to National Union; it refers to a group of entities referred to as Company(ies). We believe there are several possible readings of this provision as Company(ies) involved arguably could refer only to National Union and certain National Union affiliates, only to entities actually involved in recovery proceedings, or only to entities involved in the payment of claims to KCPL (National Union and excess insurers or additional, contributing primary insurers). These multiple possible readings create an ambiguity  a duplicity, indistinctness, or uncertainty in the meaning of the language in the policy. Keisker, 90 S.W.3d at 74. As such, we refuse to hold in contravention of industry standards that the National Union policy somehow precludes priority for an excess insurer. Not only does such priority find textual support in the excess-insurance authorizing provision, it can be inferred as a general matter from industry practice, and inferred specifically in this case, by viewing the policy as a whole and acknowledging the relative risks the respective insurers' contracted to accept. See Horace Mann, 514 F.3d at 329 (primary insurers charge larger premiums for coverage than do excess and umbrella carriers); id. at 339 (refusing to insulate [the primary insurer] from the effect of its decision to write a primary liability insurance policy). Here, for example, National Union priced its primary policy at $850,000 for $200 million of coverage and granted permission for KCPL to obtain excess insurance without reducing any of National Union's liability. Travelers priced the $100 million of excess coverage at $25,000 and asserted an unambiguous limitation on its own liability precluding payment prior to exhaustion of an underlying $200 million primary policy and asserting an unambiguous claim to a priority subrogation interest. This pricing and the bedrock nature of the policies suggests no confusion as to the relative rights and duties of the insurers in terms of payment and subrogation recoveries.