Opinion ID: 1169781
Heading Depth: 2
Heading Rank: 3

Heading: Aetna's Right to Subrogation for Defense Costs from Co-Insurers and the Effect of Hartford's Settlement

Text: We now reach Aetna's claim that it has a cause of action for equitable subrogation against Hartford. We recently held in State Farm Mutual Automobile Insurance Co. v. Northwestern National Insurance Co., 912 P.2d 983, 985-87 (Utah 1996), that an insurer which settled a claim that should have been covered by another insurance company could recover the amount paid in settlement under the equitable doctrine of subrogation. We reasoned that equity allowed an insurer which paid a debt in full that was owed by another to obtain reimbursement from those who ought to have paid it. Id. at 985. This court has also extended this right to an action to recover defense expenditures. National Farmers Union Property & Cas. Co. v. Farmers Ins. Group, 14 Utah 2d 89, 377 P.2d 786, 787-88 (1963) (holding that insurer who had successfully defended an insured which should have been covered and thus defended by another insurance company could recover the costs and attorney fees under the doctrine of subrogation). However, this court has never addressed whether the doctrine of subrogation also applies to defense costs where two or more insurance companies were equally obligated to defend. We thus look to other jurisdictions for guidance.
Whether an insurer can compel contribution from a coinsurer who is equally obligated to defend is a question that has resulted in a split of authority. Some jurisdictions have held that because the duty to defend is personal to each insurer, the obligation is several and where many carriers are obligated to defend, each separate carrier is neither entitled to divide the duty nor require contribution from another absent a specific contractual right. United States Fidelity & Guar. Co. v. Tri-State Ins. Co., 285 F.2d 579, 582 (10th Cir.1960). However, the trend in other jurisdictions has been to allow an insurer, under the doctrines of contribution or equitable subrogation, to recover costs of defense from other insurers who were equally obligated to defend yet failed to do so. See National Indem. Co. v. St. Paul Ins. Cos., 150 Ariz. 458, 724 P.2d 544, 545 (1986) (Under the principle of equitable subrogation, the insurer which has performed the duty to provide a defense to its insured should be able to compel contribution for a share of the cost of defense from another insurer who had a similar obligation to the same insured but failed to perform it.). The Arizona court reasoned that an insurer should not be encouraged to avoid its responsibility to provide a defense for its insured, nor should that insurer be rewarded for breaching its duty under its insurance contract. Id. In responding to the Tenth Circuit's approach, one scholar comments: These holdings are indefensible. The courts are ignoring realities and encouraging insurers who are not concerned with their obligations to their insured in the hope that someone else will step into the breach.... Further, as a matter of public policy, courts should be demanding that insurers give prompt defense of claims to policyholders rather than to tolerate the shifting of responsibility with such impunity. 7c John Allan Appleman, Insurance Law and Practice § 4691, at 278 (Walter F. Berdal ed., 1979). See also Continental Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 17 Cal.Rptr. 12, 366 P.2d 455, 461 (1961). [12] We agree with those jurisdictions that have allowed contribution where one insurer has paid more than its fair share of the defense costs. Where it can be shown that a co-insurer failed to defend or failed to pay its share of the defense expenses, that insurer should not be rewarded and payment excused when another co-insurer has taken upon itself the provision of that defense. Holding otherwise would not only lead to an inequitable result but may also conflict with our stated policy of encouraging prompt payments to the insured, leaving disputes concerning coverage to be determined later. See State Farm, 912 P.2d at 987. We thus conclude that Aetna does have a claim for equitable subrogation to compel Hartford to contribute its fair share of the defense expenditures. [13]
Hartford next contends that even if Aetna had a right to contribution for the defense costs it expended, Hartford's settlement with the insured extinguished Aetna's right. Hartford initially argues that under Utah law, any defenses that are valid against the insured are also valid against the [subrogated] insurer. Fashion Place Invest., Ltd. v. Salt Lake County/Salt Lake County Mental Health, 776 P.2d 941, 945 (Utah.Ct.App.1989). Therefore, since the insured settled and released all claims against Hartford, Hartford argues that that release acts as a complete defense against Aetna's subrogation claims. We disagree. In third-party insurance contexts, this court has held that where the insured settles with a tortfeasor, and the tortfeasor and/or its insurer was on notice of the other insurer's subrogation right, then the settlement and release will not affect the insurer's right of subrogation. Educators Mut. Ins. Ass'n v. Allied Property & Cas. Ins. Co., 890 P.2d 1029, 1031 (Utah 1995) ([A] settlement between an injured party and a tort-feasor who has knowledge of the subrogation rights of the injured party's insurer does not destroy the subrogation claim of the injured party's insurer.); see also Transamerica Ins. Co. v. Barnes, 29 Utah 2d 101, 106, 505 P.2d 783, 787 (1972). [14] This approach is also supported by a majority of other jurisdictions. See Farmers Ins. Group v. Martinez, 107 N.M. 82, 752 P.2d 797, 799 (Ct.App.1988); Leader Nat'l Ins. Co. v. Torres, 113 Wash.2d 366, 779 P.2d 722, 724 (1989) ( Torres II ) (The overwhelming majority of states allows a subsequent equitable subrogation action by an insurer if the insurer did not consent to the release and the tortfeasor knew of the insurer's interest prior to the release.); 16 Mark S. Rhodes, Couch on Insurance 2d § 61:201 (Rev. ed.1983). These authorities reason that allowing a general release between the tortfeasor and the insured `constitutes a trap for the unwary insured plaintiff' and `encourages fraud or, at the very least, sharp practice on the part of the tortfeasor or his insurance carrier.' Leader Nat'l Ins. Co. v. Torres, 51 Wash.App. 136, 751 P.2d 1252, 1254 (1988) ( Torres I ) (quoting Home Ins. Co. v. Hertz Corp., 71 Ill.2d 210, 16 Ill.Dec. 484, 486-87, 375 N.E.2d 115, 117-18 (1978)). Ultimately, these courts find that: To require [the unsophisticated insured] to execute a release of all claims, even though the tortfeasor has knowledge of the insurer's interest and the probable existence of a standard insurance policy provision obligating the insured to protect the insurer's subrogation rights, is simply not consistent with fair dealing and ought not to be encouraged. Id. This rationale was affirmed in Torres II, 779 P.2d at 725, where the Washington Supreme Court stated that although equities were also in favor of encouraging settlements and avoiding litigation, such a speculative result is not equitably purchased at the price of either abandoning the subrogation rights of the insurer or limiting recovery to reimbursement from the injured insured. We believe this same reasoning is equally applicable to co-insurers where one insurer is on notice that another has paid all, or more than its share, of the defense costs. Indeed, there is probably even more of an incentive for an insurer to engage in sharp practices to settle for a limited amount with the possibly unsophisticated insured to avoid the subrogation rights of another insurer who has paid substantial defense costs. We therefore conclude that it is more equitable to hold that an insurer who is on notice that another insurer has been paying significant defense costs should not be allowed to settle for a minimal sum to avoid having to contribute its fair share. [15]
Hartford finally argues that even if we find that its settlement with the insured did not defeat Aetna's subrogation claim, we must remand this issue for the trial court to determine if the expenses paid by Aetna were reasonable. We agree. In general, where an insurer breaches its duty to defend, the insured is entitled to recover the amount it paid for reasonable attorney fees. Crist v. Insurance Co., 529 F.Supp. 601, 605-06 (D.Utah 1982); see also IMCERA Group, Inc. v. Liberty Mut. Ins. Co., 50 Cal.Rptr.2d 583, 603, 47 Cal.App.4th 699 (Ct.App.1996) (Where an insurer wrongfully refuses to provide a defense, it `is manifestly bound to reimburse its insured for the full amount of any obligation reasonably incurred by him.... If there be uncertainty as to the nature or extent of the services reasonably to be rendered by counsel engaged by the insured, that uncertainty must be resolved against [the] insurer.' (quoting Arenson v. National Auto. & Cas. Ins. Co., 48 Cal.2d 528, 310 P.2d 961 (1957))), review granted, 54 Cal.Rptr.2d 41, 917 P.2d 1164 (1996); 7c John Alan Appleman, Insurance Law and Practice § 4691, at 261 (Walter F. Berdal ed., 1979) ([A]ttorneys' fees incurred by the insured in the defense of an action must be shown to be reasonable to allow a recovery thereof from the insurer.). Where the claim for breach of the duty to defend is between two insurers, courts have also held that one insurer is entitled to reimbursement only for those fees that are reasonable. Liberty Mut. Ins. Co. v. Continental Cas. Co., 771 F.2d 579, 581-82 (1st Cir.1985). We agree. We do not accept Aetna's proposition that Hartford, in failing to pay its fair share of the fees, waived its right to contest the reasonableness of the fees paid by Aetna. [16] As noted by the First Circuit in Liberty Mutual, 771 F.2d at 582, there might have been merit to this claim if Hartford had acted in bad faith or had attempted to mislead Aetna. Hartford, however, tendered a five percent share in the belief that that was all it was obligated to pay for the defense of the Liquidating Trust. We therefore conclude that although Hartford may not have paid its fair share, it should not be required to pay anything beyond the reasonable expenses paid by Aetna. As a result, we remand this case to the trial court to determine which defense expenditures were reasonable. [17]