Opinion ID: 535631
Heading Depth: 1
Heading Rank: 6

Heading: Prorationing of Defense Costs

Text: 53 Southern Publishing argues that the district court erred in not requiring Southern Guaranty to pay the entire cost of defending the action, including the Title VII claims. 3 The district court noted that as a general proposition 54 [a] liability insurer is liable to the insured for his expenses in defending an action against him based upon claims falling both within and without policy coverage where the insurer has failed to defend the action notwithstanding a policy provision requiring the insurer to defend actions on claims covered by the policy.... 55 41 A.L.R.2d 434, 436 (1955). The court properly observed, however, that this rule cannot be applied rigidly without considering the equities of each case. 56 The basis for the rule was explained in Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1224-25 (6th Cir.1980), cert. denied, 454 U.S. 1109, 102 S.Ct. 686, 70 L.Ed.2d 650 (1981). 57 What [the insured] ignores is the rationale on which its authorities are based. An insurer must bear the entire cost of defense when there is no reasonable means of prorating the costs of defense between the covered and the not-covered items. ... These considerations do not apply where defense costs can be readily apportioned. The duty to defend arises solely under contract ... Where the distinction can be readily made, the insured must pay its fair share for the defense of the non-covered risk. 58 (Citation and footnotes omitted.) In a later opinion in the same case the Sixth Circuit concluded that [w]here costs can be readily apportioned, as here, it is reasonable to have [the insured] pay its fair share of defense costs as well as indemnification costs. Insurance Company of North America v. Forty-Eight Insulations, Inc., 657 F.2d 814, 816 (6th Cir.1981) (petition for rehr'g). Likewise, in Budd Company v. Travelers Indemnity Company, 820 F.2d 787, 790 (6th Cir.1987), the Court again refused to follow rigidly the rule urged by Southern Publishing: 59 In Forty-Eight Insulations, we refused to allow the insured to reap the benefits of a free defense when the underlying liability clearly fell outside the scope of the policy coverage. In the present case, we are compelled to do the same. 60 We agree with the Sixth Circuit that the general rule should apply only where there is no reasonable means of prorating the costs of defense between the covered and not-covered items. Forty-Eight Insulations, 633 F.2d at 1224. In this case, because the district court found that the statute of limitations barred all of the intervenors' tort claims, the court had no difficulty in prorating the cost of defense between those claims and intervenors' Title VII claims. Furthermore, we are not persuaded that the equities of the case compel imposition of all defense costs against Southern Guaranty. 61 As the district court properly observed, Southern Guaranty's defense obligation was invoked and continued only because of Corn and Honeycutt's time-barred tort claims, which could have been easily disposed of by Southern Publishing. Despite the facts that the tort claims were clearly filed outside the applicable limitations period and that Southern Publishing was aware of this when it tendered coverage to Southern Guaranty, Southern Publishing made no affirmative effort to secure dismissal of these claims. Although Southern Publishing did raise limitations as a basis for denying intervention, this argument was not pressed by Southern Publishing after the intervention was allowed. Under these circumstances the district court did not err in concluding that imposition of liability against Southern Guaranty for all defense costs would not be appropriate.