USF&G v. Federated Rural Elec. Ins. Corp., 96,172.

• Decision Date: 09 October 2001
• Docket Number: No. 96,172.,96,172.
• Citation: 2001 OK 81,37 P.3d 828
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff/Appellee, v. FEDERATED RURAL ELECTRIC INSURANCE CORPORATION, Defendant/Appellant.
• Court: Oklahoma Supreme Court

37 P.3d 828

2001 OK 81

UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff/Appellee, v. FEDERATED RURAL ELECTRIC INSURANCE CORPORATION, Defendant/Appellant.

No. 96,172.

Supreme Court of Oklahoma.

October 9, 2001.

Marc A. Powell, Alan R. Pfaff, Powell, Brewer, Gough & Withers, L.L.P., Wichita, KS, for Plaintiff.

Michael C. Stewart, Chubbuck, Smith, Rhodes, Stewart & Elder, P.L.L.C., Oklahoma City, OK, for Defendant.

SUMMERS, J.

¶ 1 Pursuant to the Revised Uniform Certified of Questions of Law Act, 20 O.S.Supp. 1997, 1601 et seq., the United States Court of Appeals for the Tenth Circuit has submitted to us the following question:

"In Republic Underwriters Insurance Co. v. Fire Ins. Exchange, 655 P.2d 544 (Okla.1982), the Supreme Court of Oklahoma applied the doctrine of equitable subrogation to require two insurance companies, both of whom insured against a single common loss, to pay their respective proportionate share of the loss. Will Oklahoma apply the doctrine to require an excess insurer to pay an equitable portion of the cost of defense prior to the primary insurer's tendering of the policy limits when the excess nature of the claim was evident from the facts?"

¶ 2 We answer in the negative. An excess insurer has no duty to participate in defense costs until the limits of the primary policy are exhausted. Oklahoma will not apply the doctrine of equitable subrogation to require an excess insurer to participate in the cost of an insured's defense prior to the exhaustion of the primary policy limits, even though the claim against insured exceeds the primary insurer's policy limits.

¶ 3 This action resulted from underlying litigation concerning property losses suffered by landowners in Woods County in February, 1996. A wildfire was allegedly started by a truck being negligently operated by an employee of O & M Powerline Construction Co.(O & M) who was installing a power pole under contract with Alfalfa Electric Cooperative (Alfalfa).

¶ 4 Federated Rural Electric Insurance Corporation (Federated) and United States Fidelity & Guaranty Co. (USF & G) each insured Alfalfa. USF & G, the primary insurer, had issued a $1 million commercial general liability and business automobile policy to O & M that listed Alfalfa as an additional insured under an endorsement to the policy. USF & G's policy provided that it had a duty to defend Alfalfa against suit for damages and that its duty ended when the policy limits had been paid. Federated, the excess insurer, issued a $1 million all risk blanket policy to Alfalfa and also a $6 million commercial umbrella policy to Alfalfa.

¶ 5 The damaged landowners brought an action in Woods County District Court seeking damages from O & M and Alfalfa, alleging negligence. (See Bouziden v. Alfalfa Electric Cooperative, 2000 OK 50, 16 P.3d 450). After the defendants were served with notice of the litigation pending against them, Alfalfa notified Federated of its need for defense, but Federated declined to defend Alfalfa and requested USF & G to provide the defense, which it did. USF & G also hired separate counsel to defend O & M. Between October 1996 and November 1997, USF & G paid approximately $197,000 for Alfalfa's defense. In 1997 USF & G paid its policy limit of $1 million into court, and then was discharged in an interpleader action upon a finding that it had exhausted its policy limits. At that point USF & G's duty to defend Alfalfa ended under the policy. USF & G withdrew its defense and Federated thereafter paid all Alfalfa's defense costs. Federated has never denied that it has a duty to defend Alfalfa; it asserts only that it had no duty to do so until after USF & G exhausted its policy limits.

¶ 6 USF & G filed this declaratory judgment action in United States District Court in Kansas, seeking reimbursement from Federated under theories of contribution and equitable subrogation for half the defense costs it paid for Alfalfa. In denying Federated's motion for summary judgment, the District Court purportedly relied on this Court's decision in Republic Underwriters Ins. Co. v. Fire Ins. Exchange, 1982 OK 67, 655 P.2d 544, in support of its conclusion that Oklahoma would recognize USF & G's claim for proportionate reimbursement of defense costs from Federated under equitable subrogation where each had a duty to defend the insured. USF & G v. Federated Rural Electric, 78 F.Supp.2d 1172 (D.Kan.1999). Based on that ruling the District Court ultimately held USF & G was entitled to reimbursement from Federated, and entered judgment in favor of USF & G for half its costs of defending Alfalfa ($98,525). U.S.F. & G. v. Federated Rural Electric, 78 F.Supp.2d 1176(D.Kan.1999). It is the judgment in this latter case that Federated has appealed to the 10th Circuit, resulting in the question certified for our response.

¶ 7 The appeal itself is not before us for decision, and it is outside our province to apply our response to the facts of the litigation before the certifying federal court. It is the entirely the task of that court to analyze our answer for application to its case. McDonald v. Schreiner, 2001 OK 58, 28 P.3d 574.

I. INSURANCE — PRIMARY AND EXCESS

¶ 8 In addressing the issues involved in these questions it is important to understand the insurance terms and underlying concepts, and therefore the following overview is offered. Primary insurance provides immediate coverage for the insured upon the occurrence of a loss or the happening of an event which, under the terms of the policy, gives rise to immediate liability. In the context of liability insurance a primary insurer generally has the primary duty to defend and indemnify the insured unless specific language in the policy provides otherwise. An excess insurance policy is one which by its terms provides coverage that is secondary to the primary coverage; there is usually no obligation to the insured until after the primary coverage limits have been exhausted. Equity Mutual v. Spring Valley Wholesale Nursery, Inc., 1987 OK 121, 747 P.2d 947; Insurance Company of North America v. American Economy Insurance Co., 746 F.Supp. 59 (W.D.Okla.1990).

II. EQUITABLE SUBROGATION

¶ 9 Subrogation is a derivative concept, and is of two types: equitable (or legal) and conventional (or contractual.) Conventional subrogation is created by an agreement or contract between parties granting the right to pursue reimbursement from a third party in exchange for payment of a loss. Equitable subrogation, on the other hand, does not depend upon a contract but arises by implication in equity to prevent an injustice. The latter doctrine is based on the relationship of the parties and equitable principles of establishing substantial justice, and it is broad enough to include every instance where one person who is not a mere volunteer, pays a debt for which another is primarily answerable, and which in equity and good conscience should have been discharged by the latter. Sexton v. Continental Cas. Co., 1991 OK 84, 816 P.2d 1135, 1138; Thurston National Ins. Co. v. Zurich Ins. Co., 296 F.Supp. 619 (W.D.Okla.); Texas Employers Ins. v. Underwriting Members of Lloyds, 836 F.Supp. 398 (S.D.Texas 1993); Farmers Alliance Ins. Co. v. Commercial Union Ins. Co., 74 F.3d 1249 (10th Cir.1996).

¶ 10 In this insurance context, a claim based on equitable subrogation allows an insurer who has paid coverage to stand in the shoes of the insured and pursue recovery from a third party primarily responsible for the insured's loss which the insurer both insured and reimbursed. Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App.4th 1279, 77 Cal.Rptr.2d 296, 302 (1998). The doctrine is an equitable effort to shift the entire cost burden, as it relieves entirely the insurer who paid the loss but was not responsible for it, and places the entire burden on the party ultimately responsible for the loss and who should pay it, and whose equitable position is inferior to the paying insurer. Maryland Cas. Co. v. Nationwide Mut. Ins., 81 Cal.App.4th 1082, 97 Cal. Rptr.2d 374, 377 (2000).

¶ 11 Equitable subrogation between insurers is commonly used as a vehicle to shift defense costs between primary and excess insurers. In its application the doctrine generally works to shift costs from the excess insurer to the primary insurer, because the primary insurer is primarily responsible to defend the insured, and the excess insurer usually has the superior equitable position. Maryland Cas. v. Nationwide Mutual Ins. Co., supra.

III. EQUITABLE CONTRIBUTION

¶ 12 Even a cursory reading of judicial decisions in this area reveals a great deal of confusion in the courts about the equitable doctrines of subrogation and contribution, their differences and their appropriate applications to various factual circumstances. Their principles are often misunderstood, and many times the doctrines are used interchangeably. One court observed that it is "difficult to think of two legal concepts that have caused more confusion and headache for both courts and litigants than have contribution and subrogation." Firemans Fund Insurance Company v. Maryland Casualty Company, supra, at 302. For thoughtful discussions of these issues, see Maryland Cas. v. Nationwide Mutual Ins. Co., supra; Fireman's Fund v. Maryland Casualty Co., supra; Herrick Corp. v. Canadian Ins. Co., 29 Cal.App.4th 753, 34 Cal.Rptr.2d 844 (1995); and Signal Companies, Inc. v. Harbor Ins. Co., 27 Cal.3d 359, 165 Cal.Rptr. 799, 612 P.2d 889 (Cal.1980.).

¶ 13 Equitable contribution is the right to recover, not from a party primarily liable for the loss, but from a co-obligor or co-insurer who shares common liability with the party seeking contribution. The doctrine applies only when co-insurers have covered the same insured and the same particular risk at the same level of coverage. The right of contribution is not derivative of the rights of the insured, but belongs to each insurer independently to seek...