Fronting Policies Have a Real Defense Duty That Cannot Be Ignored (8th Cir)

AIG liable to CNA for contribution despite fact policyholder Valspar would be reimbursing AIG for its liability.

The U.S. Court of Appeals for the Eighth Circuit, applying Minnesota law, found that National Union Fire Insurance Co. of Pittsburgh, P.A.  (AIG) owed Valspar Corporation a defense duty for alleged injuries to former individuals exposed to Valspar’s paint products that contained benzene.  The court also held that CNA (Continental Casualty Company), another Valspar primary insurer, had a right of equitable contribution against AIG for defense expenses under National Union “fronting policies” issued to Valspar.  The opinion did not accept Valspar’s argument that AIG should not have a right of contribution due to an agreement in which Valspar had the duty to reimburse AIG for amounts it might have to pay Continental.

Continental had agreed to provide Valspar with a defense under a reservation of rights including the right to seek contribution from Valspar’s other insurers.  However, National Union refused to share in the defense claiming that it had a “fronting arrangement” wherein Valspar was obligated to defend itself.  Continental filed a declaratory judgment action against National Union seeking a declaration that National Union had a duty to defend Valspar and owed Continental its share of defense costs.  Valspar intervened and argued that any contribution from National Union would, because of the “fronting arrangement,” really be a right of contribution from Valspar to which Continental was not entitled.  National Union then filed a cross claim against Valspar seeking indemnity from Valspar should Continental prevail.

The Eighth Circuit found that the National Union policies clearly obligated National Union to provide Valspar with a defense if otherwise triggered.  However, although provisions in some of the agreements did oblige Valspar to reimburse National Union for some defense costs, the court found that nothing in the language overrode the duty to defend because the defense duty was not simply to “pay for defense costs.”  The Eight Circuit further reasoned that “although Valspar was ultimately financially responsible for certain defense costs under its agreement with National Union, it did not have to pay for its defense in the first instance.”  Thus, National Union did retain important obligations, including not just directing the defense but paying for it in the first instance as well.  As such, under Minnesota law, Continental had an equitable right to seek contribution for defense costs from National Union.

The court also rejected the argument that forcing Valspar to indirectly pay defense costs to Continental contradicted the district court’s previous ruling that Continental had no right to contribution from Valspar. The court noted that while Continental had the duty to defend the entirety of the suit, this was different from its contribution rights against another carrier with the defense duty.  The fact that National Union could then recoup its expenses from Valspar was irrelevant.

Valspar also unsuccessfully argued that Continental seeking contribution from National Union violated Continental’s agreement with Valspar “not to seek recovery from Valspar for defense costs advanced by Continental . . .” The court rejected this argument because Continental was suing National Union, not Valspar.  The court found unconvincing Valspar’s argument that the waiver of rights against one party can serve as a waiver of different rights against another party.

The Eighth Circuit also found unpersuasive Valspar’s argument that Continental had “dirty hands” and was precluded from maintaining an equitable contribution claim because it had failed to reimburse 3% of the outstanding attorney fees.  In rejecting the argument, the court found that this did not rise to the level of a failure “to provide Valspar with a defense.”

Finally, the court refused to give Valspar credit for amounts that it had paid out of pocket in relation to the defense because the issue was National Union’s liability.  According to the court, if Valspar wanted credit for these amounts, it should seek the credit from its other insurers.  As such, the court affirmed the district court’s ruling which found National Union was responsible for 1/7 of the costs of Valspar’s defense and Continental was entitled to contribution from National Union for its unpaid share of the defense regardless of the “fronting” nature of the coverage and Continental’s agreement not to seek reimbursement for defense costs directly from Valspar.  Continental Cas. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A.,  No. 15-1547 and No. 15623 (8th Cir. Feb. 9, 2016).

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