Indemnification Promises: The Risks of Risk Transfer

Listen to Our Legal Alerts on the Following Platforms:

From the desk of Melanie Rose:

In Oregon, the duty to defend and the duty to indemnify are distinct.  Whether an insurer has a duty to defend an action against its insured depends on two documents: the Complaint and the insurance policy.  Typically, an insurer has a duty to defend an action against its insured if the claim against the insured stated in the Complaint could impose liability for conduct covered in the policy.  When defending its insured against a claim, an insurer has the right of equitable contribution against co-insurers regardless of extracontractual “side agreements” outside the policy.  In Allianz, the Oregon Supreme Court analyzed the application of the common-law principle of equitable contribution in the context of the transfer of insured liabilities acquired by a successor business. 

Claims Pointer:

This case arose out of an insurance company’s action seeking contribution from other insurers for claims and defense costs that it paid on behalf of its insured.  Here, the Oregon Supreme Court considered the question of whether the current insurer of the defendant in the Complaint was entitled to common-law equitable contribution from previous insurers who covered the insured’s predecessor in interest during the time period in which damages were alleged to have accrued.[1]

Allianz Global Risks v. ACE Property & Casualty Ins. Co., 367 Or 711 (March 25, 2021).

Facts:

Daimler-Benz AG (“Daimler-Benz”) acquired Freightliner Corporation (“Freightliner”) from Con-Way, Inc.  As part of the transaction, Daimler liquidated Freightliner’s assets and liabilities into its subsidiary, Daimler Trucks North America LLC (“Daimler”).  Freightliner was later dissolved and transferred the majority of its assets and liabilities to Daimler.  In the “Agreement and Plan of Liquidation,” for Freightliner, Daimler expressly assumed and agreed to unconditionally pay and discharge “any and all” liabilities and debts of Freightliner.  Subsequent to Daimler’s acquisition of Freightliner, alleged liabilities related to several environmental remediation proceedings, including claims related to the Portland Harbor Superfund cleanup, and to approximately 1,500 asbestos personal injury claims were presented.

Plaintiffs Allianz Global Risk US Insurance and Allianz Underwriters Insurance Company (“Allianz”) had insured Freightliner prior to the acquisition and Daimler in the years following the acquisition.  Daimler had also purchased from Allianz an additional policy to provide coverage for future claims that might be made against Freightliner for its past operations.  Allianz incurred more than $24 million defending and paying claims based on Freightliner’s historical business operations.  Allianz filed suit seeking contribution for past and future payments from the other liability insurance companies that had insured Freightliner during the course of its business operations.[2]  Allianz alleged that it was entitled to common-law equitable contribution because each of the defendants was a co-insurer of Freightliner and Oregon recognizes an insurer’s equitable right to contribution.[3]

The defendant insurance companies declined to defend Daimler or pay claims under the relevant policies or to pay any contribution to Allianz for the amounts that it had paid, arguing that they were not responsible for any payments made by Allianz because the liabilities that they insured for Freightliner and Con-Way were not transferred to Daimler as part of the acquisition and dissolution of Freightliner.  Freightliner’s prior parent company, Con-Way, had entered into “side agreements which the court also called “fronting agreements”, whereby Con-Way agreed to indemnify the defendant insurers for all “claims, defense costs, and other expenses arising out of occurrences subject to the policies.”  The defendant insurers argued that their fronting agreements with Con-Way absolved them of the obligation to pay claims on behalf of Freightliner because Con-Way had contractually absorbed that responsibility.   

Law:

When determining whether an insurer has a duty to defend a claim, the insurer must consider whether “the allegations in the complaint assert a claim covered by the policy.”  If so, then the insurer has a duty to defend.  The duty to indemnify is independent of the duty to defend and the duties are not linked.  When considering whether an insurer has a duty under a policy to defend a lawsuit brought against its insured, the court may look at only the insurance policy and the Complaint that the insurer is being asked to defend.  This is often called the “Eight corners” rule because the Court is not allowed to consider extrinsic evidence outside the Complaint and insurance policy when determining if a duty to defend is present.  In interpreting an insurance policy, if a word or phrase is susceptible to differing plausible interpretations and the ambiguity cannot be resolved by considering the context of the wording and of the policy as a whole, the ambiguity must be construed in favor of coverage.

However, while an insurer’s obligation to its insured are governed by the insurance policy, among co-insurers a right to equitable contribution exists, independent of policy obligations to the insured.  This is because Oregon recognizes the equitable doctrine that “one who pays money for the benefit of another is entitled to be reimbursed.” The Court characterized this doctrine as being “guided by the goal of preventing unjust enrichment.”  In holding that an insurer has an equitable right to contribution from co-insurers the Court found the following reasoning from California’s Court of Appeals particularly persuasive:

It [the right to equitable contribution] is predicated on the common sense principle that where multiple insurers or indemnitors share equal contractual liability for the primary indemnification of a loss or the discharge of an obligation, the selection of which indemnitor is to bear the loss should not be left to the often arbitrary choice of the loss claimant, and no indemnitor should have any incentive to avoid paying a just claim in the hope the claimant will obtain full payment from another co-indemnitor.

Accordingly, the allegations of a Complaint may trigger an insurer’s obligations to provide a defense that the carrier will have an equitable right of contribution against all other primary carriers on risk for the loss.

Analysis:

In considering whether the “side agreements” or “fronting agreements” between Con-Way and the defendant insurers eliminated Allianz’s ability to seek contribution from the defendant insurers, the Oregon Supreme Court held that the right of contribution is grounded in principles of equity and is a right that benefits the insurer.  Courts considering an inter-insurer contribution claim should be guided by the goal of preventing unjust enrichment to one insurer at the expense of another.  To that end, the Court held that an insurance company that issues a policy that covers a particular claim cannot simply walk away from an injured third party – or a co-insurer seeking contribution – as a result of a private “side agreement” or “fronting agreement”.  Rather, the Court held that the defendant insurers were required to evaluate the claims presented and their insuring agreements pursuant to the “eight corners” rule, and provide coverage as necessary under that analysis.  The Court acknowledged that the defendant insurers would then have the contractual right, under the fronting agreements, to seek indemnity for their own expenses from Con-Way.  Nevertheless, the defendant insurers could not simply pass-through their obligations to Con-Way; rather they needed to fulfill their obligations to defend under the policy and separately seek reimbursement from Con-Way.  In essence, an insurer who attempts to rely on “side agreements” or “fronting agreements” to obtain indemnity from a third-party may have no other option but to “pay and chase”. 

The Big Picture:

Insurers should be cautious when relying on “fronting agreements” or “side agreements” not contained within an insurance policy for risk transfer.  An insurer will be obligated to provide a defense under Oregon’s “eight corners” rule whenever the allegations of the Complain assert a claim covered by the policy.  To the extent the insurer has attempted to transfer risks assumed under the policy back to the insured or to third-parties under additional contracts or fronting agreements, those additional contracts will not alter the insured’s duty to defend.  Rather, the insurer must continue to provide a defense (or share in a defense with co-insurers) and then seek reimbursement separately under the fronting agreement.  To the extent the indemnifying entity is insolvent, that risk is born by the carrier entering the fronting agreement.

[1] An additional opinion was released by the Oregon Supreme Court, three months after its first opinion, based on various parties petition for reconsideration.  See, Allianz Global Risks v. ACE Property & Casualty Ins. Co., 368 Or 229 (June 24, 2021).

[2] Because multiple coverage years were involved, Allianz named all carriers who provided Freightliner with liability coverage for the claim periods: ACE Property & Casualty Insurance Company, General Insurance Company, Westport Insurance Corporation, Certain Underwriters at Lloyd’s, London, and Certain London Market Insurance Companies.

[3] For some of the claims alleged, Allianz also relied on ORS 465.475 to 465.484, and the Oregon Environmental Cleanup Assistance Act (“OECAA”). Chapter 465 of the Oregon Revised Statutes deals with the regulation of Hazardous Waste and Hazardous Materials I.  The OECAA provides that an insurer which has paid all or part of an environmental cleanup claim may seek contribution from any other insurer that is liable, or potentially so, to the insured and which has not entered into a good-faith settlement agreement with the insured.