Ohio Casualty Insurance Co. v. Unigard Insurance Co.

2012 UT 1, 268 P.3d 180, 699 Utah Adv. Rep. 66, 2012 Utah LEXIS 1, 2012 WL 29325

• Court: Utah Supreme Court
• Decided: January 6, 2012
• Docket: No. 20090340
• Status: Published

Opinions

Justice PARRISH,

opinion of the Court:

INTRODUCTION

1 The Ohio Casualty Insurance Company (Ohio Casualty) insured Cloud Nine, LLC¹ under a commercial general liability (CGL) policy from June 10, 2001 to June 10, 2002. Unigard Insurance Company (Unigard) insured Cloud Nine under a CGL policy from December 12, 2002 through December 12, 2005. Edizone, LC sued Cloud Nine in federal district court, alleging injuries that began during the last three months of Ohio Casualty's policy period and continued throughout Unigard's policy period. The federal district court ruled that the insurers must equally share the total defense costs they incurred in defending Cloud Nine against the Edizone suit. Ohio Casualty appealed that ruling to the Tenth Cireuit Court of Appeals, which certified to us the following question regarding the apportionment of defense costs:

Should the defense costs in the Edizone case be allocated between Ohio Casualty and Unigard under the "equal shares" method set forth in the "other insurance clause" of Ohio Casualty's policy, or, in the alternative, because the policies were issued for successive periods, should those defense costs be allocated using the time-on-risk method described in Sharon Steel Corp. v. Aetna Casualty & Surety Co., 981 P.2d 127, 140 (Utah 1997)?

1 2 We conclude that the "other insurance" clauses do not apply to successive insurers. Accordingly, defense costs should be apportioned using a modified version of the Sharon Steel method that divides responsibility for defense costs between the two insurers in proportion to their time on the risk.

BACKGROUND

113 We state the facts as described by the Tenth Circuit in the Order of Certification. Ohio Casualty insured Cloud Nine from June 10, 2001, to June 10, 2002. From June 10, 2002, through December 12, 2002, Cloud Nine was uninsured. Unigard then insured Cloud Nine from December 12, 2002, through December 12, 2005.

T 4 In their respective policies, Ohio Casualty and Unigard both agree to "pay those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury' ... caused by an offense arising out of [the insured's] business but only if the offense was committed in the 'coverage territory' during the policy period."

5 Both policies also contain "other insurance" clauses that provide as follows:

If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below.

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c. Method of Sharing

If all of the other insurance permits contribution by equal shares, we will follow this method also....

16 Edizone is a product and technology developer that licensed patents and other intellectual property to Cloud Nine for the manufacture and sale of an elastometer gel technology and a product known as "Gelastic" and "GellyComb." In its federal case against Cloud Nine, Edizone alleged that Cloud Nine continued to manufacture, use, and sell its products after Edizone terminated Cloud Nine's license agreement on March 11, 2002.

17 Cloud Nine requested that both Ohio Casualty and Unigard provide a defense to Edizone's federal suit. Unigard agreed to defend, but Ohio Casualty refused. Ohio Casualty then filed a declaratory judgment action in federal district court alleging that it had neither a duty to defend nor indemnify Cloud Nine. Unigard intervened as a plaintiff and moved for partial summary judgment, arguing that Ohio Casualty had a duty to defend the Edizone suit, and that Ohio Casualty was obligated to share defense costs equally with Unigard.

8 The federal district court ruled in favor of Unigard on both issues. It held that Ohio Casualty did have a duty to defend Cloud Nine and that the two insurance companies should share equally in paying defense costs. In ruling on defense costs, the district court relied on the "other insurance" provision of Ohio Casualty's policy and the broad seope of an insurer's duty to defend under Utah law.

T9 Ohio Casualty appealed the portion of the ruling regarding the allocation of defense costs to the U.S. Court of Appeals for the Tenth Cireuit. The Court of Appeals determined that the disposition of Ohio Casualty's appeal turned on important and unsettled principles of Utah law. Accordingly, it certified the following question to this court:

Should the defense costs in the Edizone case be allocated between Ohio Casualty and Unigard under the "equal shares" method set forth in the "other insurance clause" of Ohio Casualty's policy, or, in the alternative, because the policies were issued for successive periods, should those defense costs be allocated using the time-on-risk method described in Sharon Steel Corp. v. Aetna Casualty & Surety Co., 981 P.2d 127, 140 (Utah 1997)?

We have jurisdiction under Utah Code seetion 7T8A-8-102(1) to answer a question of law certified by a federal court.

STANDARD OF REVIEW

110 The Tenth Cireuit has asked us to rule on a certified question of Utah law. "Accordingly, we are not presented with a decision to affirm or reverse, and traditional standards of review do not apply." Robert J. DeBry & Assocs, P.C. v. Qwest Dex, Inc., 2006 UT 41, ¶ 11, 144 P.3d 1079.

ANALYSIS

{11 Under the framework we announced in Sharon Steel Corp. v. Aetna Casualty & Surety Co., when determining how to apportion defense costs among insurers, we "apply equitable principles ... unless express policy language decrees the method of apportionment." 931 P.2d 127, 140 (Utah 1997) (alteration in original) (internal quotation marks omitted).

1 12 Ohio Casualty argues that the "other insurance" clause found in both its own policy and Unigard's policy does not constitute "express policy language that decrees the method of apportionment." It accordingly urges us to follow the time-on-the-risk method that we determined was the most equitable means of apportionment in Sharon Steel.

1 13 In contrast, Unigard argues that the "other insurance" clauses expressly decree the method of apportionment and require that it and Ohio Casualty should equally share the cost of defending Qoud Nine. In the alternative, it argues that a provider's time on the risk is not the most equitable method of apportioning defense costs and further that the method undermines insurers' broad duty to defend under Utah law.

114 We conclude that the "other insurance" clauses do not apply to successive insurers and therefore do not control the apportionment of costs in this case. In accordance with Sharon Steel, we hold that costs should be apportioned using the time-on-the-risk method. But on the facts of this case, that method must be modified so that the portion of defense costs attributable to Cloud Nine for the time it was uninsured is divided proportionally between the two insurers.

I. THE "OTHER INSURANCE" CLAUSES IN THE TWO INSURANCE POLICIES APPLY ONLY TO CONCURRENT INSURERS AND THUS DO NOT CONTROL THE APPORTIONMENT OF DEFENSE COSTS IN THIS CASE

115 We first consider whether the identical "other insurance" clauses in the Ohio Casualty and the Unigard policies expressly control the apportionment of defense costs between the two insurers.

116 Insurance policies are contracts between the insurer and the insured and must be analyzed according to principles of contract interpretation under Utah law. "[I]f the language within the four corners of the contract is unambiguous, the parties' intentions are determined from the plain meaning of the contractual language." Benjamin v. Amica Mut. Ins. Co., 2006 UT 37, ¶ 14, 140 P.3d 1210 (internal quotation marks omitted). We "afford[ ] the policy terms their usually accepted meanings and giv{e] effect to and harmoniz[e] to the extent possible all policy provisions." S.W. Energy Corp. v. Cont'l Ins. Co., 1999 UT 283, ¶ 12, 974 P.2d 1239.

T 17 The policies "other insurance" clauses state that when both insurance policies in question are primary and both "permit[ ] contribution by equal shares," then "if other valid and collectible insurance is available to the insured for a loss [the insurer] cover[s] ... [the insurer] will share with all that other insurance by ... equal shares."

118 The parties agree that both policies are primary and that both permit contribution by equal shares. Thus, under the policies language, the "other insurance" clause can apply only if there was "other valid and collectible insurance" available to Cloud Nine "for a loss [Ohio Casualty] cover[ed]." Uni-gard correctly notes that both insurers covered the same type of loss. But it does not follow, as Unigard contends, that "other valid and collectible insurance" was available to Cloud Nine for the loss covered by Ohio Casualty. To the contrary, Ohio Casualty's coverage of Cloud Nine was expressly limited to losses that arose out of offenses "committed ... during the policy period," which terminated on June 10, 2002. Similarly, Uni-gard's policy did not cover losses that occurred before its effective date, December 12, 2002. As Ohio Casualty's coverage and Unigard's coverage did not overlap, Unigard did not provide valid and collectible insurance for a loss that Ohio Casualty covered or vice-versa. As a result, the "other insurance" clause with its "equal shares" provision is inapplicable.

1 19 Though we find the policy language to be unambiguous and therefore controlling, we note that our conclusion is also consistent with the purpose and function of "other insurance" clauses. Courts have recognized that "other insurance" clauses "serve to prevent multiple recoveries" when "two or more policies provide coverage during the same period." Consol. Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 746 NY.S.2d 622, 774 N.E.2d 687, 694 (2002).² But such "other insurance" provisions do not apply to successive insurers. For example, the Supreme Judicial Court of Massachusetts held that "other insurance" clauses "simply reflect a recognition of the many situations in which concurrent, not successive, coverage would exist for the same loss," for instance "where one insurer issued an umbrella liability policy to the lessor of a vehicle involved in a motor vehicle accident and another insurer issued a liability policy to the lessee." Bos. Gas Co. v. Century Indem. Co., 454 Mass. 387, 910 N.E.2d 290, 308-09 (2009). And the U.S. Court of Appeals for the Seventh Cireuit has expressed skepticism that an "other insurance" provision could apply in a case where "two policies, each with an 'other insurance' clause, insure merely the same kind of risk, but not the same risk because the policies are successive." Taco Bell Corp. v. Cont'l Cas. Co., 388 F.3d 1069, 1079 (7th Cir.2004) (Posner, J.)³

20 Having concluded that the policies in question do not address the allocation of defense costs in cases such as this, we turn to Unigard's argument that we should follow Federal Insurance Co. v. Cablevision Systems Development Co. and apply the equal shares apportionment method because the "other insurance" clauses "demonstrate[ ] an intent to apportion indemnity loss equally." 836 F.2d 54, 57 (2d Cir.1987). We fail to see any general intent to apportion loss equally under the facts of this case, especially in light of the express limitation in both policies limiting covered losses to those resulting from offenses committed during the policy period. Furthermore, the Second Circuit's reasoning is incompatible with our decision in Sharon Steel, which requires an equitable distribution of defense costs absent "express policy language [that] decrees the method of apportionment," rather than general manifestations of intent. 981 P.2d at 140 (internal quotation marks omitted).

121 In summary, "other insurance" was not available to Cloud Nine for the loss Ohio Casualty covered. Consequently, the "other insurance" clause in Ohio Casualty's policy does not constitute "express policy language [that] decrees the method of apportionment" and therefore does not govern the apportionment of defense costs in this case.

II. DEFENSE COSTS SHOULD BE APPORTIONED PURSUANT TO A MODIFIED VERSION OF THE SHARON STEEL FORMULA

%22 Having determined that the policy provisions do not control the apportionment of defense costs, we turn to equitable principles to determine how to apportion defense costs between Ohio Casualty and Uni-gard. Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 9831 P.2d 127, 140 (Utah 1997). In Sharon Steel, the underlying injury involved the release of toxic material into the environment that, like the injury here, spanned many years and triggered coverage under multiple consecutive insurance policies provided by several insurance companies. Id. at 130. We held that an insurer can compel contribution for defense costs from a coinsurer that is equally obligated to defend. Id. at 139. Because we found that one insurer was "entitled to be reimbursed for those defense expenses it paid in excess of its fair share, we deem{ed] it prudent to offer guidance to the trial court in apportioning those defense costs." Id. at 140.

123 In the continuous injury, successive insurer context presented in Sharon Steel, we considered and expressly rejected apportionment based on the equal shares method that Unigard asks us to employ in this case. Id. at 140 n. 19. We rejected the equal shares method because we were "unpersuaded that [it] ... reflect[ed] the most equitable method of allocating the defense costs." Id. We instead applied the "time on the risk" apportionment method that considers the time each insurer spent "on the risk" and each insurer's policy limits. Id. at 140-41. We concluded that this method was the most equitable because it fairly related both to the time each insurer spent on the risk and the degree of risk each insurer contracted to assume. Id.⁴ We also found that "the property owners must be prepared to pay their fair share of defense costs for those years that they were without insurance coverage." Id. at 141 (internal quotation marks omitted).

124 Unigard asks us to disregard this holding. Specifically, Unigard argues that our imposition of time-on-the-risk apportionment was non-binding "guidance" to the trial court. Unigard also asserts that applying time-on-the-risk apportionment is inconsistent with its and Ohio Casualty's contractual duty to defend and with our precedent regarding the duty to defend under Utah law. It argues that applying time-on-the-risk apportionment is tantamount to holding that an insurer has the duty to defend only the claims covered by its own policy, rather than all claims "until it can limit the suit to those claims outside of the policy coverage." Benjamin v. Amica Mut. Ins. Co., 2006 UT 87, ¶ 25, 140 P.3d 1210 (internal quotation marks omitted).

125 We first reject the notion that the discussion of defense cost apportionment in Sharon Steel constituted mere "guidance" without precedential value. In Sharon Steel, we "deem{ed] it prudent to offer guidance to the trial court," and remanded the case to the trial court with instructions to fashion the precise allocation formula because it, in its capacity as fact finder, was best suited procedurally to allocate costs to the parties based upon our time-on-the-risk standard. 931 P.2d 127 at 140-42. But our conclusion that costs must be apportioned using our time-on-the-risk formula was the holding of the case and was not a holding the district court was free to ignore.

126 Moreover, we see no reason to drastically deviate from our holding in Sharon Steel. Unigard correctly notes that both insurers had a duty to defend based on both the policy language and our precedent. See Benjamin, 2006 UT 37, ¶ 25, 140 P.3d 1210. But it does not follow, as Unigard contends, that defense costs must be apportioned equally. The duty to defend and the apportionment of defense costs between two insurers that have an equal duty to defend are distinct issues. See Sharon, 931 P.2d at 137-42 (evaluating apportionment methods and applying a time-on-the-risk formula despite finding that each insurer had an equal duty to defend). The U.S. Court of Appeals for the Fifth Circuit has acknowledged this distinction, "approv[ing of] the concept of apportioning the cost of the insured's defense among those liable," but not "limit[{ing] the duty of defending the insured." Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365, 372 (5th Cir.1993).

[ 27 Given this distinction, there is no logical conflict between our duty to defend prece-edent and the time-on-the-risk formula we adopted in Sharon Steel. The time-on-the-risk method fairly allocates costs between insurers based on the amount of risk each contracted to undertake and the premiums each received without compromising the rights of the insured. It also comports with our policy of encouraging prompt and effective defense of the insured by the insurer. See Benjamin, 2006 UT 37, ¶¶ 22-25, 140 P.3d 1210 (construing an insurance policy liberally to promote the purposes of insurance and requiring an insurer to defend until uncertainties can be resolved against coverage). Under the time-on-the-risk method, the insurer facing larger indemnity costs has a greater stake in controlling choice of counsel and settlement negotiations. This insurer can more practically and efficiently take the lead in defending the suit without interference from the insurer with less indemnity cost at stake while still receiving contribution from that insurer for a benefit conferred. Alternatively, if the insurer with more indemnity cost at stake fails to defend, the insurer with less time on the risk can defend vigorously knowing that it can recoup a proportionate share of the costs from the insurer with more time and resources on the risk.

128 We therefore follow Sharon Steel to apportion defense costs in this case. But we decline to follow that portion of Sharon Steel that apportioned defense costs to the insured for those periods of time when the insured was without coverage. In this case, there is language in both polices that expressly gives each insurer control over its defense of the insured. Ohio Casualty reserved the right to, "at [its] discretion, investigate any offense and settle any claim or 'suit' that may result." And Unigard reserved the right to "conduct and control the defense of the in-demnitee." Given the insurers' legal and contractual duties to defend, they often, as Ohio Casualty and Unigard did here, reserve the exclusive right to control any litigation and make important decisions regarding the course of the litigation, including the hiring and firing of counsel and whether or not to settle. In light of this practice, it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit. Accordingly, we conclude that it would be inequitable to hold the insured responsible for the share of defense costs attributable to the time period during which it was uninsured.

¶ 29 This conclusion is consistent with insurers' duty to defend under Utah law. Where an insured holds coverage from a single insurer for part of a period of continuous injury and is then without coverage for the remainder of the injury period, the insurer may not recover defense costs from the insured for the period of noncoverage because the insurer must "provide a defense to the entire suit, at least until it can limit the suit to those claims outside of the policy coverage." Id. ¶ 25 (internal quotation marks omitted); see also Sharon Steel, 931 P.2d at 133 (acknowledging that "an insurer's duty to defend is broader than its duty to indemnify"). Where, as in this case, there are multiple insurers, the broad duty to defend also prevents the insurers from recovering defense costs from the insured for any periods of non-coverage.

1 30 In accordance with Sharon Steel and consistent with the policy language specific to this case that provides the insurance companies with complete control over the litigation, we conclude that defense costs in this case should be apportioned by a modified version of the Sharon Steel formula. This formula begins by apportioning the defense costs between successive insurers according to their time on the risk and the amount of their policy limits. It then divides the portion of defense costs attributable to any periods during which the insured lacked coverage in the same proportions.

CONCLUSION

131 In response to the question certified by the Tenth Cireuit, we hold that the "other insurance" provisions in the policies in question do not control the apportionment of defense costs. Instead, defense costs should be allocated using the Sharon Steel "time on the risk" formula modified to proportionally apportion to the insurers any defense costs attributable to periods of noncoverage. This is the most equitable method of apportionment because under it each insurer's allocation of defense costs is a function of the amount of time each insurer spent "on-the-risk" and each insurer's policy limits, And this method ensures that the insured is not responsible for defense costs related to litigation over which its insurer has full control and an absolute duty to defend.

Justice PARRISH authored the opinion of the Court, in which Chief Justice DURHAM and Justice LEE joined. Associate Chief Justice DURRANT filed a dissenting opinion, in which Justice NEHRING joined.

1 . The policies insured Cloud Nine, Easy Seat, Rodney Ford, Rex Haddock, and Blaine Ford. For ease of reference, we refer to these parties collectively throughout this opinion as "Cloud Nine."

2 . See also Owens-Ill., Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974, 991 (1994) (Historically, 'other insurance' clauses were designed to prevent multiple recoveries when more than one policy provided coverage for a given loss.").

3 . See also St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 919 F.2d 235, 241 (4th Cir.1990) (noting that "other insurance" clauses apply only where coverage is concurrent); 23 E.M. Hormzes, Appismanon Insurance § 145.4{(C], at 34 (2d ed. 2003) (noting that "other insurance" clauses do not allocate liability among successive insurers because they would "unjustly make consecutive insurers liable for damages occurring outside their policy periods").

4 . A majority of jurisdictions have also followed this formula. Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 6.02(al[!] (14th ed. 2008) (noting that "[the 'majority rule' is that defense costs are allocated among co-insurers on a pro rata basis in proportion to policy limits").