4 N.Y.3d 451 (2005)
When two insurance policies provide primary coverage to the same insured, and one is considered excess only because of an “other insurance” clause, defense costs should be shared proportionally based on policy limits if the excess insurer voluntarily assumes the defense.
Summary
General Motors Acceptance Corporation (GMAC) leased a vehicle to Sabin, who caused an accident. Both Nationwide (Sabin’s insurer) and Fireman’s Fund (GMAC’s insurer) had primary policies. Nationwide initially defended GMAC but then tendered the defense to Fireman’s, who accepted while reserving the right to seek contribution for defense costs. After settlement, Fireman’s sued Nationwide for full reimbursement of defense costs. The New York Court of Appeals held that because both policies were primary (despite the “other insurance” clause), and Fireman’s voluntarily assumed the defense, defense costs should be shared equally given the identical policy limits.
Facts
John Sabin leased an SUV from GMAC, requiring him to obtain insurance and name GMAC as an additional insured.
Sabin procured a primary policy from Nationwide with $100,000/$300,000 limits and a duty to defend.
GMAC had a primary policy from Fireman’s Fund with similar limits and a duty to defend, but an “other insurance” clause making it excess to any other collectible insurance.
GMAC also had an excess “umbrella” policy from Fireman’s Fund with a $9,000,000 limit that only required defending if no other primary insurance applied.
Sabin caused a serious accident, and lawsuits were filed against GMAC.
Nationwide initially defended but tendered the defense to Fireman’s due to high potential liability.
Fireman’s accepted the defense, reserving the right to seek contribution from Nationwide for defense costs.
Fireman’s settled the main action for $4.5 million, contributed $3.3 million of its policy limits, and Nationwide contributed its $100,000 limits.
Procedural History
Fireman’s and GMAC sued Nationwide to recover all defense costs.
The Supreme Court granted summary judgment to Fireman’s and GMAC, ordering Nationwide to reimburse all defense costs.
The Appellate Division affirmed.
The New York Court of Appeals reversed.
Issue(s)
Whether an excess insurer, whose primary policy is deemed excess only due to an “other insurance” clause, is entitled to full reimbursement of defense costs from another primary insurer when it voluntarily assumes the defense of a shared insured.
Holding
No, because where two primary policies exist, and one is excess only due to an “other insurance” provision, and the excess carrier voluntarily assumes and manages the defense, an allocation of defense costs based on primary policy limits is appropriate. The court ordered a 50-50 split of costs because both policies had identical limits.
Court’s Reasoning
The court reasoned that a primary insurer has the primary duty to defend its insured. While an excess insurer may participate in the defense, it has no obligation to do so.
Fireman’s had two policies: a primary policy deemed excess by the “other insurance” clause and a true excess policy. By accepting the defense, Fireman’s triggered its duty to defend under the primary policy.
The court emphasized that Fireman’s reservation of rights put Nationwide on notice that it was not relieved of its policy obligations and would likely be liable for a share of the defense costs.
Premiums for primary insurance are higher because they contemplate the cost of defending potential lawsuits. Relieving a primary insurer of this duty would be a windfall.
The court stated that requiring both insurers to contribute equally is consistent with the reasonable expectations of an ordinary businessman. “[I]nsurance contracts be interpreted ‘according to the reasonable expectation and purpose of the ordinary businessman when making an ordinary business contract’.”
The court rejected a rule requiring an equitable allocation between primary and excess insurers in all circumstances. The key was the coincidental primary coverage, the assumption of the defense by Fireman’s Fund, and the reservation of rights. The presence of both policies with primary coverage with a duty to defend and the voluntary assumption of the defense costs was the deciding factor in requiring each party to split the costs.