Lexington Ins. Co. v. Axis Surplus Ins. Co.

Lexington Insurance Company, Plaintiff, v. AXIS Surplus Insurance Company, Defendant.

Civ. No. 13-3348 (RHK/FLN)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

Dated: June 4, 2014

MEMORANDUM OPINIONAND ORDER

Mark E. Cohen, Anthony R. Zelle, Zelle McDonough & Cohen LLP, Boston, Massachusetts, for Plaintiff.

Kimberly H. Petrina, Jeremy S. Macklin, Michael S. Knippen, Traub Lieberman Straus & Shrewsberry LLP, Chicago, Illinois, Daniel A. Haws, Murnane Brandt, PA, St. Paul, Minnesota, for Defendant.

INTRODUCTION

In this action, Plaintiff Lexington Insurance Company ("Lexington") seeks contribution from Defendant AXIS Surplus Insurance Company ("AXIS") for amounts Lexington paid on behalf of their mutual insured, Fagen Inc. ("Fagen"), to settle an underlying lawsuit against Fagen. AXIS now moves to dismiss Count II of Lexington's Complaint, seeking equitable contribution; for the reasons set forth below, its Motion will be denied.

BACKGROUND

Fagen's Insurance Policies

Fagen is a full-service industrial contractor. It is insured under four policies relevant to the instant action.

First, Fagen has a general liability policy from Zurich American Insurance Company ("Zurich/Fagen Policy") with a $1,000,000 per-occurrence liability limit. (Compl. ¶ 7.)

Second, it is an "additional insured" under its subcontractor Kiewit's general liability policy from Zurich ("Zurich/Kiewit Policy"), which is a fronting policy¹ with a $5,000,000 per-occurrence liability limit. (Id. ¶ 9.)

Third, it has a professional liability policy from Lexington ("Lexington Policy") with a $10,000,000 per-claim liability limit. (Id. ¶ 15.) This policy covers only Fagen's negligence in the provision of architectural, engineering, and other professional services. It does not cover Fagen's negligent "workmanship, assembly, construction, erection, fabrication, installation or remediation." (Id. ¶ 16.) The policy also provides that it "shall apply as excess insurance over any other valid insurance, whether collectible or not, be it primary, excess or contributing." (Id. ¶ 17.)

Fourth, Fagen has an excess general liability policy from AXIS ("AXIS Policy"), with a $10,000,000 per-occurrence liability limit. (Id. ¶ 8.) This policy does not cover property damage that arises out of the rendering or failure to render professional services, including architectural and engineering services, by Fagen or on Fagen's behalf. (Id. ¶ 13.) The policy provides AXIS will pay "those sums in excess of the 'retained limit' which the insured becomes legally obligated to pay as damages to which this insuranceapplies because of 'bodily injury', 'property damage', or 'personal and advertising injury'." (Id. ¶ 10.) The "retained limit" is the limit of any insurance policy listed in the "Schedule of Underlying Insurance." (Id.) This Schedule includes the Zurich/Fagen Policy, but not the Lexington Policy. (Id. ¶¶ 11-12.) The policy also has an "other insurance" clause, providing: "This insurance is excess over, and shall not contribute with, any other insurance, whether primary, excess, contingent or on any other basis. This condition will not apply to insurance specifically written as excess over this policy." (Id. ¶ 14.)

The Underlying Action

In 2009, Illinois River Energy, LLC ("IRE") filed suit against Fagen, alleging Fagen had negligently designed and built IRE's ethanol plant. Specifically, IRE alleged that Fagen's design for IRE's concrete corn-storage silos used too little rebar and that in construction, Fagen used even less rebar than the design called for. IRE alleged these design and construction flaws caused the walls of the silos to crack, among other structural problems, forcing IRE to shut down the plant for for several weeks and suffer multi-million dollar damage. (Id. ¶¶ 24-25.) Fagen tendered the action to Lexington, Zurich, and AXIS. (Id. ¶ 26.) Lexington and Zurich agreed to defend Fagen. (Id. ¶¶ 27-28.) Zurich agreed to defend Fagen under both the Zurich/Fagen Policy and the Zurich/Kiewit Policy. Lexington agreed to defend Fagen under a reservation of rights including its right to decline indemnification for claims arising out of Fagen's faulty construction. AXIS did not defend Fagen and issued a reservation of rights letterasserting various defenses and denying coverage for claims for negligent professional services. (Id. ¶ 29.)

After nearly four years of litigation, the parties in the underlying action, including Fagen, reached a confidential settlement. Lexington requested that AXIS participate in the settlement negotiations and contribute toward the settlement, but AXIS refused. (Id. ¶ 34.) Lexington and Zurich agreed to share the first $2 million in indemnification costs equally—Zurich paying its $1 million limit under the Zurich/Fagen Policy and Lexington paying $1 million under its Policy. (Id. ¶ 37.) Ultimately, Zurich paid the limit of the Zurich/Fagen Policy, Kiewit paid the limit of the Zurich/Kiewit Policy, and Lexington paid substantially more than $1 million to settle the lawsuit, while reserving its right to seek contribution. (Id. ¶¶ 30-33.) The settlement did not allocate damages, rather Lexington alleges the design and construction flaws resulted in a single, indivisible injury (the defective silos). Lexington alleges that Zurich paying the limit of its policy triggered coverage under the AXIS Policy, and that AXIS is required to share the excess indemnification costs that Lexington paid.

After AXIS refused to contribute to the settlement, Lexington filed the instant action alleging two counts: a request for declaratory judgment (Count I) that AXIS is obligated to indemnify Lexington for half of the amount paid by Lexington in excess of $1 million; and a request for equitable contribution (Count II) seeking such payment and attorneys' fees. AXIS now moves to dismiss Count II for failure to state a claim.

STANDARD OF DECISION

The Supreme Court set forth the standard for evaluating a motion to dismiss in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009). To avoid dismissal, a complaint must include "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 547. A "formulaic recitation of the elements of a cause of action" will not suffice. Id. at 555. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 556).

When reviewing a motion to dismiss, the Court "must accept [the] plaintiff's specific factual allegations as true but [need] not . . . accept a plaintiff's legal conclusions." Brown v. Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010) (citing Twombly, 550 U.S. at 556). The complaint must be construed liberally, and any allegations or reasonable inferences arising therefrom must be interpreted in the light most favorable to the plaintiff. Twombly, 550 U.S. at 554-56. A complaint should not be dismissed simply because the Court is doubtful that the plaintiff will be able to prove all of the necessary factual allegations. Id. at 556. Accordingly, a well-pleaded complaint will survive a motion to dismiss even if it appears that recovery is very remote and unlikely. Id. "Finally, the complaint should be read as a whole, not parsed piece by piece to determine whether each allegation, in isolation, is plausible." Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009).

ANALYSIS

I. Equitable Contribution

In Count II, Lexington asserts a claim for equitable contribution against AXIS. Under Minnesota law, equitable contribution is the right of one insurer to recover from a co-insurer amounts it paid in excess of its proportionate share of the two insurers' common obligation.² Cargill, Inc. v. Ace Am. Ins. Co., 784 N.W.2d 341, 352 n.11 (Minn. 2010). Thus, a claim for equitable contribution requires (1) the insurers share a "common liability" and (2) one insurer paid more than its proportionate share of that liability. Id.; see also Am. Auto. Ins. Co. v. Molling, 57 N.W.2d 847, 851-52 (Minn. 1953) ("The thing that gives rise to the liability (for contribution) is that both parties were subject originally to a [c]ommon liability, and one has taken more than his just share of the burden.") (internal quotations omitted). The equitable obligation to contribute is essentially based upon a theory of unjust enrichment—it is meant to "equalize[e] the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of another." Cont'l Cas. Co. v. Nat'l Union Fire Ins. Co., 940 F. Supp. 2d 898, 929 (D. Minn. 2013) (Tunheim, J.) (internal quotation omitted).

AXIS challenges whether equitable contribution applies in the context of an insurer's duty to indemnify, rather than defend, the insured. It also challenges whether it has any "common liability" with Lexington, given the differences in coverage between the AXIS and Lexington Policies.

A. Contribution for Indemnity versus Defense

AXIS argues that the right to equitable contribution in Minnesota exists in only "a limited sense." (4/30/14 Hr'g Tr. at 3.) It contends that "this right of action exists in the context of contribution of defense costs, not in the context of indemnity." (Id.) In support, it cites Cargill, which overturned an earlier rule barring contribution for defense costs and held "a primary insurer that has a duty to defend . . . has an equitable right to seek contribution for defense costs from any other insurer who also has a duty to defend the insured." 784 N.W.2d at 354. But Cargill did not preclude contribution in the context of indemnity; it simply did not address it. In fact, the Minnesota Supreme Court's reasoning in Cargill supports Lexington's alleged right to contribution.

Before Cargill, coinsurers in Minnesota had no right to contribution for defense costs. This rule was cemented in Iowa National Mutual Insurance...