Insurance Co. of the State of Pennsylvania v. Great Northern Insurance Co. , 473 Mass. 745 ( 2016 )

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SJC-11897
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA vs. GREAT
NORTHERN INSURANCE COMPANY.
Suffolk. November 2, 2015. - March 7, 2016.
Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, &
Hines, JJ.
Workers' Compensation Act, Insurer, Coverage, Election of
remedies. Insurance, Workers' compensation insurance,
Contribution among insurers, Insurer's obligation to
defend. Contribution. Tender. Election of Remedies.
Certification of a question of law to the Supreme Judicial
Court by the United States District Court for the District of
Massachusetts.
Barbara I. Michaelides, of Illinois (Aaron S. Bayer, of
Connecticut, with her) for the plaintiff.
Jennifer C. Sheehan (Richard J. Shea with her) for the
defendant.
Laura Meyer Gregory, for Massachusetts Defense Lawyers
Association, amicus curiae, submitted a brief.
GANTS, C.J. The United States Court of Appeals for the
First Circuit certified the following question to this court,
2
pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700(1981):
"Where two workers' compensation insurance policies
provide coverage for the same loss, may an insured elect
which of its insurers is to defend and indemnify the
claim by intentionally tendering its defense to that
insurer and not the other and thereby foreclose the
insurer to which tender is made from obtaining
contribution from the insurer to which no tender is
made?"
We answer "no" to the question. Where, as here, two primary
workers' compensation insurance policies provide coverage for
the same loss arising from injury to an employee, the insurance
company that pays the loss has a right of equitable contribution
to ensure that the coinsurer pays its fair share of the loss.
The employer of the injured employee may not prevent the
insurance company that pays the loss from exercising its right
of equitable contribution by intentionally giving notice of the
injury only to that insurer.1
Background. We set forth below the relevant background and
procedural history of the case contained in the certification
order from the First Circuit, occasionally supplemented by
undisputed information in the record. In January, 2010, an
employee of Progression, Inc. (Progression), was severely
injured in an automobile accident while traveling abroad on a
business trip. Progression had purchased two workers'
1
We acknowledge the amicus brief submitted by the
Massachusetts Defense Lawyers Association.
3
compensation policies from two different insurers, one providing
compulsory workers' compensation coverage from the Insurance
Company of the State of Pennsylvania (ISOP), and a second
providing workers' compensation coverage for employees traveling
outside the United States and Canada from Great Northern
Insurance Company (Great Northern). Both policies provided
primary coverage; neither was an excess policy.2 The employee
gave timely notice of his injury to Progression and pursued a
workers' compensation claim before the Department of Industrial
Accidents (department). Progression gave notice of the claim
only to ISOP; it did not notify Great Northern. ISOP
immediately began making payments pursuant to the policy and
defended the claim before the department.
ISOP later learned that Progression also had workers'
compensation coverage under its Great Northern policy and, on
October 3, 2011, sent a letter to Great Northern that gave
notice of the claim and requested contribution. In a letter
dated March 15, 2012, Great Northern declined "the attempted
tender" of the claim. It informed ISOP that it had learned from
2
An excess insurance policy provides coverage for a risk
only when the coverage limits from other policies insuring that
risk have been exhausted. See R. Segalla, Couch on Insurance 3d
§ 220:32 (2005). An excess insurance policy and a primary
insurance policy "do not (absent a specific provision) act as
coinsurers of the entirety of the risk. Rather, each insurer
contracts with the insured individually to cover a particular
portion of the risk." Allmerica Fin. Corp. v. Certain
Underwriters at Lloyd's, London, 449 Mass. 621, 629-630 (2007).
4
Progression that Progression had intended to tender the claim
only to ISOP and had not authorized ISOP to report or tender the
claim to Great Northern.
On November 7, 2013, ISOP filed a complaint against Great
Northern in the United States District Court for the District of
Massachusetts, seeking a judgment declaring that the doctrine of
equitable contribution required Great Northern to pay one-half
of the past and future defense costs and indemnity payments
related to Progression's claim. On August 25, 2014, a judge of
the District Court allowed Great Northern's motion for summary
judgment. Insurance Co. of Pa. v. Great N. Ins. Co., 43 F.
Supp. 3d 76, 82-83 (D. Mass. 2014). The judge concluded, "in
the absence of binding precedent on this point," that Great
Northern was correct "that any obligation of a co-insurer for
equitable contribution to the other insurer does not arise until
a claim for defense or indemnity is tendered by the insured or
one authorized to act on behalf of the insured." ISOP timely
appealed and, on May 29, 2015, the First Circuit certified the
question before us.
Discussion. 1. Equitable contribution. Under the
doctrine of equitable contribution, where multiple insurers
provide coverage for a loss of an insured, an insurer who pays
more than its share of the costs of defense and indemnity may
require a proportionate contribution from the other coinsurers.
5
See Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966,
974 (2000) ("Equitable contribution permits reimbursement to the
insurer that paid on the loss for the excess it paid over its
proportionate share of the obligation . . ."). See generally
S.M. Seaman & J.R. Schulze, Allocation of Losses in Complex
Insurance Coverage Claims § 5:2 (3d ed. 2014) (Seaman & Schulze)
("Equitable contribution applies to insurers that share the same
type of obligation on the same risk with respect to the same
insured"). "The right of equitable contribution does not depend
on an express agreement between the parties to indemnify each
other, but, rather, rests upon equitable principles that imply
an obligation to contribute ratably toward the payment of a
common obligation." Lexington Ins. Co. v. General Acc. Ins. Co.
of Am., 338 F.3d 42, 49-50 (1st Cir. 2003). See Seaman &
Schulze, supra ("The doctrine is based on principles of equity,
not contract"). Because it does not derive from contract,
equitable contribution, unlike subrogation, is a right of the
insurer and exists independently of the rights of the insured.
Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App. 4th
1279, 1294- 1295 (1998).
Equitable contribution is designed to prevent the potential
unfair result that the company that pays first is left to cover
the entire loss. See id. at 1295. "[W]here multiple insurers
or indemnitors share equal contractual liability for the primary
6
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." Id.
The underlying principle is that "each [insurer] pays its fair
share and one does not profit at the expense of the others."
Id. at 1296. The doctrine recognizes that an insured who
expects to be paid in full by one insurance company may have no
incentive to ask the other insurance company covering the same
risk to pay its share. See Truck Ins. Exch., 79 Cal. App. 4th
at 974. And the doctrine aims to deprive an insurer of "any
incentive to avoid paying a just claim in the hope the claimant
will obtain full payment from another coindemnitor." Fireman's
Fund Ins. Co., supra at 1295. Apart from ensuring fairness,
equitable contribution furthers the basic risk-spreading purpose
of insurance by allowing insurers to distribute the costs of a
claim equally among all insurers with coverage obligations. See
S. Plitt, D. Maldonado, & J.D. Rogers, Couch on Insurance 3d
§ 1:9 (Supp. 2015).
For these reasons, the majority of jurisdictions recognize
the equitable contribution doctrine. See Seaman & Schulze,
supra at § 5:2 (citing cases from jurisdictions recognizing
equitable contribution and noting that only a "minority of
states" do not allow it). We are among the majority of States
that have recognized the right of an insurer to seek equitable
7
contribution from coinsurers who cover the same risk. See
Mission Ins. Co. v. United States Fire Ins. Co., 401 Mass. 492,
498-500 (1988) (where two policies create "umbrella-type excess
insurance," both insurers must "contribute equally until the
policy with the lower limit is exhausted"); Travelers Ins. Co.
v. Aetna Ins. Co., 359 Mass. 743 (1971) (affirming order
requiring coinsurer to provide contribution to insurer that paid
settlement amount for jointly covered claim). See also
Rubenstein v. Royal Ins. Co. of Am., 44 Mass. App. Ct. 842, 852
(1998), S.C., 429 Mass. 355 (1999) ("Of course, there is no bar
against an insurer obtaining a share of indemnification or
defense costs from other insurers under the doctrine of
equitable contribution"). Cf. Boston Gas Co. v. Century Indem.
Co., 454 Mass. 337, 347-348, 365-366 (2009) (where various
insurers provided coverage for environmental damage over many
years, pro rata allocation produces most equitable result for
"long-tail claims" because it avoids saddling one insurer with
full loss and "promotes judicial efficiency, engenders stability
and predictability in the insurance market, provides incentive
for responsible commercial behavior, and produces an equitable
result"). We have recognized the right of equitable
contribution in past cases, and now clearly declare that we
adopt the doctrine.
8
2. Selective tender. Great Northern does not challenge
the wisdom of the equitable contribution doctrine but contends
that it does not apply in this case because Progression
purposely tendered the workers' compensation claim only to ISOP.
It argues that "there is no support in the case law of any
jurisdiction for the proposition that, in the absence of
exceptional circumstances, the doctrine of equitable
contribution can override explicit, unambiguous policy
language." Lexington Ins. Co., 338 F.3d at 50. And it notes
that, under its workers' compensation insurance policy with
Progression, it had no duty to provide coverage unless
Progression "fully complied with all of the terms and conditions
of the policy." One of those terms required Progression to give
notice to Great Northern "at once if injury occurs that may be
covered" by the policy. Because Progression purposely gave no
such notice, Great Northern claims that it had no duty to
provide coverage for the losses suffered by Progression's
injured employee. It also claims that, because it had no duty
to provide coverage, there can be no equitable contribution,
which is predicated on multiple insurers providing coverage for
the same risk.
Although it does not use the term, Great Northern
essentially asks us to recognize the "selective tender"
exception to the doctrine of equitable contribution, which
9
provides that, "where an insured has not tendered a claim to an
insurer, that insurer is excused from its duty to contribute to
a settlement of the claim." Mutual of Enumclaw Ins. Co. v. USF
Ins. Co., 164 Wash. 2d 411, 421 (2008). The exception has been
recognized by only "a minority of jurisdictions." R. Segalla,
Couch on Insurance 3d § 200:37 (2005). See, e.g., John Burns
Constr. Co. v. Indiana Ins. Co., 189 Ill. 2d 570, 574 (2000);
Mutual of Enumclaw Ins. Co., supra at 421-422. The Supreme
Court of Washington adopted the "selective tender" exception,
reasoning:
"Equity provides no right for an insurer to seek
contribution from another insurer who has no obligation to
the insured. . . . The duties to defend and indemnify do
not become legal obligations until a claim for defense or
indemnity is tendered. Further, the insurer who seeks
contribution does not sit in the place of the insured and
cannot tender a claim to the other insurer. Thus, if the
insured has not tendered a claim to an insurer prior to
settlement or the end of trial, other insurers cannot
recover in equitable contribution against that insurer"
(emphasis in original; footnote omitted).
Mutual of Enumclaw Inc. Co., supra at 420-421. As this excerpt
makes clear, the underlying premise of the selective tender
exception is that, if the insured chose not to tender a claim to
an insurer, the insurer has no obligation to defend or indemnify
that claim and therefore has no obligation to contribute towards
the defense or indemnification. That premise is incorrect with
respect to workers' compensation insurance under Massachusetts
law.
10
Workers' compensation insurance is a creature of statute,
and all workers' compensation insurance policies must be
interpreted to comply with applicable statutes and regulations
governing workers' compensation. See generally G. L. c. 152,
§§ 26, 44; Darcy v. Hartford Ins. Co., 407 Mass. 481, 485 (1990)
(notice provision in workers' compensation insurance policy
interpreted in accordance with applicable statute). General
Laws c. 152, § 26, provides that when an employee is injured in
the course of his or her employment, that employee "shall be
paid compensation by the insurer or self-insurer." Therefore,
under Massachusetts law, although the employer purchases the
workers' compensation policy, a workers' compensation insurer is
directly liable to an injured employee for the workers'
compensation benefits provided by law; the insurer does not
reimburse the employer for its payment of these benefits.
Under Massachusetts workers' compensation insurance law, an
injured employee presents a claim for compensation by providing
notice of the injury in writing "to the insurer or insured
[i.e., the employer] as soon as practicable" after the incident
causing the injury, stating the time, place, and cause of the
injury (emphasis added). G. L. c. 152, §§ 41, 42. The employer
is required to give notice of the injury to the department and
its workers' compensation insurer within seven days, but the
11
failure to do so results only in a nominal fine to the employer;3
it does not bar the employee from obtaining compensation from
the workers' compensation insurer. The employee is barred from
receiving workers' compensation benefits under G. L. c. 152,
§ 44, only if the insurer, the insured (i.e., the employer), and
their agent had no knowledge of the injury and the insurer was
prejudiced by the absence of notice. See G. L. c. 152, § 44.
By giving notice of the injury to the employer alone, an
employee preserves his or her entitlement to workers'
compensation benefits.
In light of these statutory provisions, Great Northern's
obligation to defend and indemnify the claim was triggered by
the notice given to Progression by its injured employee,
regardless of whether Progression gave notice of the injury to
Great Northern. Therefore, as applied to workers' compensation
benefits, the language in Great Northern's policy providing that
its duty of coverage is contingent on the employer providing
notice of the injury is contrary to Massachusetts law, and null
and void with respect to a Massachusetts employee.
3
Under G. L. c. 152, § 6, the failure of an employer to
notify the Department of Industrial Accidents or the workers'
compensation insurers of the injury "shall be punished by a fine
of one hundred dollars for each such violation" but is
punishable only if the employer violates this provision three or
more times in any year.
12
The Supreme Court of Utah considered whether to adopt the
selective tender exception where multiple insurers provided
overlapping workers' compensation coverage and rejected it for
the same reasons we do. Workers Compensation Fund v. Utah
Business Ins. Co., 296 P.3d 734, 739 (Utah 2013). The court
explained that Utah's workers' compensation statute (like ours)
provides that insurers are liable for injuries reported by
employees regardless of whether employers notify or formally
tender claims to insurers. Id. Because "[a]ll insurers . . .
are automatically liable for claims reported to employers," the
court held that "[t]he statutory scheme . . . precludes [it]
from adopting the [selective] tender doctrine in the context of
workers compensation." Id.The selective tender exception also does not accord with
Massachusetts law governing general liability insurance. Under
Massachusetts law, an insurer's coverage obligation is triggered
by notice regardless of the timing or the source of such notice;
late notice or notice from a third party does not preclude
coverage unless the insurer is prejudiced. See G. L. c. 175,
§ 112; Boyle v. Zurich Am. Ins. Co., 472 Mass. 649, 655-659
(2015). Specifically, pursuant to G. L. c. 175, § 112, "[a]n
insurance company shall not deny insurance coverage to an
insured because of failure of an insured to seasonably notify an
insurance company of an occurrence . . . which may give rise to
13
liability insured against unless the insurance company has been
prejudiced thereby." See Johnson Controls, Inc. v. Bowes, 381
Mass. 278, 282 (1980) (insurance company seeking relief from
coverage obligations under liability insurance policy because of
untimely notice must show both breach of notice provision and
prejudice arising from breach). In Boyle, supra at 658, where a
third party notified the insurer of the complaint, we held that
the insured's failure to give notice did not excuse the insurer
from its duty to defend unless it could demonstrate that the
insured's breach of its notice obligation caused prejudice by
depriving the insurer of the opportunity to mount an effective
defense. Therefore, in Massachusetts, an insured's failure to
tender a claim by giving timely notice does not protect the
insurance company from liability on the claim, even if the
failure were intentional, unless the insurance company was
prejudiced by the untimeliness of the notice. Because the
premise of the selective tender doctrine is that an insurer is
not liable on a claim where the insured fails to give timely
notice, adoption of the selective tender exception would be in
conflict with our statutory and case law governing liability
insurance.
Its adoption would also be contrary to sound public policy
because it would reward insurers that try to ignore their
coverage obligations at the expense of those that
14
conscientiously honor them. Under the selective tender
exception, an insured that has two insurers of the same risk
might choose to tender the claim to the insurance company that
will promptly honor and pay the claim with minimum inconvenience
and paperwork, and avoid tendering the claim to the insurance
company that would delay payment of the claim and maximize the
inconvenience and paperwork involved in obtaining payment.
Selective tender would prevent the conscientious insurer from
seeking equitable contribution from its less conscientious
coinsurer. It would reward the "bad" insurer, who would be
spared paying its fair share of the claim, and punish the "good"
insurer, who would be required to pay the entirety of the claim
alone. Insurers should be encouraged to promptly accept their
coverage obligations and begin defending claims; they should not
be rewarded for failing to do. See Fireman's Fund Ins. Co., 65
Cal. App. 4th at 1295.
Selective tender would also burden the Massachusetts
Insurers Insolvency Fund, which, among other things, covers
claims of insureds where the insurer has become insolvent. See
G. L. c. 175D, § 5. If an employer with two workers'
compensation insurers could negate an insurance company's
workers' compensation coverage by electing not to notify that
insurer of the injury, then the full burden of coverage would
15
fall on the notified insurer and, if that insurer were to become
insolvent, on the Fund. See id. See also G. L. c. 175D, § 2.
Conclusion. We answer "no" to the certified question.
Under Massachusetts law, where two workers' compensation
insurance policies issued by different companies provide
coverage for the same loss, an employer, by electing to provide
notice of the claim only to one insurer, does not foreclose that
insurer from obtaining equitable contribution from the other
insurer.
The Reporter of Decisions is to furnish attested copies of
this opinion to the clerk of this court. The clerk in turn will
transmit one copy, under the seal of the court, to the clerk of
the United States Court of Appeals for the First Circuit, as the
answer to the question certified, and will also transmit a copy
to each party.