Picture this: you’re an insurance company that has just received notice of a claim from one of your insureds. You provide coverage under the terms of the policy. Subsequently, you find out that your insured also has coverage from another insurer, but your insured never notified them of the claim. You provide notice to the other insurance company and seek equitable contribution, but the other insurance company refuses to contribute. It seems outrageous—can they do that?!
It turns out that, under a recent District of Massachusetts opinion, applying Massachusetts law, the other insurance company can deny coverage under the “selective tender” rule. In Insurance Company of the State of Pennsylvania v. Great Northern Insurance Company, the Insurance Company of the State of Pennsylvania (“ISOP”) received notice of a worker’s compensation claim from one of its insureds. ISOP paid worker’s compensation benefits to the employee pursuant to the insured’s policy. When ISOP discovered that the insured also had a policy with another insurer, Great Northern, it notified Great Northern of the insured’s claim and sought equitable contribution. Equitable contribution permits an insurer (such as ISOP) to seek reimbursement from a co-insurer (such as Great Northern) where one insurer pays more than its fair share of a loss on a claim for which both insurers have a contractual obligation to provide coverage.
Great Northern denied the claim and refused to provide equitable contribution because the insured never provided Great Northern with notice of the claim. Moreover, Great Northern noted that the insured never authorized ISOP to report the claim, nor make tender of it, to Great Northern.
The parties filed cross-motions for summary judgment, with ISOP seeking a declaration that it was entitled to equitable contribution from Great Northern. Judge Casper held that ISOP was not entitled to contribution, citing the “selective tender” rule. This rule holds that where multiple insurance companies provide coverage for the same claim, the insured can choose whether it wants to notify one or all insurance companies of a potential claim. If the insured chooses to notify one insurance company, but not another, the selective tender rule provides that the company notified cannot seek contribution from other insurers.
In adopting the selective tender rule, the Court stated 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.” The Court noted that this rule comported most closely with the “admonition that the doctrine of equitable contribution cannot override explicit, unambiguous policy language.” In this case, the Court noted that the explicit policy language, like most policies, conditioned coverage on the insured’s notification to Great Northern of a claim. Because the insured failed to do so, the Court found that Great Northern was under no obligation to contribute to ISOP for the insured’s claim, despite the fact that Great Northern had received timely notice from ISOP.
The Court also dispelled the notion that the “late tender” rule might demand equitable contribution to ISOP. The “late tender” rule requires an insurer perform its contractual obligations, even where an insured fails to provide timely notice of a claim, unless the insurer can show that it was materially prejudiced by the late notice. The purpose of the rule is to protect the insured and the public. The Court noted that if an insurance company is not materially prejudiced by the insured’s late notice, and still refuses to provide coverage, the insurance company gets a windfall at the expense of the insured and the public for the uninsured loss.
Because the selective tender rule provides full coverage for the insured, the late tender rule does not demand equitable contribution from another insurer. The court noted that each insurer was under contractual obligation to provide full coverage for the loss, and each received consideration for doing so. Thus, the insurer is not harmed by being forced to perform its contractual obligations.
Massachusetts joined a minority of jurisdictions in adopting the selective tender rule. Most other states, including California and Ohio, permit equitable contribution from one insurer to the other even if the insured does not notify one of the claim. As long as one insurer provides timely notice of the claim to the other, equitable contribution is a possibility.
Commentators have suggested that trial court judges will struggle to reconcile Judge Casper’s ruling with a line of authority in the Supreme Judicial Court that holds that notice clauses are not enforced literally, but rather only when late notice causes prejudice to the insurance companies. However, the SJC has not had an occasion to consider late tender in the context of equitable contribution among insurers, and Judge Casper’s ruling specifically notes that in this specific area, the late tender rule does not apply because the policy behind the rule is not served.
So what does this decision mean for insurance companies? It means that in Massachusetts, equitable contribution won’t be used against an insurance company to impose extra obligations outside of its contract with the insured. It also means that an insured policy holder can pick and choose which insurer it wants to bear the burden of coverage for a particular claim. The insured could have any number of reasons for notifying one insurance company over another, including keeping the premiums low on a particular policy. There could also be more sinister reasoning, such as collusion with one insurer to force the other insurer to bear the burden of coverage.
Only time will tell whether Massachusetts appeals courts will adopt the selective tender rule based on Judge Casper’s reasoning, or whether they will stick with the majority and permit insurance companies to seek equitable contribution from each other so long as notice of a claim is timely. In the meantime, insurance companies need to be aware that equitable contribution from another insurer may be barred as a matter of law if the insured does not provide timely notice of a claim to all insurers. Of course, insurance companies are free to limit their liability in this regard by requiring their insured to notify all insurance companies that could provide coverage of a claim.
