Jefferson Ins. Co. v. Travelers Ins. Co.

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
 40 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
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                                 No. 90-451


 Jefferson Insurance Company                  Supreme Court

                                              On Appeal from
      v.                                      Windsor Superior Court

 Travelers Insurance Company                  March Term, 1992


 Alan W. Cheever, J.

 Richard K. Bowen and John J. Boylan, III, of Kiel & Boylan, Springfield,
   for plaintiff-appellant

 Ritchie E. Berger and Frederick S. Lane III, of Dinse, Erdmann & Clapp,
   Burlington, for defendant-appellee


 PRESENT:  Gibson, Dooley, Morse and Johnson, JJ.


      DOOLEY, J.   Plaintiff, Jefferson Insurance Company, appeals a
 superior court judgment denying its claim against defendant, Travelers
 Insurance Company, to readjust the shares of a settlement award the
 companies paid to a party in litigation against their insured.  Plaintiff
 asserts error by the trial court in denying its claim for relief and
 allowing reformation of the contract between defendant and the insured, the
 Town of Weathersfield, to exclude liability coverage for the Town's
 ambulance service.  We hold that plaintiff, having agreed on a settlement
 and paid an amount within its policy limit without reserving rights to later
 seek further contribution from defendant, waived the right to present such a
 claim.  Therefore, we need not decide whether reformation of defendant's
 contract with the Town was proper.  We affirm.
      Prior to 1977, the Town held a comprehensive insurance policy with
 defendant, and it included liability coverage for the Town's ambulance
 service as well as the ambulance operators themselves.  By letter dated
 January 27, 1977, defendant notified the Town, through its insurance broker,
 that it would no longer cover liability related to operation of the
 ambulance service and would phase out the coverage and payments therefor.
 The Town then obtained substitute insurance from plaintiff to cover
 liability related to its ambulance service.  Plaintiff, which provided
 coverage up to a limit of $100,000 per incident, issued its policy to the
 Town without reliance on or knowledge of the Town's policy with defendant.
 By mistake, defendant's comprehensive liability policy with the Town was not
 altered to exclude coverage of the ambulance service, although the premium
 payments were reduced as if the exclusion were in place.
      On October 8, 1980, Patrick Standen suffered serious injuries in an
 automobile accident in the Town.  He sued the Town and its ambulance
 operator, alleging negligence compounding his injuries when he was removed
 from the car at the scene of the accident.  The Town immediately notified
 plaintiff, which undertook the Town's defense in the action.  Defendant was
 not notified of the Standen claim until more than a year later.  When
 notified, defendant requested information and copies of the pleadings,
 indicated its willingness to investigate the claim, but noted its lack of
 "direct knowledge of the circumstances involved" and the violation of policy
 conditions requiring prompt notification of claims.  Defendant stated that
 it was "not prepared to tender coverage" at that time, and ten days later,
 through counsel, it denied provision of defense or indemnity for the Standen
 claim because of the ambulance service exclusion in its policy.  The Standen
 case went to trial, and defendant sent counsel to observe. Defendant's
 counsel determined during the course of the trial that, given the evidence
 presented, a large judgment against the Town was likely if the case went to
 the jury.  Concerned that such a judgment would exceed plaintiff's policy
 limits and force the Town to change its position and pursue defendant for
 indemnity, defendant explored settlement with plaintiff and Standen.  A
 settlement was reached for a payment to Standen of $250,000.  During
 settlement negotiations, plaintiff demanded that defendant either pay half
 of the costs of defense or pro rate the shares of the settlement according
 to the respective policy limits of the companies, which would have meant
 payments of 75% by defendant ($187,500), based on its limit of $300,000, and
 25% by plaintiff ($62,500), based on its limit of $100,000. (FN1) Defendant,
 which continued to maintain that it was not liable for the claim, refused,
 agreeing to pay only $150,000.  Plaintiff paid its full policy limit of
 $100,000.  Neither company obtained any reservation of rights against the
 other, nor is there any evidence that either indicated that it intended to
 pursue contribution or indemnity from the other after making their agreed
 payments to Standen.
      Plaintiff then filed suit against defendant in Windsor Superior Court,
 seeking contribution toward the cost of defending the Standen action and
 reimbursement from defendant for the difference between the amount paid to
 Standen and the amount it would have been required to pay had the
 companies' shares of liability been pro rated in proportion to their
 relative policy limits.  The court found for defendant after reforming
 defendant's policy with the Town to exclude liability connected with the
 ambulance service.  Having found no duty for defendant to defend or
 indemnify in the Standen action, the court held plaintiff was not entitled
 to contribution of costs of defense or return of part of its settlement
 payment.
      On appeal, plaintiff attacks the trial court's ruling with respect to
 the coverage of activities of the ambulance service by defendant and argues
 further that defendant waived its right to deny coverage on the Standen
 claim.  We do not reach these claims because we conclude that the
 settlement negotiation and ultimate agreement between the insurance
 companies, Standen, and the Town, settled the rights, not only between the
 companies and Standen, but also between the two insurers.
      Ordinarily, an insurer who defends and indemnifies on behalf of its
 insured will be subrogated to the rights of its insured.  See Lopez v.
 Concord General Mutual Ins. Group, 155 Vt. 320, 324, 583 A.2d 602, 605
 (1990); 8 V.S.A. { 4203(4).  Plaintiff would, then, be in a position to
 exercise against defendant any rights retained by the Town with respect to
 the defense and indemnification of the Standen claim.  Here, plaintiff
 asserts that defendant, through its liability to the Town on its insurance
 contract, is liable to plaintiff, subrogated to the Town's rights, for
 contribution towards the defense of the Standen claim and for an adjustment
 so that each company will have paid its pro rata proportion of the
 settlement. (FN2)
      Rights of an insurer that would be gained through subrogation may be
 lost, however, through waiver or estoppel.  Lopez, 156 Vt. at 324, 583 A.2d 
 at 605.  When an insurer undertakes the defense of a claim on behalf of its
 insured and pays out an award, it generally may preserve issues it disputes
 with its insured or another third party for later resolution only by
 specifically reserving rights to do so in an agreement with other parties to
 the settlement.  See American Fidelity Co. v. Kerr, 138 Vt. 359, 363, 416 A.2d 163, 165 (1980) (unilateral reservation of rights is ineffective).
 Such an agreement allows for the prompt settlement of the underlying dispute
 while reserving rights for the insurer to later pursue an action under its
 contract with the insured for contribution or indemnity.  See Beatty v.
 Employers' Liability Assurance Corp., 106 Vt. 25, 34, 168 A. 919, 923
 (1933).  Thus, other courts have held that when, with knowledge of facts
 that would place liability for a loss on another insurer, an insurer
 negotiates and settles a claim against its insured without expressly
 reserving rights to pursue a cause of action for contribution, indemnity or
 subrogation at a later time, such a claim is waived.  See National Surety
 Corp. v. Western Fire & Indemnity Co., 318 F.2d 379, 386 (5th Cir. 1963)
 (relying on reservation of rights agreement between two insurance companies,
 which together paid a settlement award to a third party, to allow a later
 action for indemnification by one against the other); Hanover Ins. Co. v.
 Travelers Indemnity Co., 239 F. Supp. 37, 40 (D. Conn. 1965), aff'd 355 F.2d 552, (2d Cir. 1966) (one insurer, which paid $15,000 as part of settlement,
 waived its claim against the other, which paid $5,000, because it agreed to
 settlement after making demand for more from the other, but without an
 express reservation of the right to later alter their respective
 liabilities); Lumbermens Mutual Casualty Co. v. Foremost Ins. Co., 425 So. 2d 1158, 1159-60 (Fla. Dist. Ct. App. 1983) (failure to obtain oral or
 written reservation of rights agreement waived right of settling insurance
 company to later pursue another insurer for contribution or
 indemnification).
      The rationale behind these cases forms the basis of the rule, set
 forth in Norfolk and Dedham Fire Insurance Co., 132 Vt. 341, 344, 318 A.2d 659, 661 (1974), that when an insurer makes a voluntary payment for which it
 is not liable, it cannot be subrogated to the rights of the insured.   The
 rule is based on the policy that "[d]iscouraging voluntary payment
 encourages prompt resolution of disputes before payment has induced a change
 in reliance on payment and before passing time interferes with any
 determination that may be necessary as to the facts."  Id.  The absence of
 a reservation of rights requirement would result in an inhibition on the
 part of parties to enter into settlement agreements, because they could not
 be assured that an agreement would finally conclude their responsibilities
 in the matter.  See Mutual of Emunclaw Ins. Co. v. State Farm Mutual
 Automobile Ins. Co., 37 Wash. App. 690, 694, 682 P.2d 317, 319-20 (1984).
      We have no difficulty in this case in finding that plaintiff waived any
 rights against defendant by failing to reserve them.  The trial court
 specifically found that plaintiff did not expressly reserve its right to
 bring an action for contribution against defendant or any other party to the
 settlement.  Instead, after its demand for greater contribution toward
 either the defense of the case or the settlement award was refused by
 defendant, plaintiff agreed to contribute the full amount of its policy
 limit.  The agreement reflected the relative liability positions of the two
 insurers, and defendant has a right to rely on the presumed final
 resolution of rights and responsibilities as between the companies.
      At the time of the agreement, both insurers faced a risk that a jury
 award for Standen might subject the Town to financial liability far beyond
 the policy limits of both companies combined.  The companies might then have
 been sued by the Town for bad faith failure to settle the claim at the
 lesser amount before the case went to the jury.  See Myers v. Ambassador
 Ins. Co., 146 Vt. 552, 558, 508 A.2d 689, 692 (1986).  Defendant's risk was
 reduced by its claim that it had no obligation to indemnify or defend the
 Standen claim.  Defendant's position at the time of the agreement was at
 least arguable, (FN3) and was likely a major factor in the allocation of
 liability between plaintiff and defendant.  Each party had an opportunity to
 weigh its risk against the cost of settlement.  Plaintiff reaped a benefit
 from its bargain by obtaining defendant's participation.  We will not permit
 it to pursue defendant without warning for further contribution, when to do
 so would strip from defendant the benefit of certainty and finality that
 induced its participation in the settlement.
      Affirmed.
                                         FOR THE COURT:




                                         Associate Justice



FN1.    The policy issued by each insurance company to the Town included a
 provision which limited liability on a loss insured by that company and
 another to an amount not greater as a "proportion of such loss bears to the
 total applicable limit of liability of all valid and collectible insurance
 [against] such loss."

FN2.        It is not clear from Vermont case law whether the pro rata
 distribution of liability of more than one insurance company applies at all
 in cases in which no legal duty to pay has yet arisen, such as here where
 the award to the party suing the insured was not made pursuant to a
 judgment, but instead came out of a settlement agreement.  See Norfolk and
 Dedham Fire Ins. Co. v. Aetna Casualty & Surety Co., 132 Vt. 341, 344, 318 A.2d 659, 661 (1974) (one who pays as "volunteer" rather than under legal
 duty can not be subrogated to rights of another).  Cases from other
 jurisdictions are divided on the question of whether an insurer paying a
 settlement award for more than its pro rata share of liability pays as a
 volunteer and without the right to contribution.  See, e.g., Liberty Mutual
 Ins. Co. v. Standard Accident Ins. Co., 164 F. Supp. 261, 264 (S.D.N.Y.
 1958), aff'd, 264 F.2d 671 (2d Cir. 1959) (allowing settling insurer,
 subrogated to rights of insured, to recover pro rata share of award from
 other insurer covering same loss); Nationwide Mutual Ins. Co. v. Weeks-Allen
 Motor Co., 18 N.C. App. 689, 695, 198 S.E.2d 88, 92 (1973) (by settling
 claim for amount within policy limit, insurer acted as volunteer and could
 not be subrogated to rights of its insured).  Because we hold that plaintiff
 waived any right to pursue defendant for contribution, we need not decide
 the issue for the instant case.

FN3.     Plaintiff has argued in the trial court and here that defendant
 waived the issue of its own liability on the Standen claim through its
 conduct before and during the trial of that action, and its participation in
 the settlement.  The availability of that argument was also part of the
 chemistry of the settlement agreement and presents no independent ground to
 say that the settlement did not end the dispute between plaintiff and
 defendant.