United States: Federal Court Addresses Allocation Of Defense Costs

Last Updated: December 24 2013
Article by Virginia L. White-Mahaffey and Andrew J. Sloniewsky

In National Union Fire Insurance Company of Pittsburgh, Pa. v. Essex Insurance Company, Civil Action No. 13-32, 2013 WL 6328792 (W.D. Pa. Dec. 5, 2013), a federal district court1 applying Pennsylvania law denied motions to dismiss and for joinder that an insurer filed against two other insurers who were seeking recovery of defense costs. In particular, the court denied the motion of defendant Essex Insurance Company (Essex) to dismiss a claim for defense costs that plaintiffs National Union Fire Insurance Company of Pittsburgh, Pa. (National Union) and American Home Assurance Company (American Home) had brought against Essex based on alternative theories of indemnification and contribution. The court also denied Essex's motion to join a fourth insurer, Hartford Fire Insurance Company (Hartford), as a necessary party to the litigation under Rule 19 of the Federal Rules of Civil Procedure.2

The principal policyholder in National Union v. Essex, Earth Support Services, Inc. d/b/a Micon (Micon), manufactured chemicals used in the coal mining industry. 2013 WL 6328792, at **1-2. The plaintiff insurers provided primary liability coverage to Micon for various periods between 1995 and 2004, whereas Essex supplied Micon with coverage for periods before 1995. Hartford provided primary liability coverage to Micon Products International (MPI), a Micon affiliate.

Beginning in 2001, Micon was the target of several lawsuits brought by coal miners who alleged that exposure to Micon chemicals had caused personal injury. Id. National Union and American Home provided the initial defense to these lawsuits, and Essex later joined in the defense. Starting in 2004, the coal miners also began to name MPI as a defendant in certain of these lawsuits, and National Union, American Home, Essex, and Hartford ultimately agreed to a joint defense of Micon and MPI. Thereafter, following settlement of the lawsuits against Micon and MPI, National Union and American Home asserted that they had paid more than their fair share of defense costs and sought recompense from Essex and Hartford. Hartford reached an agreement with National Union and American Home regarding allocation of defense costs, but Essex refused to contribute. Id. at **1-2, 9. Accordingly, National Union and American Home filed a suit against Essex that sought, in part, recovery of defense costs based upon theories of contribution and indemnity. Id. at **1-2. Essex responded with motions that sought dismissal of the claim for indemnification and the joinder of Hartford as a party.

In its opinion denying Essex's motion to dismiss, the court found that the complaint properly stated a claim for indemnification under Pennsylvania law. Id. at **3-4. Essex argued that National Union and American Home necessarily were liable for some of the defense costs, and that therefore they could only seek contribution, not indemnification. The court disagreed, stating that, while equitable contribution appeared to be the likely basis for recovery, it was at least plausible that National Union and American Home could establish that Essex owed indemnity for defense costs incurred for policy periods before 1995, when only Essex provided coverage.

The court also rejected Essex's assertion that Hartford was a necessary party to the litigation under Rule 19. Id. at **7-9. In reaching this conclusion, the court relied upon prior decisions under Pennsylvania law regarding allocation, as embodied in Koppers Company, Inc. v. Aetna Casualty & Surety Company, 98 F.3d 1440, 1449-54 (3d Cir. 1996), Koppers Company, Inc. v. Aetna Casualty & Surety Company, 158 F.3d 170, 174 (3d Cir. 1998), and General Refractories Company v. First State Insurance Company, 500 F.3d 306, 312-22 (3d Cir. 2007). The court held that these precedents "resolved" the issue of the "necessity" of naming a settling insurer as a party when attempting to determine another insurer's pro rata share of defense and indemnity costs. In particular, the court found that Essex's liability for defense costs depended on the terms of its policies, and that, while Essex would be entitled to a pro rata set-off for any defense costs owed by Hartford, calculation of such amounts could be determined through discovery from Hartford. Accordingly, the court found that a proper allocation of defense costs could be calculated without the joinder of Hartford as a party.3

National Union v. Essex sheds substantive light on two aspects of Pennsylvania insurance law. First, it confirms that in some cases a carrier may seek recovery of defense costs from another insurer based on an indemnification or a contribution theory. Second, it clarifies that an insurer seeking recovery of defense costs from another carrier may not need to name all of the policyholder's other insurers as parties in its complaint in order to obtain a pro rata allocation of such costs.


1.The parties in National Union v. Essex consented to a magistrate judge acting as trial judge in the case. National Union v. Essex, Dkts. 11 and 12.

2.The court also refused to dismiss claims in the complaint seeking declaratory relief and legal fees. 2013 WL 6328792, at **5-7. It did, however, grant Essex's motion to dismiss claims for delay damages on grounds that National Union and American Home had apparently conceded this issue.

3.The court also found that Hartford was not a necessary party under National Union's and American Home's alternative theory that Essex had entered into an agreement with the other carriers to pay a share of defense costs. Id. at *9.

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