Last In First Out: Priority of Recovery for Insurers in Missouri

Although issues between primary and excess carriers regarding who is entitled to what in a subrogation recovery do not arise often, when they do they can involve substantial sums and interesting issues. Last fall the United States Court of Appeals for the Eighth Circuit addressed such issues under Missouri law. The underlying case involved an explosion in 1999 that caused $452 million in total losses. The incident raised issues relating to coverage, damages, allocation between insured and uninsured losses, and priority of recovery between primary and excess carriers. Travelers Property Casualty Ins. Co. v. National Union Ins. Co., 621 F.3d 697 (8th Cir. 2010).

The insured had $200,000,000 in primary coverage and $100,000,000 in excess coverage. It submitted a claim of $285,000,000 to its insurers and claimed significant uninsured losses not covered by its policies. After the explosion, the insured invited the insurers to discuss potential litigation against third parties and the allocation of litigation expenses and recoveries, including its independent claims for uninsured losses. The excess insurer declined to participate as it was not clear that the loss would exceed the primary layer. The insured and the primary carrier entered into an allocation agreement for recoveries and expenses between them at 45% - 55% respectively. The insured invited the excess carrier to join the agreement after it was signed. The excess carrier declined.

Two suits were pursued: one by the insured against the primary carrier on the amount of damage covered by the primary policy and a subrogation action pursuant to the allocation agreement. One defendant in the subrogation action settled for $126,000,000 and the proceeds were split according to the agreement. The case went to trial against the remaining defendant and the jury returned a verdict of $452,000,000 in total damages. After appeal, the defendant was responsible for $97,000,000. After rulings by the trial court in the coverage litigation, the primary carrier paid its $200,000,000 limit, and the excess insurer agreed to pay $10,000,000 to the insured to resolve the coverage suit. In a settlement agreement the parties reserved issues regarding the excess insurer's subrogation rights due to the pendency of the appeal of the subrogation verdict. After the appeal of that action was decided, the excess carrier sough recovery of its $10,000,000 in federal district court. After rulings on motions for summary judgment were appealed, the Eighth Circuit issued its opinion.

The Court ruled that the excess carrier was entitled to a priority interest in the subrogation proceeds representing insured losses. The excess carrier waived any right to contest the insured's designation of its own recovery as uninsured losses for failing to participate and allowing the insured and primary carrier to incur expenses in pursuit of recoveries. The excess carrier therefore had no priority against the insured to recover uninsured losses under state law or the insurance policy. The excess policy, however, clearly provided it priority in the subrogation provision. The subrogation provision in the primary policy was, at best, silent on the issue. The Court specifically acknowledged that the result under the policies was consistent with the recognized industry practice of "last in first out" for pure excess insures. That practice recognizes the realities of the risks bargained for and premiums received.

This opinion is a good place to start when dealing with issues relating to primary and excess disputes on subrogation recoveries.

Missouri: Subrogation Against Condominium Unit Owners and Members of the Household

The subrogating carrier of a unit owner or condominium association to pursue subrogation against another condominium unit owner, renter and/or member of the household of the unit varies by jurisdiction. 

Unlike most jurisdictions, the state of Missouri utilizes a statute which requires policies covering condominium properties to waive subrogation against unit owners and members of their household.  The reasoning behind the statute is that the property insurance premium on the building and common areas paid by and through the association, which is funded by the assessment monies of the unit owners, all of whom have an ownership interest in the common elements.  Therefore, the association members all benefit from the insurance protection on the common elements versus the individual protection afforded on personal condominium property or contents and on the use of the property by and through a separate condominium policy issued to a unit owner.  From this statute, policies issued to condominium associations in Missouri now commonly contain a “Condominium Association Coverage Endorsement,” which essentially precludes carriers from recoveries against a unit owner and/or its liability policy.  In fact, the endorsement trumps the terms of the condominium by-laws, regulations and building rules, which were traditionally documents that dictated subrogation opportunities under these circumstances. 

Despite the statute, subrogation may still be viable in Missouri when presented with similar facts.  In a different coverage scenario, where a property insurance carrier has provided separate condominium coverage to a unit owner, successful recovery efforts have been achieved in Missouri as to the unit owner’s loss of personal property and as to the loss of the use of the property.  In these cases, successful arguments have been made that the statute does not apply because (1) there is no joint interest in the insured property of a separate owner against another owner and (2) there is no sharing of the risk.  This model remains a viable avenue to pursue in Missouri by subrogated carriers when the insured is a unit owner, and many policies of insurance include arbitration clauses or provisions that facilitate the adjudication of these claims under this particular setting.