Legal Expenses Disputed in Multi-Million Dollar Auto Case

Commercial Auto	Additional Insured
Leased Auto	Primary Versus Excess Insurers

In 1994, General Motors Acceptance Corporation (GMAC) leased an SUV to John Sabin (Sabin). The lease agreement required Sabin to maintain automobile insurance and to add GMAC as an additional insured on the policy. Sabin acquired the insurance from Nationwide Insurance Company, which limited liability to $100,000 per person and $300,000 per occurrence.

Sabin was involved in a serious automobile accident on April 5, 1995, in which two people were seriously injured and one was killed. Several lawsuits followed, and the one that exposed GMAC to the greatest liability involved Elizabeth Mammano (Mammano), an injured party who was left in a permanent vegetative state.

To cover its potential liability if the lessee failed to secure insurance and to secure extra coverage for catastrophic injuries, GMAC purchased two separate policies from Fireman's Fund Insurance Company. The first was a primary business auto policy with liability limits similar to the Nationwide policy. This Fireman's policy specified that Fireman's had "the right and duty to defend any suit asking for [ ] damages" and clarified that its coverage was "excess over any other collectible insurance." There was no similar limitation on Fireman's Fund duty to defend.

In addition to the business auto policy, GMAC had purchased an excess liability policy from Fireman's with a $9 million limit per occurrence. Unlike the Fireman's business auto coverage, this excess liability policy only required Fireman's to defend if no primary policy or other insurance was in effect.

At the beginning of this case, Nationwide reasonably anticipated an award greater than its policy limits and offered its entire policy to Mammano's attorney in exchange for a general release. However, counsel declined the offer, and the case continued.

Initially, Nationwide handled GMAC's defense in the Mammano case but later transferred it to Fireman's. Nationwide argued that Fireman's was better suited to defend since Nationwide's $100,000 liability limit was only a small fraction of the potentially large indemnification potential. Fireman's agreed voluntarily to take on the defense, while reserving the right to recover all defense expenses from Nationwide.

The parties settled the Mammano action in January 1999 for $4.5 million, with $3.3 million to be paid immediately and the remaining amount to be disbursed through guaranteed payments over 10 years. Nationwide contributed its entire $100,000 policy limit to the settlement.

Following the settlement, Fireman's attempted to recover $200,000 in legal costs from Nationwide. When Nationwide declined to pay, Fireman's and GMAC filed a lawsuit to recover these fees. The lower court awarded Fireman's and GMAC over $289,000, and this decision was upheld by the appellate division. Nationwide then appealed.

On appeal, Nationwide contended that defense costs should be divided between the primary and excess insurers. The New York Court of Appeals disagreed. It pointed out that Fireman's issued two separate policies: a primary policy, considered excess due to the "other insurance" clause, and a true excess or "umbrella" policy. The true excess policy limited Fireman's duty to defend, stating it would "assume charge of the settlement or defense of any claim or suit against the Insured seeking damages to which this policy applies and to which no Primary Insurance or Other Insurance applies."

Both Nationwide and Fireman's primary auto policies explicitly reaffirmed their obligations to defend the insured. The court ruled that when Fireman's took on the defense, it activated its duty to defend under its primary policy, which coincided with Nationwide's similar obligation. The fact that Nationwide's policy limits might be exceeded in the Mammano case did not reduce its duty to defend. Therefore, both insurers should split the defense costs equally, 50-50.

 The appellate division's decision was reversed, and the case was remanded to the lower court for further proceedings.

General Motors Acceptance Corporation vs. Nationwide Insurance Company-Court of Appeals of New York-March 31, 2005-828 North Eastern Reporter 2d 959