The Utah Supreme Court determined the "other insurance" provisions of successive policies were inapplicable and instead adopted the time-on-the-risk method of allocation for defense costs in The Ohio Casualty Ins. Co. v. Unigard Ins. Co., 2012 Utah LEXIS 1 (Utah Jan. 06, 2012).
Ohio Casualty insured Cloud Nine from June 10, 2001 to June 10, 2002. Thereafter, through December 12, 2002, Cloud Nine was uninsured. Unigard then covered Cloud Nine from December 12, 2002, until December 12, 2005. Both Ohio Casualty and Unigard's policies contained "other insurance" provisions.
Edizone licensed patents and other intellectual property to Cloud Nine for manufacture and sale of an elastometer gel technology. Edizone eventually sued, alleging Cloud Nine continued to manufacture, use and sell its products after Edizone terminated the license.
Cloud Nine turned to Ohio Casualty and Unigard for a defense. Unigard agreed to defend. Ohio Casualty refused and filed a declaratory judgment action in federal district court alleging ithad neither a duty to defend nor indemnify Cloud Nine. Unigard intervened and moved for partial summary judgment, arguing that Ohio Casualty had a duty to defend the Edizone suit and that Ohio Casualty was obligated to share defense costs equally with Unigard.
The federal district court ruled in favor of Unigard on both issues. The case was appealed and the Tenth Circuit certified a question to the Utah Supreme Court, asking whether the underlying defense costs should be allocated under the "equal shares" method set forth in the "other insurance" clause in the policies, or, because the policies were issued for successive periods, should the defense costs be allocated using the time-on-risk method?
The Tenth Circuit first determined that the "other insurance" clauses did not apply to successive insurers.
The court then turned to equitable principles to determine how to apportion defense costs between the two insurers. The time-on-the-risk method fairly allocated costs between insurers based on the amount of risk each contracted to undertake and the premiums each received without compromising the rights of the insured. Under the time-on-the-risk method, the insurer facing larger indemnity costs had a greater stake in controlling choice of counsel and settlement negotiations.
The court further determined that defense costs should not be apportioned to the insured for the period in which it was without coverage. Both policies gave the insurer control over its defense of the insured. It would therefore be inequitable to apportion any defense costs to an insured who had no power to select counsel or negotiate rates, and no voice in deciding whether to settle the suit. Accordingly, the court held it would be inequitable to hold the insured responsible for the share of defense costs attributable to the time period during which it was uninsured.
