Policy Requires Allocation of Defense Costs Based Upon Parties’ Relative Legal Exposure

The United States District Court for the Central District of Illinois has held that an insurance policy requires allocation of defense costs based on the parties’ relative legal exposure if it clearly and unequivocally expresses an intent to allocate costs in such a manner.  Twin City Fire Ins. Co. v. Alcast Co., 2021 WL 5889519 (C.D. Ill. Dec. 13, 2021). 

The bankruptcy trustee for the estate of another company sued the insured company, one of its officers and its president, along with eleven other defendants.  Thirteen of the fourteen defendants hired the same law firm to represent them in connection with the proceeding.  Several of the allegations overlapped between the defendants, but there were also some issues that were not common among all defendants.  The insured company demanded that its insurer pay all of the law firm’s bills, even if it benefitted the non-insured co-defendants.

The private company D&O policy at issue defined Loss to include Defense Costs.  It defined Defense Costs as “reasonable legal fees and expenses incurred in the defense or appeal of a Claim” but expressly excluded from the definition “any fees, expenses or costs which are incurred by or on behalf of a party which is not a covered Insured.”  The policy also contained an allocation provision that required the insurer, if it has the duty to defend, to pay “100% of the Insured’s Defense Costs” and “allocate[] between covered Loss and non-covered loss based upon the relative legal exposure of all parties to such matters.”  But, if the insurer does not have the duty to defend, “Loss shall be allocated between covered Loss and non-covered loss based upon the relative legal exposure of the parties to all such matters.”

The court held that the specific policy language governed the allocation issues and rejected application of the “reasonably related” test proposed by the insureds.  Applying the “relative legal exposure” language of the policy at issue, the court determined that the policy required allocation as follows: (1) the insurer must reimburse the insured company for 100% of the defense costs incurred by the insured alone; (2) the parties must apportion costs jointly incurred based on the relative legal exposure of all parties to such matters; and (3) the insurer owes nothing for the fees incurred solely by non-insured defendants.  The court held that factual issues precluded summary judgment on the actual apportionment of the defense costs because the parties had not adequately addressed that “exceptionally important issue” in their briefing.

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