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HARTFORD FIRE INSURANCE COMPANY v. TERRA INSURANCE COMPANY

August 2, 2004.

HARTFORD FIRE INSURANCE COMPANY
v.
TERRA INSURANCE COMPANY.



The opinion of the court was delivered by: NORMA SHAPIRO, Senior District Judge

Memorandum and Order

Plaintiff, Hartford Fire Insurance Company ("Hartford"), brought this action seeking equitable contribution from defendant, Terra Insurance Company ("Terra"), for the cost of defending the parties' mutual insured, French & Parrello Associates ("FPA"), an engineering company. FPA was covered under a comprehensive general liability insurance policy issued by Hartford ("the Hartford policy"),*fn1 and professional liability insurance policy issued by Terra ("the Terra policy").*fn2 This action was filed in the Philadelphia Court of Common Pleas, and removed here by Terra.

Moving for summary judgment, Hartford argues that the Terra policy contractually obligated Terra to contribute to the cost of defense of a third party action. On a cross-motion for summary judgment, Terra asserts that it did not have an obligation of equitable contribution because the Terra policy was a retrospectively-rate premium contract.

  Background*fn3

  The Wilkinson Action

  In 1994, Merle Barry Wilkinson, Sr., Administrator of the Estate of Merle Barry Wilkinson, Jr. filed a Complaint in the Luzerne County Court of Common Pleas, against a number of defendants, including FPA, for the death of Merle Barry Wilkinson, Jr.*fn4 Upon receipt of the Wilkinson Complaint with allegations of general negligence and professional negligence, FPA served Hartford and Terra with notice of the Wilkinson Complaint.*fn5 After review of the Wilkinson Complaint, Hartford agreed to defend FPA. Terra advised Hartford that it "could not commit at this time to any split of the defense costs in this [Wilkinson] matter" Exh. L, Defendant's Motion for Summary Judgment, Letter from Ms. Talbot to Ms. Schoelkoph, at 2. Terra stated that "any costs incurred by Terra will have an direct impact on the Insured's [FPA] premium" because the FPA policy was retrospectively rated. Id., at 1.

  Before FPA's Motion for Summary Judgment was granted Hartford paid $176,285.58 in legal fees, costs and expenses for FPA's defense.

  The Hartford and Terra Policies

  The Hartford Policy provided:
This insurance shall apply only as excess insurance over any other valid and collectible insurance which would apply in the absence of this policy . . .
Exh. A, Plaintiff's Motion for Summary Judgment, The Hartford Policy, at 14. The Terra Policy included a similar provision with regard to "other insurance":
This insurance shall be excess insurance over the deductible and any other valid and collectible insurance available to YOU whether such insurance is stated to be primary, project specific, contributory, excess, contingent or otherwise, unless such other insurance specifically applies as excess insurance over the Limit of Liability set forth in the GENERAL DECLARATIONS, Item 6. . . . We will not defend any CLAIM that any other insurer has a duty to defend.
  Ordinarily, insurance premiums are calculated prospectively, based on an actuarial projection of the risk of loss. See generally, Marten Transport Ltd. v. Hartford Specialty Co., 533 N.W.2d 452, 454 n. 2 (Wis. 1995). The Hartford Policy provided for such a typical prospective premium. The premium for the Terra Policy was "retrospectively-rated" in accordance with a Retrospectively Rated Premium Contract between FPA and Terra, associated with the Terra policy.

  A retrospective premium has two components: a basic premium and a conversion loss factor to adjust the premium by consideration of the insured's actual losses during the policy period. Edward Gray Corp. v. Nat'l Union Fire Insurance Co. of Pittsburgh, PA, 94 F.3d 363 (7th Cir. 1996); Marten, 533 N.W.2d at 454 n. 2. An insurance policy with retrospectively-rated premium is sometimes referred to as a form of "self-insurance" because the policy covers only claims exceeding the maximum premium under the policy.*fn6 Richmond, Douglas R., Issues and Problems in "Other Insurance," Multiple Insurance, and Self Insurance, 22 PEPP. L. REV. 1373, 1448 (2002).

  Typically, a standard or tentative premium is paid initially and then adjusted at stated times:
If the actual losses incurred during the policy period are less than estimated, the insured receives a partial premium rebate. If actual losses are greater than the insurer estimated, the insured is charged an additional premium.
Richmond, Douglas R., Issues and Problems in "Other Insurance," Multiple Insurance, and Self Insurance, 22 PEPP. L. REV. 1373, 1450 (2002). See also, Holmes, APPLEMAN ON INSURANCE 2D, v. 6, ยง 35.3, at 71. The retrospective premium is a percentage of the losses, sometimes coupled with some portion of defense costs or a charge for claims administration. Richmond, 22 Pepp. L. Rev. at 1450. The purpose of a retrospective premium is to make the premium more closely reflect the actual loss and cost experience of the insured by averaging such experience over an extended period. Edward Gray, 94 F.3d at 367.

  Under the Retrospectively Rated Premium Contract between FPA and Terra (dated July 6, 1992), the Provisional Premium was $245,000 in 1992, $250,000 in 1993, and $250,000 in 1994, a total of $745,000 over the three-year period. Exh. C, Defendant's Motion for Summary Judgment, Retrospectively Rated Premium Contract between French & Parrello Associates, P.A. and Terra Insurance Company, at 1. The Provisional Premium of $745,000 consisted of a Minimum Premium, "the premium that the insurance company retains to cover the administrative cost of the policy," of $98,000 in 1992, $100,000 in 1993 and $100,000 in 1994, a total of $298,000 over the three-year period, plus a Deposit Premium of $147,000 in 1992, $150,000 in 1993, and $150,000 in 1994, a total of $447,000. Id., at 1-2. The premium was recalculated annually to account for actual loss and expenses, but there was a Maximum Premium; Terra could charge FPA no more than $1,154,250 over the three year period, i.e. no more than an additional $409,250 above the three year Provisional Premium of $745,000 ($298,000 $447,000) in the event claims exceeded the deductible plus the Provisional Premium.*fn7 Id., at 2 Terra could bill for the additional premium at 18 months, 30 months, and 42 months into the three year term. Id., at 2. As of October 23, 1992, the Retrospectively-Rated Contract was amended, adjusting the Provisional Premium to $725,800 and the Minimum Premium to $278,000 over the three year term of the contract. Id., at 5. This amendment did not change the Maximum Premium or Deposit Premium, but did adjust the additional amount Terra could bill over the Provisional Premium in the event claims exceeded the deductible and Provisional Premium, to $428,450 (from $409,250). Id.

  A deductible amount is distinct from a maximum premium or self-insured retention because a deductible amount is subtracted from the policy limits, to reduce an insurer's indemnity obligation, but the full policy limits are available once the self-insured retention has been satisfied. Richmond, 22 Pepp. L. Rev. at 1449.*fn8 The Terra Policy provided for a per claim deductible of Twenty-Five Thousand Dollars ($25,000) which applied to any expenses or costs related to defending the claim.*fn9 Exh. B, Defendant's Motion for Summary Judgment, The Terra Policy, Endorsement No. 2. FPA was solely responsible for payment of the deductible before any claim could be made against the policy coverage.

  Both policies imposed on the insurer with the right and duty to defend any claim against the insured for damages covered under the policy. With regard to the duty to defend, the Hartford Policy provided:
The Company shall have the right and duty to defend any claim or suit against the insured seeking damages payable under this policy, even though the allegations of the suit may be groundless, false or fraudulent. The Company may make such investigations and settlements of any claim or suit as it deems expedient. The Company is not obligated to pay any claim or judgment or to ...

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