Republic Underwriters Ins. Co. v. Fire Ins. Exchange:
The Fallacy of the Pro Rata Clause and Its Influence on the Application of the Equitable Doctrines of Subrogation and Contribution in Oklahoma
By Clayton B. Bruner

“Even a cursory reading of judicial opinions in this area reveals a great deal of confusion in the courts about the equitable doctrines of subrogation and contribution, their differences and their appropriate applications to various factual circumstances.”1

One court has even stated that it is “difficult to think of two legal concepts that have caused more confusion and headache for both courts and litigants than have contribution and subrogation.”2

It must be stated initially that the Oklahoma Supreme Court has adhered to its description above and has failed to provide clarity as to one doctrine’s applicability over the other.  Generally, when multiple insurers cover the same risk of an insured, Oklahoma courts apply equitable subrogation broadly.3 For example, in Republic, the Oklahoma Supreme Court stated that equitable subrogation is intended to be “pliable and capable of being molded to attain justice to compel the ultimate discharge of a debt or obligation by the party who in good conscience ought to pay for it.”4 In contrast, Oklahoma courts have applied equitable contribution narrowly when multiple insurers cover the same risk.5 This strict application, however, is unfounded.6  

Equitable Subrogation v. Equitable Contribution

Equitable Subrogation

Subrogation is a derivative concept.7 In the conventional sense, subrogation is created by agreement or contract between parties and grants to the parties a right to pursue reimbursement from a third-party after payment of a loss.8 Equitable subrogation, on the other hand, is based on the principles of equity and does not depend on contract.9 Equitable subrogation’s goal is to “place the entire burden for a loss on the party who is ultimately responsible for it and by whom it should have been discharged, and to relieve entirely the insurer who indemnified the loss and who is not responsible for paying for it.”10

In the insurance context, a claim based on equitable subrogation allows the insurer who indemnified a loss to stand in the shoes of the insured to pursue recovery from the party ultimately responsible, normally the uninsured or underinsured party at fault in an accident.11 However, between insurers of a common risk, equitable subrogation is normally applied to “shift defense costs between primary and excess insurers.”12 In application, the doctrine shifts the costs absorbed by the excess insurer to the primary insurer given that the primary insurer is principally responsible for defending the insured.13 Until the primary insurance is exhausted, the excess insurer is thought to have the superior equitable position.14 Accordingly, where two insurers cover the same risk of an insured, equitable subrogation should apply only when one of the insurers is deemed primary, and the other excess. Absent this fact, no insurer could rightfully claim a superior equitable position.

Equitable Contribution

Equitable contribution is the right to recover, “not from a party primarily liable for a loss, but from a co-obligor or co-insurer who shares common liability with the party seeking contribution.”15 The right belongs to each insurer individually.16 The right to contribution is based on the equitable principle that the burden of indemnifying the insured should be distributed among those insurers who independently contracted with the insured, “with the loss equitably distributed among those who share liability for it in direct ratio to the proportion each insurer’s coverage bears to the total coverage provided by all insurance policies.”17 The doctrine thus assumes the existence of two or more contracts of insurance covering the same particular risk of the same insured.18

In insurance, equitable contribution typically arises when multiple insurers cover the same risk and are obligated to indemnify the same insured.19 In this context, each insurer has “independent standing to assert a cause of action against its co-insurers for equitable contribution when it has undertaken the defense or indemnification of the common insured.”20 The theory is that the debt one insurer pays is equally owed by co-insurers of the same risk and should be paid in pro rata proportion to their respective coverage of the risk.21 Where two primary insurers cover the same risk, each will have a right to contribution, “but in the absence of agreement there is generally no right of contribution between a primary and excess insurer, because they do not share a common obligation with common rights.”22 Thus, where two insurers cover the same risk of an insured, equitable contribution should only apply when both are considered primary insurers. Absent this fact, the two insurers would not share a common obligation to the insured. 

The Fallacy of the Pro Rata Clause and Its Influence on the Doctrines

Republic Underwriters Ins. Co. v. Fire Ins. Exchange

Republic Underwriters Ins. Co. v. Fire Ins. Exchange23 is the seminal case for the proposition that pro rata clauses obstruct the application of the doctrine of equitable contribution when multiple, primary insurers cover the same risk. In Republic Underwriters Ins. Co. v. Fire Ins. Exchange, two primary insurers covered the same property against fire. Republic Underwriter’s policy had a property coverage limit of $10,000 and a living expense limit of $4,000.24 Fire Insurance Exchange’s policy had a property coverage limit of $15,000 and a living expense limit of $3,000.25 Both insurance policies contained pro rata clauses that limited each company’s liability to the proportion of the loss that their respective coverage bore to the total coverage.26 Republic received notice of loss and paid the insured its property limits of $10,000 and an additional $701.85 in living expenses.27 Fire, on the other hand, denied liability completely. Thus, Republic brought suit under the doctrine of equitable subrogation and/or contribution, seeking reimbursement of the amount it had paid over its proportionate share.28

In its effort to avoid liability, Fire argued that because both companies contracted with pro rata clauses, which fixed their respective liability to a definite amount, neither was obligated to pay for the entire loss.29 Since both were only obligated to pay the insured a specific amount depending on the loss and the pro rata apportionment, the companies were not under a common burden to the insured.30 Because there was no common liability, Fire argued that Republic had no right to contribution and therefore should be deemed a volunteer as to its payment over its proportionate amount.31 Fire’s proposition, in essence, would eliminate the application of equitable contribution when multiple insurers use pro rata clauses to apportion the loss in proportion to their respective coverage limits.

The Oklahoma Supreme Court correctly recognized that Fire’s proposition was not embraced under Oklahoma law, but ultimately failed to seize the opportunity to expand equitable contribution’s applicability.32 The court merely stated “[i]rrespective of this authority which limits contribution rights to contracts evincing a common or concurrent liability, this Court is unwilling to impede early payment of an insured’s loss by characterizing the carrier paying the full loss as a volunteer”33 The statement clearly indicated the court was seeking an equitable result in favor of Republic regardless of the doctrine applied. In the end, the Oklahoma Supreme Court applied the doctrine of equitable subrogation holding that it was pliable and flexible enough to compel Fire Insurance to pay its proportionate share of the loss.34 The court never reasoned why equitable contribution could not apply under the circumstances.

It is obvious, however, that equitable contribution was intended to remedy the exact issue in Republic. Fire and Republic were both primary insurers of the same risk. Additionally, both were obligated to pay a proportionate share of any loss up to their respective policy limits. The court, however, failed to implement the doctrine of contribution. Instead, the court applied equitable subrogation to a scenario where neither insurer could have had an equitable superior position. Fire and Republic were both primary insurers and neither one was primarily responsible for the entire loss. 

It could have been argued that a pro rata clause should have no effect on Republic’s right to indemnification based on the doctrine of contribution. Pro rata clauses deal exclusively with apportionment of the loss, not the obligation of the insurer to pay its fair share. The clauses are essentially the reaffirmation of an insurer’s obligation to pay only its proportional share of an insured’s total loss when multiple insurers exist. More importantly, pro rata clauses were meant to eliminate the exact factual scenario Republic and Fire faced — i.e., one obligated insurer paying more than its fair share of a loss. It should be inconceivable that the same clause that prevents an insurer from being liable for more than it was contractually obligated to pay could have the exact opposite effect if applied under the doctrine of equitable contribution.35 The pro rata clause simply does not have that much force.  

The flawed reasoning of Fire’s proposition becomes clear when one realizes it bases liability for the loss directly on the time Republic settled its claim, rather than on both insurer’s contractual obligation to the insured. If pro rata clauses were enforced in this manner, it would literally compel multiple insurers of a single risk to settle at the exact same time, so neither paid more than its proportionate share of the total loss. This outcome would render the doctrine of equitable contribution useless because the doctrine would never have to be applied — i.e., both insurers would know exactly what each owed, so neither would ever pay more than its proportionate share. A pro rata clause should never be construed so strictly that it forfeits an insurer’s right to seek indemnification from a mutually obligated insurer just because it settles early. The day or time a particular insurer settles with an insured should have no bearing on what an insurer is contractually obligated to pay.

Ultimately, Fire’s proposition was an attorney’s creative attempt to skirt a contractual obligation to pay a proportionate share of a loss. The proposition promotes bad settlement tactics. It rewards insurers who delay settlement negotiations by potentially freeing them of their contractual obligation to pay. More importantly, the strict application of the pro rata clause under the doctrine of equitable contribution impedes the underlying policy the doctrine was founded on: that multiple insurers who contract to cover the same risk are obligated to pay their proportionate share of a loss in order to equalize the common burden shared by coinsurers in the name of justice.36 Instead of applying contribution broadly to a factual scenario where it clearly applied, the Republic court created confusion by applying the doctrine of subrogation to attain justice. In the end, the court could have applied equitable contribution and obtained the same result. Accordingly, Republic should be viewed as a result based decision, and therefore an unpersuasive application of the doctrine of contribution.

Republic’s Progeny in Oklahoma

U.S. Fidelity Guar. Co. v. Federated Rural Elec. — Creating Confusion

The Oklahoma Supreme Court created more confusion between the application of the two doctrines in U.S. Fidelity Guar. Co. v. Federated Rural Elec. Ins. Corp.37 In U.S. Fidelity, the court’s primary holding was that an excess insurer is not liable to a primary insurer under the doctrine of equitable subrogation prior to exhaustion.38 However, the court, in dictum, stated, “[R]epublic correctly recognized that contribution was not an appropriate remedy because when insurance contracts contain pro rata clauses, each contract is independent of the others, and the liability is several as the insurers who have restricted their liability do not have a common and concurrent obligation.”39 The court cited Equity Mutual Ins. Co. v. Spring Valley Wholesale Nursery Inc.40 as additional authority for its affirmation of the proposition the Republic court clearly stated was not embraced under Oklahoma law.41 However, a close reading of Equity Mutual reveals that it is unsound authority for the court’s statement in U.S. Fidelity.

Equity Mutual Ins. Co. v. Spring Valley Wholesale Nursery Inc.

Equity Mutual dealt exclusively with conflicts of apportionment among insurers when multiple policies cover the same risk.42 Specifically, the court dealt with priority battles between policies containing excess insurance clauses, escape clauses and pro rata clauses. Excess insurance clauses provide, under the terms of the policy, that the excess insurer is liable only after primary coverage has been exhausted.43 Escape clauses, on the other hand, disclaim all liability if other insurance is available.44 The court held “when one policy provides pro rata coverage and another provides only excess coverage, the pro rata policy is to be treated as primary.”45 Similarly, the court held when one policy provides an escape clause and another provides a pro rata clause, the pro rata coverage will be deemed primary.46 It then held that when insurers designate in their policies the same method of apportionment, the contract controls.47 Further, if insurers fail to provide for apportionment, the loss should be shared among multiple insurers on a pro rata basis.48 However, the court never discussed how the existence of multiple pro rata clauses restricts liability, or how the restriction causes multiple insurers to lose a common obligation to an insured, or even more importantly, a right to contribution.49 Thus, it is clear that the U.S. Fidelity court’s reliance on this case for its statement in dictum was unfounded.

Pentz v. Davis – Creating Clarity

Pentz did not cite Republic, but it is by far the best analysis of when the doctrines should be available for indemnification purposes. Pentz dealt with the conflict of priority and apportionment when multiple UM policies existed for a single loss.50 The court stated that the applicable UM statute, 36 O.S. § 3636, was silent with regard to priority of payments, but found that insurers who settled were entitled to proceeds of any settlements against any person or entity legally responsible for the damages with subrogation rights.51 Clearly, insurers do not lose their right to indemnity among other primary insurers who cover the same risk because payment “entitles the UM insurer to seek a distribution of the burden of loss among all the insurers...”52

The court, however, stated that its research revealed “no general rule for distributing the burden of loss among UM insurers.”53  Nevertheless, “[u]pon payment to the injured insured, the equitable remedies of subrogation and contribution are available [to the insurer].”54 Accordingly, Pentz clearly holds that contribution is available as a remedy when multiple UM insurers cover the same risk and one pays on the loss.      

Thus, contrary to the proposition in Republic, a pro rata clause merely setting forth that multiple insurers are only liable for their proportionate share of a loss should not eliminate the application of the doctrine of equitable contribution where it clearly applies. That is, when multiple insurers covering a single risk are deemed primary — i.e., the UM insurers in Pentz — all owe an obligation to the insured to pay on the loss. If one primary insurer pays more than its proportionate share, that insurer should be allowed to seek contribution from the other primary insurers, once all insurers settle with the claimant.55 Thus, Pentz’s holding created clarity for both of the doctrine’s application in instances when multiple, primary insurers cover a single loss.56

Conclusion

In the end, the Pentz holding is correct, i.e. — the doctrine of equitable contribution should be available for indemnification purposes when multiple primary insurers cover the same risk, and one insurer pays more than its obligated share. Considering the foundational principles of the two equitable doctrines, contribution should be the doctrine preferred and applied under these circumstances regardless of whether the policies contain pro rata clauses.

Further, the factual distinctions of Pentz and Republic are distinctions without difference. The application of equitable contribution should not depend on whether the primary insurers are UM insurers (Pentz) or Fire insurers (Republic). Thus, Republic’s decision and U.S. Fidelity’s affirmation of that decision should both be viewed as unpersuasive applications of the doctrine of equitable contribution in Oklahoma law.  

1. U.S. Fidelity Guar. Co. v. Federated Rural Elec. Ins. Corp., 2001 OK 81, 37 P.3d 828, 832.
2. Firemans Fund Ins. Co. v. Maryland Casualty Co., 65 Cal.App.4th 1279, 77 Cal.Rptr.2d 296, 302 (1998).
3. Id at 835 (citing Republic Underwriters Ins. Co. v. Fire Ins. Exchange, 1982 OK 67, 655 P.2d 544).
4. Republic Underwriters Ins. Co., 655 P.2d at 546 (citing Mid American Trailer Sales Inc. v. Moorman, 576 P.2d 1194 (Okla. Civ. App. 1977).
5. Id.
6. See Republic Underwriters Ins. Co. v. Fire Ins. Exchange, 1982 OK 67, 655 P.2d 544; Equity Mutual Ins. Co. v. Spring Valley Wholesale Nursery Inc., 1987 OK 121, 747 P.2d 947, 954; U.S. Fidelity Guar. Co. v. Federated Rural Elec. Ins. Corp., 2001 OK 81, 37 P.3d 828, 835; Pentz v. Davis, 1996 OK 89, 927 P.2d 538.
7. U.S. Fidelity Guar. Co., 37 P.3d at 831.
8. Id.
9. Id.
10. Id at 832 (emphasis added).
11. Id.
12. Id.
13. Id.
14. Id (citing Maryland Cas. Co. v. Nationwide Mutual Ins., 81 Cal.App.4th 1082, 97 Cal.Rptr.2d 374, 377 (2000)).
15. U.S. Fidelity Guar. Co., 37 P.2d at 832.
16. Firemans Fund Ins. Co., 77 Cal.Rptr.2d at 304.
17. Id.
18. Id at 305.
19. Id.
20. Id.
21. Id.
22. U.S. Fidelity Guar. Co., 37 P.2d at 832 (citing Firemans Fund Ins. Co. v. Maryland Casualty Co., supra).
23. 1982 OK 67, 655 P.2d 544.
24. Id at 545.
25. Id.
26. Id.
27. Id.
28. Id.
29. Id at 546.
30. Id (citing Commercial Union Ins. Co. of N.Y. v. Farmers Mutual Fire Ins. Co., 457 S.W.2d 224 (Mo.App.1970)).
31. Id.
32. Id.
33. Id at 547.
34. Id.
35. Under Republic, the court stated that the use of a pro rata clause when multiple, primary insurers cover a single risk would essentially make the first insurer to settle a volunteer as to its payment under the doctrine of equitable contribution. Thus, the very clause that limits an insurer’s liability would actually provide a windfall for the insurer who delays its settlement of a particular claim.
36. Firemans Fund Ins. Co. v. Maryland Casualty Co., 65 Cal.App.4th 1279, 77 Cal.Rptr.2d 296, 304 (1998).
37. 2001 OK 81, 37 P.3d 828.
38. Id at 835.
39. Id (emphasis added).
40. 1987 OK 121, 747 P.2d 947, 954.
41. Id.
42. Id at 954.
43. Id.
44. Id.
45. Id.
46. Id.
47. Id.
48. Id. The court provided a great example of pro rata apportionment stating: “if one insurer has a policy limit of $100,000, another $200,000 and a third $300,000, the first would pay 1/6 of the loss up to $100,000, the second would pay 1/3 of the loss up to $200,000 and the third would pay 1/2 of the loss up to $300,000.
49. Id.
50. Pentz v. Davis, 1996 OK 89, 927 P.2d 538.
51. Id at 541.
52. Id at 542.
53. Id (emphasis added).
54. Id (emphasis added).
55. See Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal.App. 4th 1, 105-06, 52 Cal.Rptr.2d 690 (stating “apportionment among multiple insurers must be distinguished from apportionment between an insurer and its insured. When multiple policies are triggered on a single claim, the insurers’ liability is apportioned pursuant to the “other insurance” clauses of the policies or under the equitable doctrine of contribution. (Emphasis added). That apportionment, however, has no bearing upon the insurers’ obligations to the policyholder. A pro rata allocation among insurers ‘does not reduce their respective obligations to their insured.’ The insurers’ contractual obligation to the policyholder is to cover the full extent of the policyholder’s liability up to the policy limits”).
56. Multiple UM insurers covering a single loss necessarily means that the insurers would all be deemed primary insurers of the risk, as none could be viewed as excess. Thus, Pentz’s holding (that both doctrines are available) should be applied broadly to all instances when multiple, primary insurers cover the same risk and one pays more than its fair share of the loss.

About The Author

Clayton Bruner graduated from the OU College of Law in 2008. He received his B.A. in 2005 from Southwestern Oklahoma State University. Prior to college, he played professional baseball with the Detroit Tigers organization for six years. While attending SWOSU, he worked as an insurance agent and was the proprietor of Benchwarmer Brown’s Sports Grill. He took the Oklahoma bar exam in July and intends on practicing law at Pignato, Cooper, Kolker & Roberson PC in Oklahoma City.

Republic Underwriters Ins. Co. v. Fire Ins. Exchange:
The Fallacy of the Pro Rata Clause and Its Influence on the Application of the Equitable Doctrines of Subrogation and Contribution in Oklahoma
Published 79 OBJ 1785 (August 9, 2008)