Where an indemnitor receives notice of a claim against an indemnitee, the general rule is that the indemnitor will be bound by any reasonable good faith settlement the indemnitee might make. However, in Indemnity Insurance Company of North America v. St. Paul Mercury Insurance Company, the court did not follow the general rule. In an underlying personal injury action, the plaintiff, an employee of Yonkers Construction Company, was injured when Yonkers’ subcontractor Romano’s cable snapped. Yonkers’ had a contract whereby it was to defend and indemnify the City of New York, the owner of the property where plaintiff was injured. Romano’s contract in turn, required it to defend and indemnify the City and Yonkers. Romano’s primary carrier, Royal assumed the defense and indemnification of the City. At some point, Royal tendered the defense of the City to Royal’s excess carrier, Indemnity Insurance Company of North America (IICNA), as the injuries exceeded Royal’s $1 million dollar limit. During trial, IICNA settled the case for $3 million, with Royal contributing the first million and IICNA contributing $2 million. IICNA then sued Yonkers’ carrier St. Paul, as it was required to defend and indemnify the City. IICNA argued that St. Paul’s policy was primary to the IICNA excess policy, and thus it should reimburse IICNA the $2 million it paid. The court, however, held that “where the insurer did not take part in settlement negotiations or agree to the settlement of an underlying personal injury action, it was not required to contribute to that settlement.”

Thanks to Cheryl Fuchs for her contribution to this post.

http://www.courts.state.ny.us/courts/ad1/calendar/appsmots/2010/April/2010_04_22_dec.pdf