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STATE OF MINNESOTA IN COURT OF APPEALS A08-1082 Cargill, Incorporated, et al., Appellants, vs. Ace American Insurance Company, et al., Respondents, Affiliated FM Insurance Company, et al., Respondents, Allianz Underwriters Insurance Company, et al., Respondents, Allied World Assurance, et al., Defendants, American Guarantee and Liability Insurance Company, et al., Respondents, American Home Assurance Company, et al., Respondents, American Employers Insurance Company, et al., Respondents, Arch Reinsurance Ltd., Respondent, Associated International Insurance Company, Respondent, Everest Reinsurance Company, et al., Respondents, Great American Assurance Company, Respondent, Certain Underwriters at Lloyds, et al., Respondents, Employers Mutual Casualty Company, et al., Respondents, General Security Indemnity Company of Arizona, et al., Respondents, Hartford Accident and Indemnity Company, et al., Respondents, Pennsylvania Lumbermens Mutual Insurance Company, et al., Respondents, Minnetonka Insurance Company, Respondent,

Liberty Mutual Insurance Company, Respondent, Northwestern National Insurance, Respondent, St. Paul Fire and Marine Insurance Company, et al., Respondents, The Orion Insurance Company, PLC, et al., Respondents, XL Insurance America, Inc., Respondent. Filed May 26, 2009 Certified question answered in the affirmative Stauber, Judge Dissenting, Larkin, Judge Hennepin County District Court File No. 27CV073337 Thomas C. Mielenhausen, Christoper H. Yetka, Lindquist & Vennum, P.L.L.P., 4200 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402; and Paul L. Langer, Proskauer Rose, L.L.P., 29th Floor, 222 South Riverside Plaza, Chicago, IL, 60606-5808 (for appellants) Michael J. Cohen, Meissner, Tierney, Fisher & Nichols, S.C., 19th Floor, 111 East Kilbourn Avenue, Milwaukee, WI 53202; and Robert W. Kettering, Theodore J. Smetak, Christopher D. Newkirk, Arthur, Chapman, Kettering, Smetak and Pikala, P.A., Young Quinlan Building, 81 South Ninth Street, Minneapolis, MN 55402-3214 (for respondent Liberty Mutual) Charles E. Spevacek, Amy J. Woodworth, Meagher & Geer, P.L.L.P., Suite 4400, 33 South Sixth Street, Minneapolis, MN 55402 (for respondents St. Paul Fire, et al.) Considered and decided by Larkin, Presiding Judge; Minge, Judge; and Stauber, Judge.

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SYLLABUS Whenever a primary insurer with a duty to defend offers to tender a defense on behalf of an insured, the insured has a reciprocal duty to allow the insurer to seek contribution from other primary insurers with a similar duty to defend. In the event that an insured declines to enter into such an arrangement, a district court may order the insured to preserve the insurers opportunity to seek an equitable apportionment of liability for defense costs among insurers with such an obligation. OPINION STAUBER, Judge Pursuant to Minn. R. Civ. App. P. 103.03(i), the district court certified the following question for appellate review as important and doubtful: "Can a court order primary insurers, who insure the same insured for the same risks, and whose policies are triggered for defense purposes, to be equally liable for the costs of defense where there is otherwise no privity between the insurers?" Because an insured, as a part of its contractual duty to cooperate, has an affirmative obligation to preserve the insurers opportunity to obtain contribution from other primary insurers with a similar duty to defend, and because a district court has the equitable authority to award such relief when an insured refuses to cooperate, we answer the certified question in the affirmative. FACTS In 2005, the state of Oklahoma sued appellants Cargill, Inc., and Cargill Turkey Production, LLC (collectively referred to as "Cargill") for damages arising out of Cargills waste disposal practices at poultry operations in or around that state, which 3

allegedly contributed to the pollution of the Illinois River Watershed. The same year, Cargill was also named as a defendant in a series of lawsuits in Arkansas alleging that contaminants found in chicken waste produced at Cargills plants had caused physical harm to several plaintiffs. Because it was unclear when the harm alleged in these lawsuits first began, Cargill provided notice of the pending litigation to its primary and umbrella-level liability insurers from the past several decades who potentially had a duty to defend, to indemnify, or both. Upon receiving notice, respondent Liberty Mutual Insurance, offered to fund Cargills defense and requested that Cargill execute a customary and neutral loan receipt agreement1 to allow Liberty Mutual to seek contribution from the more than 50 other non-participating insurers for the multi-million dollar litigation costs in defending against the lawsuits. None of the 50-plus insurers would agree to assume responsibility for defense costs without the ability to seek contribution from other insurers. On February 14, 2007, Cargill sought a declaratory judgment and other relief against over 50 insurers who allegedly had an obligation to defend and indemnify Cargill in the lawsuits. Cargill asked the district court to declare that each insurer had an individual duty to defend and indemnify. Liberty Mutual filed cross claims against
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A loan receipt agreement is a device commonly used to resolve insurance disputes. See, e.g., Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 164 (Minn. 1986). Under such an arrangement, an insurer with a duty to defend agrees to loan the insured the amounts necessary to defend against a lawsuit in exchange for the insureds promise to pursue an action in its own name to recover the costs of defense from other duty-to-defend insurers. See id. at 163. The insured then repays the loan with funds recovered in the subsequent action. Id. Loan receipt agreements are an effective tool for insurers because they essentially allow insurers to seek contribution from other duty-to-defend insurers despite the absence of privity between them. 4

several insurers seeking a declaration that it would have a right to subrogation or contribution from them in the event that Liberty Mutual solely incurred defense costs on behalf of Cargill. The district court bifurcated the proceedings, with the first phase relating solely to the duty to defend.2 On October 8, 2007, Liberty Mutual and several other primary insurers again notified Cargill that, subject to their respective reservations of rights, they would be willing to enter into a neutral loan receipt agreement with Cargill. Under the terms of the proposed agreement, the insurers would loan Cargill an amount equal to the defense costs in the underlying litigation on the condition that Cargill would grant the insurers the right to seek repayment of the loan from any other primary insurance providers with a duty to defend. Liberty Mutual also tendered a check for $704,762.22 as partial payment for Cargills defense costs, contingent on Cargill signing the agreement.3 Cargill declined the offer out of concern that it could become responsible for additional deductible payments and retentions to the contributing insurers and because contribution might be sought from Cargills "fronted policies" incorporated into its sophisticated insurance scheme. It appears from the record that some of these fronted policies amounted to self insurance by Cargill, while the others were issued by Cargills subsidiaries.

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The district court chose to postpone consideration of the duty to indemnify until the second phase because "the duty of indemnification may not arise until the underlying lawsuits are concluded (unless earlier settlements are negotiated), and that could be years down the road." 3 Liberty Mutual asserts that at least $5.4 million in defense costs had been incurred by Cargill as of 2007. 5

Thereafter, Cargill moved for partial summary judgment as to Liberty Mutuals duty to defend. As part of its motion, Cargill argued that it could select Liberty Mutual to fully and exclusively defend against the underlying litigation, that it had no obligation to enter into a loan receipt agreement with Liberty Mutual, and that, absent such an agreement, Liberty Mutual had no right to seek contribution from any other insurer who has a defense obligation. Liberty Mutual filed a cross-motion for partial summary judgment seeking an order creating a constructive loan receipt agreement or a similar declaration that Liberty Mutual could pursue contribution from other insurers without a loan receipt agreement. Prior to the summary judgment hearing, Cargill proposed a new "framework" for a possible loan receipt agreement. Cargills proposal would have permitted Liberty Mutual to pursue contribution for defense costs from certain primary insurers, but precluded recovery of defense costs from Cargill, its insurance subsidiaries, or the issuers of its fronted policies. The proposal also would have required Liberty Mutual to indemnify Cargill from the contribution demands of any other primary insurers. Liberty Mutual rejected the offer. The district court subsequently denied Cargills motion and granted partial summary judgment in favor of Liberty Mutual. Although the court acknowledged that no privity of contract exists between Liberty Mutual and other insurers with a similar duty to defend, it concluded that it would be inequitable to require Liberty Mutual to assume the multi-million dollar cost of defending Cargill without any right to contribution, stating the following in the memorandum accompanying its order: 6

The point here is that Cargill, a sophisticated business entity, has created this insurance structure, and it seems inequitable that they should now be permitted to avoid cooperating with Liberty Mutual (the insurer who they have self-chosen to defend their liability claims) because of their concern that the insurance structure that they have created may have some adverse consequences to go along with the benefits they have received. The court also posited that Cargills refusal to cooperate with Liberty Mutuals request for a loan receipt agreement constituted a violation of its policy obligations to Liberty Mutual. Accordingly, the court determined that the most equitable result would be to allow for an equitable apportionment of defense costs among the numerous insurers because it would "encourag[e] . . . insurers to promptly undertake the insureds defense . . . if [they] know from the beginning that defense costs will be apportioned equally among those insurers whose policies are triggered." In order to facilitate the sharing of defense costs, the court ruled that Liberty Mutual was allowed to seek contribution from other liable primary insurers without the necessity of a loan receipt agreement. In the alternative, the court indicated that it could impose a constructive loan receipt agreement, and attached a sample agreement with appropriate provisions to its order. It is noteworthy that the court did not decide whether Cargill or its fronted insurance arrangements would be included in the allocation of defense costs, stating "[s]ome of the case law relating to allocation of defense costs treats captive company reinsurance and self-insurance differently than it treats mere liability for a deductible."

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The court certified for appeal the issue of whether a district court can "order primary insurers, who insure the same insured for the same risks, and whose policies are triggered for defense purposes, to be equally liable for the costs of defense where there is otherwise no privity between the insurers." The court concluded that the question was "important because it relates to substantial underlying but related litigation which is likely to persist for years and to be very expensive . . . [and] is an issue of state-wide impact." The question was also declared doubtful "because there appear to be unresolved conflicts in the Minnesota appellate court decisions, which on more than one occasion have indicated that each case is different and must be resolved on its specific facts." ISSUE When an insured maintains numerous insurance policies and insurance arrangements and the insured demands that one primary insurer pay all defense costs and refuses to cooperate with that insurer to preserve a full right to contribution, does a district court have the authority to fashion a remedy that will allow the primary insurer to preserve its claim for contribution for defense costs? ANALYSIS Minn. R. Civ. App. P. 103.03(i) provides that an appeal may be taken to this court from an order that denies a motion for summary judgment if the district court "certifies that the question presented is important and doubtful." In deciding a certified question arising from denial of summary judgment, this court "review[s] the record to determine whether a genuine issue of material fact exists and whether the law was correctly applied." Murphy v. Allina Health Sys., 668 N.W.2d 17, 20 (Minn. App. 2003), review 8

denied (Minn. Nov. 18, 2003). Absent genuine issues of material fact, appellate courts review certified questions de novo. Employers Mut. Cas. Co. v. A.C.C.T., Inc., 580 N.W.2d 490, 493 (Minn. 1998). Here, de novo review is appropriate because the material facts are not in dispute. Cargill challenges the district courts preservation of apportionment of defense costs among all primary insurers, claiming it can select any one of its many individual insurers to tender a defense because each insurer owes a separate and distinct obligation to pay the defense costs without contribution from other similarly obligated insurers. Cargill also argues that, absent a loan receipt agreement, no privity of contract exists among the insurers that would allow Liberty Mutual to seek contribution. Conversely, Liberty Mutual contends that a loan receipt agreement is only necessary in situations where an insurer has actually tendered a defense. Liberty Mutual also argues that principles of good faith and fair dealing, as well as the cooperation clause contained in the Liberty Mutual insurance policy, require Cargill to cooperate in enabling Liberty Mutual to preserve the opportunity to obtain contribution from other insurers and further obligates Cargill to enter into a neutral loan receipt agreement with Liberty Mutual in exchange for its tender of defense. 1. Is a loan receipt agreement presumptively necessary to equally apportion

defense costs among the insurers? The first issue to consider in answering the certified question is whether a primary insurer with a duty to defend must normally enter into a loan receipt agreement in order to obtain contribution from other primary duty-to-defend insurers. Cargill argues that 9

this issue is controlled by the supreme courts ruling in the seminal case of Iowa Nat'l Mut. Ins. Co. v. Universal Underwriters Ins. Co., 276 Minn. 362, 150 N.W.2d 233 (1967). We agree. In Iowa National, the supreme court concluded that an insurer who undertakes the defense of an insured generally cannot pursue contribution for defense costs from another insurer with a parallel duty to defend because no privity of contract or joint liability exists between the insurers. Id. at 367

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