In addition, Accu-Fab was the named policyholder of a $1,000,000 primary liability insurance policy issued by Colony Insurance Company. The Colony policy designated “[a]ll persons or organizations as required by written contract with [Accu-Fab]” as additional insureds, subject to certain limitations and exclusions.

On March 4, 2015, Omega informed Colony that it expected to receive “claims for personal injury and/or wrongful death” arising out of the July 2014 explosion. Asserting that it qualified as an “additional insured” under the Colony policy, Omega demanded that Accu-Fab and Colony “defend and fully indemnify [it] from any [such] claims.”

On March 13, 2015, Colony notified Omega that it was conducting an investigation into the explosion “under a full and complete reservation of rights . . . including the right to disclaim coverage in whole or in part should it consider such denial warranted.” Colony contended that the total pollution exclusion in its policy may apply to preclude coverage and expressed doubt that Omega qualified as an additional insured.

Colony subsequently filed a declaratory judgment action that named Accu-Fab and Omega as defendants and that sought a ruling “declaring that the [Colony policy did] not provide any coverage for any and all damages or injuries sustained as a result of the [July 2014] explosion.”

Thereafter, Mr. Taylor's estate and survivors filed a wrongful death action against Omega. Colony agreed to fund Omega's defense, subject to a “full and complete” reservation of rights, “including the right to seek recovery of all defense costs it incurs on behalf of Omega should a court determine that Colony does not in fact owe a defense to [Omega].” In a letter dated December 9, 2015, Colony informed Omega's attorney that:

Colony's position is that it does not believe the policy of insurance it issued to Accu-Fab provides any coverage whatsoever for the unfortunate incident which occurred at the Omega Protein facility on July 28, 2014. Nevertheless, at your request Colony has agreed to fund the defense of Omega Protein, and is pursuing a declaratory judgment action in order to have the court determine whether its coverage position is or is not correct. Colony is providing a good-faith defense to Omega through the services of your law firm and yourself. If the court ultimately determines that the policy issued by Colony to Accu-Fab does not require that it fund Omega's defense, Omega will have been unjustly enriched to the extent Colony paid its defense costs when it had no obligation to do so.

Colony also wrote that, “[w]ith regard to [Mr.] Taylor's settlement demand, Colony will of course consider any reasonable demand sent to it,” but “any demands for settlement made on behalf of the estate and survivors of Mr. Taylor will be reviewed in light of the insurance coverage issue which is currently the subject of Colony's declaratory judgment action.”

The trial court scheduled a settlement conference in the Taylor lawsuit for January 14, 2016. Two days before the settlement conference, First Specialty wrote to Colony and requested that Colony settle the lawsuit. The letter stated:

The Colony Additional Insured endorsement amends its Other Insurance clause, stating that the Colony coverage “is primary insurance and [Colony] will not seek contribution from any other insurance available to [Colony] additional insured.” Colony, therefore, is primary to [AAIC]. The Taylor claim will certainly not settle for $1 million. As noted, failure to take advantage of the opportunity on January 14 to settle the Taylor claim for $2 million or less may not come again and may result in substantial unnecessary losses for Omega and its excess insurers, potentially including [First Specialty]. Accordingly, [First Specialty] respectfully requests Colony to be prepared to tender its limits to settle the Taylor claim during the January 14 settlement conference. . . .

At the settlement conference, Colony excluded First Specialty's representative from the conference and agreed to pay its $1,000,000 policy limit in exchange for Omega's “full and complete release” from the lawsuit. Colony subsequently dismissed its declaratory judgment action against Omega.

Colony then demanded that First Specialty reimburse the full amount that Colony had contributed to the Taylor settlement. When First Specialty refused, Colony sued, asserting claims of equitable subrogation and implied indemnity.

The district court found that Mississippi's voluntary payment doctrine precluded Colony from recovery for payments made on behalf of a defendant that it did not insure, and it granted First Specialty's motion.

Colony appealed to the Fifth Circuit, which certified the following question to the Mississippi Supreme Court:

Does an insurer act under “compulsion” if it takes the legal position that an entity purporting to be its insured is not covered by its policy, but nonetheless pays a settlement demand in good faith to avoid potentially greater liability that could arise from a future coverage determination?

Now, the court has issued its decision.

The Mississippi Supreme Court's Decision

The Mississippi Supreme Court answered the certified question in the negative.

In its decision, the court explained that, under state law, a voluntary payment – one made “[w]ithout compulsion or fraud, and without any mistake of fact, of a demand which the payor does not owe, and which is not enforceable against [the payor]” – could not be recovered.

It then decided that Colony had been under no “compulsion” when it made the $1,000,000 payment to settle the case against Omega and, therefore, that its payment had been voluntary.

In particular, the court decided that an insurer was not acting under “compulsion” if it took the legal position that an entity purporting to be its insured was not covered by its policy, but nonetheless paid a settlement demand in good faith to avoid potentially greater liability that could arise from a future coverage determination.

The court rejected Colony's argument that, because it had an interest to protect when it made the settlement payment, it paid under compulsion no matter the extent or quantity of its interest. The court declined to adopt Colony's argument that a payment was not voluntary if the payor was acting under compulsion to protect its own interests.

The court pointed out that when Colony negotiated the settlement payment, Colony did not merely dispute that its policy excluded coverage for the injuries Mr. Taylor had suffered, but Colony also maintained that it did not insure Omega at all. According to the court, “Colony's fear that Omega might be an additional insured under its policy” did “not amount to compulsion.”

Moreover, the court added, Colony had the option to pursue its declaratory judgment action before it paid the Taylor settlement. Instead, the court pointed out, approximately four months after the Taylor action was filed, “Colony negotiated and agreed to pay the settlement.” The settlement “lacked compulsion,” the court ruled.

The court concluded:

[I]f Colony continually maintained that it was not Omega's insured, Colony did not act out of compulsion when it negotiated the settlement. Because Colony failed to pursue its legal remedies, we answer the . . . certified question in the negative.

The case is Colony Ins. Co. v. First Specialty Ins. Corp., No. 2018-FC-00574-SCT (Miss. Jan. 31, 2019). Attorneys involved include: FOR APPELLANT: RICHARD EDWARD KING, OLIVIA YEN TRUONG. FOR APPELLEE: DAVID A. BARFIELD, DALE T. MILLER.