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AIG unit must help pay costs of policyholder's defense

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An American International Group Inc. unit that was acting as a fronting insurer had a duty to help defend a paint manufacturer, even though its costs will ultimately be paid by the policyholder, an appeals court said Tuesday.

Minneapolis-based Valspar Corp. faced various lawsuits in 2005 and 2006 claiming damages from benzene in its products, which triggered policies it had bought from Continental Casualty Co., a unit of Chicago-based CNA Financial Corp., and National Union Fire Insurance Company of Pittsburgh, Pa., among others, according to the ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Continental Casualty Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., The Valspar Corp.

Continental agreed to defend Valspar, reserving its rights to have other insurers contributing to paying the costs, according to the ruling. Continental paid more than $560,000 for the defense, said the ruling.

National Union refused to contribute, stating it had a fronting arrangement with Valspar, “which meant Valspar was responsible for its own defense cost and National Union was not obligated to defend it,” according to the ruling. Continental sued, seeking declarations National Union had a duty to defend Valspar and that National Union owed Continental its share of the defense costs.

Valspar then intervened in the litigation, “arguing that in light of National Union's asserted right to pass its costs to Valspar, a nominal right of Continental to contribution from National Union would really be a right to contribution from Valspar, to which Continental was not entitled,” said the ruling.

The U.S. District Court in Minneapolis ruled in Continental's favor, and ordered National Union to pay one-seventh of Continental's defense costs, and Valspar appealed.

A three-judge court panel of the 8th Circuit unanimously upheld the lower court's ruling.

“National Union had a duty to defend Valspar and therefore has an equitable obligation to contribute to paying the costs of the defense … And National Union's share of the defense costs paid by the insurers is unaffected by amounts paid by Valspar,” said the ruling, in remanding the case for further proceedings.