Citing advice provided by the Mississippi Supreme Court, a federal appeals court affirmed a lower court ruling in favor of a Swiss Re Ltd. unit in a dispute with an Argo Group International Holdings Ltd. unit in a case stemming from a 2014 explosion.

A July 2014 explosion at a facility owned by Houston-based Omega Protein Corp. killed an employee of Moss Point, Mississippi-based Accu-Fab & Construction Inc., according to court documents in Colony Insurance Co. v. First Specialty Insurance Corp. 

Omega was the named policyholder of two third-party insurance policies. Philadelphia-based Ace American Insurance Co. provided a $1 million primary commercial general liability policy to Omega, subject to a $250,000 deductible, while Swiss Re unit First Specialty Insurance Corp., based in Overland Park, Kansas, provided a $10 million excess liability policy.

In addition, Richmond, Virginia-based Argo Group unit Colony provided a primary liability policy with a $1 million limit to Accu-Fab. The policy included an additional insured provision.

In 2015, Omega demanded that Accu-Fab and Colony defend and indemnify it from any claims arising from the explosion. Colony filed suit in state court seeking a declaratory judgment on its coverage, but subsequently agreed to fund Omega’s defense, subject to a reservation of rights, although it said it did not believe its policy provided coverage for the incident.

At a settlement conference, Colony agreed to pay its $1 million policy limit in exchange for Omega’s release from the lawsuit, then demanded First Specialty reimburse it for the full amount it had contributed to the settlement.

First State refused, and litigation between the insurers ensued, with the U.S. District Court in Gulf Port, Mississippi, ruling in First Specialty’s favor.

The case was appealed to the 5th U.S. Circuit Court of Appeals in New Orleans, which asked the Mississippi Supreme Court to decide whether, under the state’s voluntary payment doctrine, which provides that a voluntary payment cannot be recovered, Colony was precluded from being indemnified.

The issue was whether Colony’s payment was voluntary if it took the position its insured was not covered under its policy but still paid a settlement demand to avoid potential greater liability, according to the ruling.

The Mississippi Supreme Court said it was voluntary. “We decline to adopt Colony’s argument that a payment is not voluntary if the payor is acting under compulsion to protect its own interests,” the court ruled.

Citing the Supreme Court ruling, a three-judge 5th Circuit panel unanimously affirmed the District Court’s ruling in First Specialty’s favor Friday.

“Colony contends the Mississippi Supreme Court overreached factually by ignoring that Colony had already assumed Omega’s defense of the Taylor action and therefore became obligated to act in the best interest of Omega until the coverage issue was resolved,” said the ruling.

“Colony also claims the court disregarded the fact that it was presented with a settlement offer prior to the state court ruling on its declaratory judgment action and that refusing to settle at that time would have led to an even larger judgment against Omega,” said the ruling.

“We disagree. The Mississippi Supreme Court expressly considered these facts and still held that the settlement lacked compulsion,” said the court, in ruling in First Specialty’s favor.

Attorneys in the case could not be reached for comment.