Stephen Chitwood owned and operated a semi-tractor trailer. Chitwood reached an agreement to lease his truck and to use that truck to deliver products for the Foster Brothers (Fosters). The agreement included Chitwood stating that he would indemnify the Foster Brothers for any semitrailer loss caused by his negligence.

Chitwood and the Fosters purchased commercial auto liability coverage. Chitwood's insurer, Continental Western Insurance Company, provided limits of $750,000. Foster Brothers' coverage was for $1,000,000 and was provided by Reliance National Insurance Company. Both parties were listed as insureds on each other's policies.

Reliance sued Chitwood and Continental to seek reimbursement for a payment it made to settle a loss involving Chitwood colliding with another vehicle and injuring its three occupants. While handling the loss, Reliance and Continental agreed that Reliance was in position as the excess insurer and Continental owed primary coverage. However, Reliance led the action and, eventually, Continental assigned an attorney to the matter.

Continental agreed to settle the case for $600,000. As part of the settlement, the insurer and the plaintiffs agreed that additional payments would be sought from Reliance, but only for any additional damages that exceeded $750,000 (Continental's policy limit). After getting notice of the Continental settlement, Reliance and the plaintiffs agreed to settle litigation with prejudice for $250,000. Once the plaintiffs were paid, Reliance sued Chitwood and Continental to recover its payment as well as part of its legal expenses and interest that accrued as prejudgment interest. All parties filed motions for summary judgment supporting their respective positions. Chitwood and his insurer's motion was granted, finding that no reimbursement was due for either the settlement or for legal expenses (attorney fees). Reliance appealed.

In its appeal, Reliance argued (again) that it was owed the payments based on Chitwood's agreement to indemnify the Fosters for at-fault accidents and upon Continental breaching its duty to a secondary insurer (since its settlement of $600,000 did not exhaust its policy limit). The appellate review involved a re-examination of the two insurers' settlement agreements, relevant cases and state law (Missouri). The court determined that Continental did not breach a duty to Reliance since its settlement agreement had the effect of exhausting its policy limits.

The higher court also determined that permitting Reliance to pursue reimbursement from Chitwood violated a state anti-subrogation against co-insureds law. Since Chitwood was named as an insured under the Reliance policy, enforcing Chitwood's agreement to indemnify the Fosters had the same effect of requiring payment from a co-insured. According to the anti-subrogation law, such actions undermine the principle of insurance and are illegal. However, the higher court disagreed with the lower court ruling that barred repayment of part of Reliance's initial legal expenses. The higher court affirmed the motion in favor of barring repayment of Reliance's settlement and reversed the ruling regarding the legal expenses (attorneys’ fees and prejudgment interest).

Reliance Insurance Company, Appellant v. Stephen Chitwood; Continental Western Insurance Company, Appellees. United States Court of Appeals, Eighth Circuit. No. 05-1446. Filed January 10, 2006. Affirmed in part and reversed in part and Remanded. http://caselaw.findlaw.com/data2/circs/8th/051446P.pdf. [downloaded 01/19/06]