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Indemnitor Cannot Replace Insurer as Party in Asbestos Coverage Suits, Court Rules

WISCONSIN – In an asbestos coverage suit brought by Eaton Corporation against its insurers, Eaton Corporation sought to substitute itself for First State Insurance Company in third-party indemnity and contribution claims brought against First State by other defendant insurers. Eaton and First State had entered into a settlement agreement in which Eaton agreed to defend and indemnify First State in such contribution claims, and First State granted Eaton the right to control First State’s defense in such claims. Eaton argued that because of the settlement agreement, it was the real party in interest in the contribution claims against First State and, therefore, should be substituted as the defendant under Federal Rule of Civil Procedure 17(a).

The court disagreed. First, the court noted that Rule 17(a) usually applies to claimants in order to avoid duplicative suits against defendants, but the rule still applies to defendants in situations where the court needs to determine diversity jurisdiction (i.e., when determining diversity, the court looks to the citizenship of the real party in interest). Neither of those purposes applied in Eaton’s case, where First State was not a claimant and diversity jurisdiction was not at issue.

Next, the court held that even if it needed to determine which was the real party in interest, it would choose First State. As applied to the defendants, the real party in interest is the party that possesses the liability alleged by the claimant. In spite of the defense and indemnity agreement between First State and Eaton, First State still possessed the liability alleged by the insurers who brought contribution claims, namely obligations under the insurance policies providing coverage for the underlying asbestos claims. Eaton’s agreement with First State merely put Eaton in the position of an ordinary insurer, who agrees to assume its insured’s defense and indemnify it against an adverse judgment. Ordinary insurers are not the real parties in interest in litigation against their insureds. By the same token, Eaton was not the real party in interest in the contribution claims against First State. As a result, Eaton’s motion to substitute itself for First State was denied.

Read the case decision here.