Bad Faith - Sixth Circuit Rules That Excess Insurer May Bring Bad Faith Claim Against Primary Insurer Under Kentucky Law
This week, in National Surety Corporation v. Hartford Casualty Insurance Company, No. 06-6168 (July 30, 2007), the Sixth Circuit Court of Appeals ruled that under Kentucky law an excess insurer may pursue a claim against a
primary insurer for bad faith failure to settle within policy limits. In so ruling, the Sixth Circuit reversed the decision of the Western District of Kentucky, which had predicted that the Kentucky Supreme Court would not recognize
such a cause of action.
In the underlying case, the plaintiff sued Sufix, which was insured by both Hartford and National, for an injury arising out of a weed trimmer made by Sufix. Hartford’s policy provided $1 million in primary liability coverage
and National’s policy provided $10 million in excess liability coverage. Hartford assumed Sufix’s defense in the underlying case, and through counsel, engaged in settlement negotiations with the plaintiff, but ultimately
rejected an offer to settle for Hartford’s $1 million policy limit. National did not receive notice of the underlying case until two weeks before trial. The case went to trial, and a jury awarded $6,486,588 to the plaintiff
against Sufix.
National subsequently sued Hartford in the U.S. District Court for the Western District of Kentucky for breach of contract and for violation of the common law duty of good faith. National asserted, among other things, that Hartford
failed to settle claims against Sufix within policy limits, thereby exposing Sufix and Sufix’s assets to excess judgment, and that National was subrogated to Sufix pursuant to the terms of the excess policy and the doctrine
of equitable subrogation. Hartford filed a motion to dismiss that was granted by the district court, which predicted that the Kentucky Supreme Court would not recognize a cause of action by an excess insurer pursuant to the doctrine
of equitable subrogation.
On appeal, National argued that under equitable subrogation doctrine it could bring a claim against Hartford for bad faith failure to settle within policy limits. National also argued that it could assert a claim against Hartford
for Hartford’s failure to discover that Sufix was insured by National. In considering the bad faith claim, the court highlighted two principles of Kentucky insurance law: (1) an insured is permitted to sue a primary carrier
for bad faith failure to settle; and (2) the doctrine of equitable subrogation permits an insurer to step into the insured’s shoes. The court determined that considering these two principles together “leads to the conclusion
that an excess insurer is permitted to step into the shoes of the insured to sue a primary insurer pursuant to the doctrine of equitable subrogation to enforce the primary insurer’s duty to avoid excessive judgments against
an insured.” The court further stated that this rule had been adopted by the overwhelming majority of jurisdictions, with Alabama and Idaho being the only exceptions. The court did, however, affirm the district court’s
ruling that National could not assert a claim against Hartford for Hartford’s purported failure to investigate whether Sufix had other insurance, finding that National did not offer any reason why Kentucky’s Supreme
Court would impose a duty on an insurer to investigate whether its insured had other insurance coverage.