California Insurance - Without An Excess Judgment, An Excess Insurer Has No Equitable Subrogation Rights Against A Primary Insurer That Fails To Settle Within Its Limits
RLI Ins. Co. v. CNA Cas. of California, No. B184637, 2006 WL 1868457 (Cal. Ct. App. July 7, 2006)
In a decision that declined to follow contrary precedent, the Second District Court of Appeal (Los Angeles) held that an excess insurer cannot maintain an equitable subrogation action against the primary insurer for unreasonably
refusing to settle, where the underlying claim did not go to trial and there was no excess judgment against the insured.
In RLI, the insured was involved in a traffic accident that resulted in a fatality. The deceased’s survivors sued the insured and initially offered to settle their claim for $1 million – the limit of
the insured’s primary policy. The primary insurer rejected that offer; one year later, the lawsuit settled for $2 million, with the primary insurer paying its $1 million policy limit and the excess insurer paying $1
million.
The excess insurer brought an equitable subrogation lawsuit against the primary insurer based on the primary insurer’s failure to accept a reasonable settlement demand within its policy limits. The trial court granted
the primary insurer’s motion for judgment on the pleadings, agreeing with the primary insurer that because the underlying case settled and did not result in an excess judgment, there was no actionable claim. The Second
District Court of Appeal affirmed.
The RLI court relied chiefly on the California Supreme Court’s decisions in Hamilton v. Maryland Cas. Co., 27 Cal. 4th 718 (2002), and Commercial Union Assurance Cos. v. Safeway Stores, Inc.,
26 Cal. 3d 912 (1980), both of which made clear that where an insurer is providing a defense, the insured’s agreement to a pretrial settlement resulting in a stipulated judgment in excess of policy limits does not support
a claim for the insurer’s refusal to settle within limits. Until there is a judgment following an actual trial that fixes the insured’s liability, the insured has suffered no harm by the mere potential for an
excess judgment.
The RLI court reasoned that because the underlying action was resolved by a settlement, not an excess judgment, the insured had no assignable cause of action for the primary insurer’s earlier failure to settle within
its policy limits. Because the excess insurer’s rights were entirely derivative of the insured’s, the court affirmed the trial court’s dismissal of the excess insurer’s equitable subrogation claim.
In reaching its decision, the RLI court declined to follow Fortman v. Safeco Ins. Co., 221 Cal. App. 3d 1394 (1990), which held that an excess judgment was not a prerequisite to an excess insurer’s equitable
subrogation action against a primary insurer. The RLI court found Fortman “unpersuasive,” observing that it was contrary to the California Supreme Court’s Hamilton decision, was
based on principles of equitable contribution among coinsurers that exist independent of the insured’s rights, and that it arose
in a context where the primary insurer abandoned its insured, entitling the insured to settle on the best terms possible and giving rise to an assignable bad faith claim against its primary insurer for its refusal to defend.