Court Holds That An Excess Insurer Cannot Maintain An Action For Equitable Subrogation Against A Primary Insurer Unless The Underlying Case Results In A Final Excess Judgment
RSUI Indem. Co. v. Discover P&C Ins. Co., 2014 U.S. Dist. LEXIS 53035 (E.D. Cal. Apr. 15, 2014)
In RSUI Indemnity Co., the Eastern District of California granted a primary insurer’s motion to dismiss the excess insurer’s subrogation claim against the primary insurer for allegedly failing to settle within the primary limits because the underlying action was settled and did not result in a judgment in excess of the primary limits.
In this case, the primary insurer issued the insured a policy with a $1 million limit and the excess insurer issued the insured a policy with an additional $4 million in coverage. The insured tendered an underlying action involving an automobile accident to the primary insurer, who agreed to defend and appointed counsel. The third-party claimant offered to settle her claim for an amount within the primary insurer’s policy limits, but the primary insurer rejected the offer. The parties ultimately settled the underlying action and the excess insurer paid more than $3.5 million under its policy.
The excess insurer thereafter filed a lawsuit against the primary insurer to recover the amounts it paid towards settling the underlying action. The excess insurer included a cause of action for subrogation and alleged that the primary insurer breached its duties to the insured by failing to effectuate settlement where liability was reasonably clear and by exposing the insured to the risk of liability in excess of the primary limits. The primary insurer filed a motion to dismiss the subrogation claim on the basis that an excess carrier cannot assert such a claim against a primary carrier unless a final judgment is rendered in the underlying action. The district court agreed with the primary carrier and dismissed the subrogation claim without prejudice. In reaching this conclusion, the court relied heavily on Mercado v. Allstate Insurance Co., 340 F.3d 824, 827 (9th Cir. 2003). The excess carrier filed an amended complaint, and the primary carrier again moved to dismiss the subrogation claim.
In connection with the primary insurer’s second motion to dismiss the subrogation claim, the excess insurer argued that the Mercado case and its predecessors were distinguishable because these cases contemplated situations in which the parties had entered into a stipulated judgment with a covenant not to execute as opposed to the settlement at issue in this case. The district court, however, rejected this distinction and found that the excess insurer had not shown how a stipulated judgment differed enough from a settlement to warrant a different result. Accordingly, the district court granted the primary insurer’s second motion and dismissed the excess insurer’s subrogation claim with prejudice.
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