Second District’s Fourth Division Takes A Side In The Split Over Whether An Excess Insurer That Contributes To An Excess Settlement Can Assert A Cause Of Action Based On A Primary Insurer’s Unreasonable Rejection Of Prior Demands
Ace American Ins. Co. v. Fireman’s Fund Ins. Co., 2016 Cal. App. LEXIS 647 (Cal. App. 2d Dist. Div. 4, Aug. 5, 2016)
Categories: Equitable Subrogation – Bad Faith Refusal Of Settlement Demand – Absence of Litigated Excess Judgment
If a primary insurer unreasonably rejects a settlement demand within its policy limits then, later, consents to a settlement above its policy limits, can the excess insurer that paid the excess amount state a cause of action against the primary insurer when there is no litigated excess judgment against the insured? Two divisions of the Second District have already issued conflicting decisions on this issue. In Ace American Insurance Co. v. Fireman’s Fund Insurance Co., the Fourth Division took a side, holding that the excess insurer properly pled a cause of action against the primary and that a litigated excess judgment is not essential.
Fireman’s Fund issued a primary policy and an umbrella policy to the insured, and Ace issued a policy excess to the Fireman’s Fund policies. A personal injury action was brought against the insured and ultimately settled for an amount in excess of Fireman’s Fund’s limits. Ace paid the excess amount then brought an action against Fireman’s Fund alleging that Fireman’s Fund had unreasonably refused to accept prior settlement demands within the underlying limits and, as a result, Ace was required to contribute to the settlement exceeding Fireman’s Fund’s limits. Fireman’s Fund prevailed in the trial court on demurrer, with the trial court concluding that an excess judgment is an essential element of any claim based on an alleged bad faith failure to accept a reasonable settlement demand.
Acknowledging there is a split of authority, the Court of Appeal reversed. It followed Fortman v. Safeco Insurance Co., 221 Cal. App. 3d 1394 (Cal. App. 2d Dist. Div. 1 1990) (holding that an excess insurer’s equitable subrogation claim does not depend on the entry of an excess judgment) and rejected RLI Ins. Co. v. CNA Casualty of California, 141 Cal. App. 4th 75 (Cal. App. 2d Dist. Div. 2 2006) (declining to follow Fortman) in holding that “[a]n excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing.” Rather, it concluded, “where [an] insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.”
The Court of Appeal distinguished this case from those in which a defending insurer rejects a settlement demand within policy limits and then the insured unilaterally settles with the underlying claimant without insurer consent, agreeing to entry of judgment against itself in exchange for the claimant’s agreement not to enforce it against the insured. In such cases, if “the insurer is providing a defense but merely refuses to settle, the insured has no immediate remedy,” and “the agreed judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.” Even court approval “cannot transform an agreed judgment that, by covenant, the insured will never have to pay, into a determination of the existence and extent of the insured’s liability.” Here, by contrast, the primary insurer consented and contributed to the settlement, and the excess insurer paid the excess amounts. Accordingly, this case did not involve short-circuiting an insurer’s contractual right to defend or depend on unreliable proof of damages.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.