The California Court of Appeal has held that an excess judgment against an insured is required before an excess insurer can maintain an equitable subrogation action against a primary insurer for unreasonable failure to settle. ( RLI Insurance Company v. CNA Casualty of California (2006) 2006 WL 1868457)
Facts
Several claimants filed a wrongful death action against the insured. The insured had a $1 million primary liability policy through one insurer, and $1 million excess liability policy through another insurer.
The claimants offered to settle the wrongful death action against the insured in exchange for the primary insurer’s $1 million policy limit. The primary insurer rejected the settlement offer. One year later, the claimants settled the wrongful death case against the insured for $2 million, with the primary insurer paying its $1 million limit and the excess insurer likewise paying its $1 million limit.
Following the settlement, the excess insurer filed an equitable subrogation action against the primary insurer. The excess insurer alleged that the primary insurer had failed to accept a reasonable settlement demand within the primary insurer’s policy limits and that, as a result, the underlying action ultimately had settled for $2 million rather than $1 million. The excess insurer sought to have the primary insurer bear the entire cost of the underlying $2 million settlement.
The trial court ruled that because the underlying action was settled instead of litigated to judgment , the excess insurer had no right to pursue an equitable subrogation claim against the primary insurer. The trial court thus entered judgment against the excess insurer and in favor of the primary insurer.
Holding
The Court of Appeal affirmed. The appellate court acknowledged that an excess insurer can recover damages from a primary insurer when the primary insurer unreasonably fails to settle a claim against the insured. However, as a general rule, in order for the excess insurer to prevail against the primary insurer, it must be shown that the primary insurer’s failure to settle resulted in an excess judgment against the insured.
According to the appellate court, if there is no excess judgment against the insured, the insured suffers no harm. If the insured suffers no harm, the insured has no direct claim against the primary insurer, and the excess insurer likewise has no derivative claim against the primary insurer.
Comment
The RLI court declined to follow Fortman v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1394, which reached a contrary result. According to the RLI court, the Fortman decision is inconsistent with various California Supreme Court cases requiring an excess judgment before the insured (or an excess insurer standing in the insured’s shoes) can sue a primary insurer for unreasonable failure to settle.
The RLIcourt noted that an exception to the above rule exists in cases where the primary insurer refuses to defend at all. In that situation, the insured may make a reasonable settlement with the claimant, and then maintain or assign an action against the primary insurer for breach of the insurer’s contractual duties.