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(Article from Insurance Law Alert, September 2016)

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A California appellate court ruled that an excess insurer that has settled an insured’s liability claims may bring an equitable subrogation claim against a primary insurer based on its unreasonable refusal to settle within policy limits.  Ace American Ins. Co. v. Fireman’s Fund Ins. Co., 206 Cal. Rptr. 3d 176 (Cal. Ct. App. 2d Dist. 2016).

A worker sued its employer for injuries sustained during employment.  The employer was insured under a primary policy with Fireman’s Fund and an excess policy with Ace.  Fireman’s Fund defended and ultimately settled the case, with participation and contribution from Ace.  Ace sued Fireman’s Fund for equitable subrogation, alleging that the worker had offered to settle the case within primary policy limits and that Fireman’s Fund unreasonably rejected those offers.  As a result, Ace was obligated to contribute to the ultimate settlement, which exceeded primary policy limits.  Fireman’s Fund responded by arguing that Ace’s claim was not viable because there was no excess judgment in the underlying personal injury suit.  A California trial agreed, and the appellate court reversed.

The court noted that the purpose of requiring an underlying judgment is “simply to ensure that a plaintiff has a reliable basis for alleging that damages have resulted from the insurer’s alleged breach of the duty to settle within policy limits. . . .”  The court explained that while “[a] judgment may constitute reliable evidence of damages,” “it does not follow that a judgment is the only manner by which an insured or subrogee may prove damages resulting from an unreasonable failure to settle within policy limits.”  Where, as here, the primary insurer participated in and consented to the settlement, the court held that the excess settlement constitutes sufficient allegations of damages.  The court distinguished cases in which the primary insurer did not participate in the settlement, which gave rise to concerns about collusion between the insured and excess insurer.