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Colorado Court Rules That Excess Insurer’s Equitable Subrogation Claim Against Primary Insurer Fails Absent Allegations Of Bad Faith Refusal To Settle

05.31.18

(Article from Insurance Law Alert, May 2018)

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A Colorado appellate court ruled that an excess insurer must plead and prove that a primary insurer acted in bad faith in refusing to accept a settlement in order to seek reimbursement of a settlement payment.  Preferred Professional Ins. Co. v. The Doctors Company, 2018 WL 1633269 (Colo. Ct. App. Apr. 5, 2018).

A doctor was insured by a $1 million primary professional liability policy issued by The Doctors Company (“TDC”) and an excess policy issued by Preferred Professional Insurance Company.  When the doctor was sued for malpractice, TDC declined the underlying claimant’s $1 million settlement offer.  Preferred, concerned that a verdict could exceed TDC’s $1 million limit, advised the doctor to accept the offer and agreed to fund the settlement.  Thereafter, Preferred sued TDC for equitable subrogation, seeking reimbursement of the payment.  A Colorado trial court granted Preferred’s summary judgment motion, finding that it had satisfied the requirements of an equitable subrogation claim.  The appellate court reversed.

The appellate court ruled that in order for an excess insurer to recover under equitable subrogation, it must prove that the primary insurer refused to settle in bad faith.  The court held that the only rights Preferred has against TDC are those that the insured doctor would have had against TDC, explaining that under equitable subrogation, Preferred “stands in the shoes” of the original insured.  Thus, because the doctor could not recover settlement payments against TDC unless its settlement decisions were deemed unreasonable, Preferred is subject to the same requirements.  The court rejected Preferred’s assertion that an “independent equitable claim” exists under Colorado law, which would allow it to seek reimbursement from TDC based on general principles of equity.  The court explained that allowing an equitable claim to proceed in this context, without a showing of bad faith, would “allow an excess carrier to nullify the primary insurer’s contractual right [to settle] merely because the excess insurer disagrees with the primary insurer over the risk of exposure.”