A few months ago, we highlighted a split of authority in California on whether an excess insurer can settle a case the primary insurer failed to settle within primary limits and pursue an equitable subrogation action against the primary insurer for the amount paid in excess of the primary limits. (November 18, 2015, When May An Excess Liability Insurer Sue A Primary Insurer For Failing To Settle A Claim.) In Fortman v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1394 (“Fortman”), the excess insurer, which paid $1.25 million in excess of primary limits to settle, was deemed to have a right to pursue an equitable subrogation claim against the primary insurer even in the absence of an excess judgment against the insured. However, subsequently, in RLI Ins. Co. v. CNA Cas. of Cal. (2006) 141, Cal.App.4th 75 (“RLI”), the Court of Appeal held the excess insurer could not maintain a claim against the primary insurer unless an excess judgment had been rendered against the insured. We discussed the arguments and reasoning on both sides of the issue and suggested the California Supreme Court may ultimately have to decide the issue.
On August 5, 2016, the issue was again addressed by the Court of Appeal in Ace American Insurance Company v. Fireman’s Fund Insurance Company, 2016 WL 4156686 (“Ace American”). The court rejected both the reasoning and holding of RLI, and followed Fortman. The case presents an opportunity for the California Supreme Court to decide the issue once and for all.
In Ace American, an excess insurer, Ace American, filed a complaint for equitable subrogation against a primary insurer, Fireman’s Fund, after Fireman’s Fund, rejected offers to settle an action within the limits of the primary policy. The underlying action, which Fireman’s Fund had been defending, was thereafter settled, before judgment, for an amount in excess of the primary policy limits. Fireman’s Fund participated in the settlement, but only paid its policy limits. Ace American paid the excess amount. The trial court, relying upon RLI, dismissed Ace American’s complaint for failure to state a claim on the ground California law (RLI) required the entry of a litigated excess judgment as a prerequisite to an equitable subrogation claim by an excess insurer against a primary insurer.
The Court of Appeal disagreed and reversed, noting the direct conflict between >RLI and Fortman, the latter of which held that no litigated excess judgment was required for the excess insurer to establish a viable cause of action against the primary insurer. The Court of Appeal determined that “Ace American has paid the claim of its insured, Warner Brothers, to protect its interest and not as a volunteer; Ace American suffered damages caused by Fireman’s Fund’s act or omission; and Ace American’s damages are in a liquidated sum.” Nothing more was required to overcome Fireman’s Fund’s demurrer.
The Court also determined that the Fortman rule was consistent with the California Supreme Court’s rationale in both Isaacson v. Cal. Ins. Guar. Ass’n., (1988) 44 Cal.3d 775, 793 and Hamilton v. Maryland Casualty Co., (2002) 27 Cal.4th 718, 732, that an insured does not need to stand idly by and risk financial ruin or other damages. Rather, it observed that it is the insured’s well established right under California law to settle to avoid an excess of limits judgment, by contributing toward a settlement in which the primary insurer also participates—and then to seek reimbursement from that breaching primary insurer. The Court found the same principle applies to the excess insurer (Ace American) who, standing in the shoes of the insured, was required to contribute to the settlement of the underlying case to avoid an excess judgment against the insured—all because of the primary insurer’s failure to reasonably settle the case within policy limits when it had the opportunity to do so.
As the Ace American Court acknowledged, “‘California’s public policy is to encourage settlement.’” The Court noted that the Fortman rule promotes settlement by encouraging excess insurers to contribute to settlements, without imposing any additional duties on primary insurers. Therefore, it held that the excess insurer’s right to subrogation was established by payment of a reasonable settlement on behalf of the insured in order to avoid exposing the insured to an excess judgment.
The Court also relied upon non-California cases, including the recent Ninth Circuit decision in RSUI Indem. Co. v. Discover P & C Ins. Co. (9th Cir. May 3, 2016) 2016 WL 1745119 (in which this firm represented RSUI), which concluded that “the rule announced in Fortman is more likely to be adopted by the California Supreme Court because it more faithfully applies California insurance law.” (Id. at p. *2.)
With Ace American’s clear rejection of RLI in favor of Fortman, the conflict in the decisional law on this issue is ripe for review by the California Supreme Court.
Steven Adams is a partner with Musick, Peeler & Garrett in its Los Angeles office. His full bio and contact information can be found at: http://musickpeeler.com/professional/Steven_Adams.