On August 5, 2016, the Second Appellate District of the California Court of Appeal held that a judgment in excess of the underlying limits is not necessary for an insurer to maintain an action against an underlying carrier for failure to accept a reasonable settlement within that carrier’s policy limits. An excess carrier who pays the portion of a settlement in excess of that covered by the underlying policy can bring an action for equitable subrogation and breach of the duty of good faith and fair dealing if the primary carrier rejects a settlement demand within its limits and then ultimately agrees to settle the case for an amount that impacts the excess limits. See Ace American Insurance Company v. Fireman's Fund Insurance Company (Cal. Ct. App., Aug. 5, 2016, No. B264861) 2016 WL 4156686, at *1.
In July 2010, John Franco sustained serious injuries during the filming of the movie “Green Lantern.” His injuries included pelvic crush injuries, a broken hip, fractures to both femurs, crush injuries to both knees, broken tibias and fibulas, broken ribs, a punctured lung, and facial injuries. He claimed permanent pain, eye injury, urinary and sexual dysfunction, and continuing mental distress. Franco brought suit against Warner Brothers for his injuries and Warner Brothers tendered the suit to its primary carrier, Fireman’s Fund, for defense and indemnification.
Fireman’s Fund agreed to defend under a $2 million primary policy. Warner Brothers also claimed coverage under a $3 million umbrella excess policy issued by Fireman’s Fund and a $50 million excess policy issued by ACE. In April and May 2012, Franco made demands within the $5 million limits of Fireman’s Fund’s coverage. Fireman’s Fund rejected these initial settlement demands. In October 2012, Fireman’s Fund agreed to a settlement “‘for an amount substantially in excess’ of the limits of the Fireman’s Fund policies.” Id.
ACE paid the portion of the settlement in excess of the Fireman’s Fund limits and then brought suit against Fireman’s Fund for equitable subrogation and breach of the duty of good faith and fair dealing. In granting Fireman’s Fund’s demurrer to the Complaint, the trial court held that ACE had failed to state a cause of action upon which relief could be granted as there was no judgment in excess of the policy limits. The court found that a refusal to settle cannot give rise to a cause of action without an excess judgment being entered.
The Court of Appeal reversed the lower court’s ruling and held that causes of action for equitable subrogation and breach of the duty of good faith and fair dealing could be brought by an excess carrier against a primary insurer despite the lack of an excess judgment against the insured. In so holding, the Court explicitly rejected the reasoning of RLI Insurance Company v. CNA Casualty of California wherein it was stated that, “Without an excess judgment, the primary insurer's refusal to settle is not actionable.” RLI Insurance Company v. CNA Casualty of California (2006) 141 Cal.App.4th 75, 82. Instead, the Court followed Fortman v. Safeco Insurance Co. (1990) 221 Cal.App.3d 1394 which held that an excess judgment is not necessary to bring an equitable subrogation claim if the excess insurer can show that it actually paid an amount in excess of the primary insurer's policy limits. Ace American, supra, at *2.
The opinion also cited to a recent Federal Court decision and to the public policy of the State of California in support of the decision. The Ninth Circuit decision, RSUI Indem. Co. v. Discover P & C Ins. Co. (9th Cir., May 3, 2016, No. 14–15825) 2016 WL 1745119, followed Fortman in holding that, when an excess insurer contributes to a settlement, that insurer may bring a cause of action for damages due to a primary carrier’s unreasonable refusal to accept a settlement demand within primary policy limits. Ace American, supra, at *12. The Court of Appeal found that its holding was in line with California public policy in that it “protects insureds, because insurers whose mishandling of settlement offers causes damages will be liable for the losses they cause.” Ace American, supra, at *13.
The Ace American decision is significant for both primary and excess carriers. For a primary carrier, it adds additional pressure to evaluate liability and damages even before receiving an initial demand from the claimant. For an excess carrier, this decision is a significant weapon to use in convincing an underlying carrier to accept a potentially reasonable settlement demand within its limits early in the litigation process.