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Equitable subrogation is not a new idea; it has been accepted by a nearly unanimous majority of the courts in the Unites States for many years. Basically, the equitable subrogation theory states that an excess insurer is subrogated to the rights and obligations of its insured as against a primary insurer in an action for wrongful failure to settle a claim against the insured. The Minnesota Supreme Court in Continental Casualty Company v. Reserve Insurance Company, 238 N.W.2d 862 (1976) described the concept of equitable subrogation and its purpose as follows: if the insured purchases excess coverage, he in effect substitutes an excess insurer for himself; it follows that the excess insurer should assume the rights and obligations of the insured. Put another way, since the insured would have been able to recover from the primary carrier for a judgment in excess of policy limits caused by that carrier's wrongful refusal to settle, the excess carrier, who discharges the insured's liability as a result of the tort, stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier that the insured himself could assert; this was the decision of the California Supreme Court in Commercial Union Assurance Company v. Safeway Stores, 610 P.2d 1038 (1980).

It is true, as you imply, that primary carriers do not normally have contractual relationships with excess carriers; but then, none is needed. The simple truth is that the insured has to make a payment that would not have been required except for the wrongful action (or inaction) of the primary carrier. The excess insurer, by reason of its insuring agreement with the insured, pays the amount due. Equity calls for the insured to recover from the primary insurer and the subrogation clause allows the excess insurer to “stand in the shoes of” the insured and assume the recovery rights.

As noted above, equitable subrogation is accepted by most courts. There are, however, some limitations on the theory. The Michigan Supreme Court in Commercial Union Company v. Medical Protective Company, 393 N.W.2d 479 (1986) identified three principles that should serve as guidelines for equitable subrogation cases. First, an excess carrier has no greater or lesser rights than those of the insured. Second, an insured's breach of the obligations owed to the primary carrier can defeat the subrogation claim of the excess carrier. Third, active participation by the excess carrier in settlement negotiations may estop the excess carrier from recovery.

Finally, you should know that the doctrine of equitable subrogation is well established in your state. Just two of the decisions that have established the theory are: Ranger Insurance Company v. Travelers Indemnity Company, 389 So. 2d 272 (1980) and Phoenix Insurance Company v. Florida Farm Bureau Mutual Insurance Company, 558 So. 2d 1048 (1990).