The U.S. Court of Appeals for the Ninth Circuit, reversing a decision by the U.S. District Court for the Eastern District of California, has ruled that, under California law, an excess litigated judgment was not a prerequisite to an equitable subrogation action by an excess insurer against a primary insurer when the excess carrier had contributed to the underlying settlement.
The Case
RSUI Indemnity Company sought recovery in equitable subrogation against the insured's primary carrier, Discover P & C Insurance Company, alleging that Discover had rejected offers to settle a personal injury action within the limits of the primary policy and that the personal injury action settled for an excess amount, which RSUI paid on behalf of the insured.
The district court dismissed RSUI's equitable subrogration suit, reasoning that because the personal injury action had resolved through settlement, there was no litigated excess judgment and that California law required the entry of a litigated excess judgment as prerequisite to an equitable subordination action.
RSUI appealed to the Ninth Circuit.
The Ninth Circuit's Decision
The circuit court reversed.
In its decision, the Ninth Circuit explained that the California Supreme Court had not yet decided whether a litigated excess judgment was required as a prerequisite to an equitable subrogation action between an excess and primary insurer.
The Ninth Circuit noted, however, that the California courts of appeal have reached contrary conclusions. Compare Fortman v. Safeco Ins. Co., 271 Cal.Rptr. 117 (Cal. Ct.App. 1990) (holding that an excess insurer's equitable subrogation claim did not depend on the entry of an excess judgment to prove damages to the insured), with RLI Ins. Co. v. CNA Cas. of Cal., 45 Cal.Rptr.3d 667 (Cal. Ct.App. 2006) (expressly rejecting Fortman ).
The circuit court then concluded that the rule announced in Fortman was “more likely to be adopted by the California Supreme Court because it more faithfully applies California insurance law.”
Accordingly, the circuit court held that when an excess insurer, faced with a primary insurer's unreasonable refusal to pay a settlement demand within the policy limits, actually contributed payment to conclude settlement, it could state a claim for equitable subrogation despite the absence of a litigated excess judgment.
The circuit court reasoned that the risk of collusion was not present when an excess insurer contributed to settle a case on behalf of an insured, and that the Fortman rule promoted the settlement of claims, promoted excess insurers' contributions to settlements, and was “favorable both to the insured and to claimants.”
The case is RSUI Indemnity Co. v. Discover P & C Ins. Co., No. 14–15825 (9th Cir. May 3, 2016). Attorneys involved include: David A. Tartaglio, Cheryl A. Orr, Esquire, Musick Peeler & Garrett, LLP, Los Angeles, CA, for Plaintiff–Appellant; Melissa A. Dubbs, Carlson, Calladine & Peterson LLP, San Francisco, CA, for Defendant–Appellee.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].